On July 21, 2010, the President signed the federal Wall Street Reform and Consumer Protection Act into law.  The voluminous law is otherwise known as the “Dodd-Frank” legislation.  Dodd-Frank makes certain amendments to the ”Protecting Tenants at Foreclosure Act of 2009″ (the “Tenants Protection Act”), which affects post-foreclosure eviction procedures.  The amendments to the Tenants Protection Act found in Dodd-Frank were effective on July 21, 2010.

The Tenants Protection Act was enacted as part of the “Helping Families Save Their Homes Act of 2009”.  It provides protections to bona fide tenants in foreclosed properties where the foreclosed mortgage is a “federally related mortgage loan” (a very broad category of mortgage loans as defined in the federal Real Estate Settlement Procedures Act (“RESPA”)).

Dodd-Frank Extends the Expiration Date

The Tenant Protection Act was originally set to expire or “sunset” on December 31, 2012; Dodd-Frank changes that, and the Tenants Protection Act will now sunset on December 31, 2014.  An amended version of the Tenants Protection Act is available here.  A sample letter for tenants and advocates to use to implement the Tenants Protection Act is available here.

Are Commercial Loans Covered?

An important question for lenders, mortgage holders and servicers is whether the Tenants Protection Act is limited to residential one- to four-family mortgage loans, or whether commercial loans are covered.  The answer is that some commercial loans are covered; where a loan is made to an individual or entity to purchase or improve property which is one- to four-family residential property, the Tenants Protection Act provisions for notice and eviction must be followed, even if the borrower took the applicable mortgage loan for a commercial purpose.  Commercial purpose loans that meet the definition of “federally related mortgage loans” must comply with the Tenants Protection Act.

A “federally related mortgage loan” is any loan (other than a temporary loan such as a construction loan), which is secured by a first or subordinate mortgage on real property that is designed to be a one- to four-family residential property (including condominiums and manufactured homes), and the property has to be located in a U.S. state.  Refinancings and purchase money mortgages are included.  The mortgage loan (1) must be made by a lender that is either federally regulated or its deposits are insured by the Federal Government; (2) is insured, guaranteed or supplemented by the Federal Government; (3) is made in conjunction with programs administered by HUD or by another federal agency; (4) is intended to be sold to Fannie Mae, Ginnie Mae or Freddie Mac; (5) is made by a “creditor” as defined by the Consumer Credit Protection Act (15 USC §1602(f)) and that creditor makes or invests in $1,000,000 worth of residential real estate loans per year; (6) is a reverse mortgage made by one of the aforementioned lenders; (7) is an installment sales contract for residential one- to four-family residential property.

Protecting Tenants at Foreclosure Act of 2009 Before Dodd-Frank Amendments

As a refresher, the Tenants Protection Act requires immediate successors in interest to foreclosed properties, including banks that take title to property after foreclosure, to provide a notice to vacate to any bona fide tenant at least ninety (90) days prior to evicting those tenants as a result of foreclosure.  In the event a foreclosure does take place, the Tenants Protection Act requires the successor owner of foreclosed property to honor any existing leases with renters until the end of the lease terms.  Protection is not available for the former mortgagor, the mortgagor’s spouse, child or parent.  A “bona fide” lease is the result of an arm’s-length transaction, and the rent has to be fair market value or government subsidized.  The Tenants Protection Act also provides Section 8 tenants in foreclosed properties certain protections.

Dodd-Frank Clarifies When Prior Notice of Foreclosure Occurs

A major change in the Tenants Protection Act brought about by Dodd-Frank concerns the interpretation of the provision that allows bona fide tenants of foreclosed properties to continue to reside at the property for the remaining term of the lease executed with the former owner only if that lease was entered into “as of the date of foreclosure”.  Prior to the amendment found in Dodd-Frank, it was unclear when the “date of foreclosure” occurred.  If the cut-off period began when foreclosure notices were sent, borrowers and tenants could no longer enter into leases that would have to be honored once the foreclosure notices were mailed and advertised.  Thus, under the prior version of the Tenants Protection Act, a foreclosing owner would take the position that leases entered into AFTER the date the foreclosure notice was mailed were not effective, and the foreclosing owner would not have to honor those leases.

Dodd-Frank changes all that by clarifying the phrase and explaining “For purposes of this section, the date of a notice of foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provisions in a mortgage, deed of trust or security deed.”    Unfortunately, ambiguity remains.  While Dodd-Frank clarifies that “notice of foreclosure” does not mean any correspondence or advertising undertaken by the mortgagee leading up to the foreclosure sale, it leaves the post-foreclosure timeframe unclear.  Put more simply, Dodd-Frank shifts the ambiguity from pre-foreclosure sale to post-foreclosure sale.  This is due to the use of the term “complete” in the new definition, i.e., what does “complete title” mean?

Debate is already underway as to whether “complete title to a property is transferred to a successor” occurs at the time of the foreclosure sale or at the time of recording of the foreclosure deed.   In Bankruptcy Courts, Judges who have opined on the issue of when the foreclosure sale is final from a bankruptcy perspective find that the foreclosure is final when the gavel goes down completing the auction, and the purchase and sale agreement is executed by the buyer.  On the other hand, there is an argument that the buyer at foreclosure who tenders a deposit and signs the purchase agreement only has equitable title; no legal title passes until the foreclosure deed is tendered to the buyer.  Still another interpretation is made by the foreclosing owner who seeks to evict any holdover borrowers or tenants from the property after foreclosure.  Post-foreclosure property owners are going to have to watch out for borrowers and mortgagors whose properties are in the process of foreclosure, as they could enter into lease agreements with tenants AFTER the foreclosure sale date, but before the foreclosure deed goes on record, and the foreclosing owner would be required by law to honor those lease and tenancy agreements.

Another issue Dodd-Frank raises is the impact its amendments will have on pending eviction cases.  As statutes are not typically retroactive unless such intention is expressly stated, Dodd-Frank, which is silent on retroactivity, should not impact pending evictions.  However, financial institutions should be aware that since each state has its own eviction process, knowing when such a process has begun will be state specific.  Accordingly, a review of the status of each pending eviction should occur.

In sum, post-foreclosure property owners must continue the practice of giving ninety (90)-day pre-eviction notices to bona fide tenants, but the date on which that notice has to be given will now be later in the process — on or after the date the foreclosure deed is recorded.  Ninety (90)-day notices sent on behalf of the servicer during the foreclosure process will no longer satisfy the Tenants Protection Act.  Post-foreclosure property owners should do everything they can to ensure that foreclosure deeds are recorded expeditiously after a foreclosure sale to cut off the rights of mortgagors from entering into new lease agreements with bona fide tenants so that the new owner does not have to contend with honoring the terms of those new lease agreements.

“I received a Form 1099-C, Cancellation of Debt from my lender, now what?”

Form 1099-C: If your debt is reduced or eliminated, you will normally receive a year-end statement, Form 1099-C, Cancellation of Debt from your lender. By law, this form must show the amount of debt forgiven and the fair market value of any property foreclosed. Examine Form 1099-C carefully and notify the lender immediately if any of the information shown is incorrect. Note the amount of debt forgiven in Box 2 as well as “home value” listed in Box 7.

If your mortgage debt is partly or entirely forgiven during tax years 2007 through 2012, you might be able to claim special tax relief and exclude the debt forgiven from your income, according to a tax tip e-mailed from the Internal Revenue Service.  It provides the following facts about mortgage debt forgiveness:

$2 million forgivable: Normally, debt forgiveness results in taxable income, but under the Mortgage Forgiveness Debt Relief Act of 2007, you might be able to exclude up to $2 million of the debt forgiven on your principal residence. The limit for a married person filing a separate return is $1 million.

Principal residences only: You may exclude debt reduced through mortgage restructuring, as well as mortgage debt forgiven in a foreclosure. To qualify, the debt must have been used to buy, build or substantially improve your principal residence and be secured by that residence. Refinanced debt proceeds used for the purpose of substantially improving your principal residence also qualify for the exclusion.

Non-qualifiers: Proceeds of refinanced debt used for other purposes, such as paying off credit card debt, do not qualify for the exclusion.

Form 982: If you qualify, claim the special exclusion by filling out IRS “Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness” and attach it to your federal income tax return for the tax year in which the qualified debt was forgiven.

Second homes: Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the tax relief provision. In some cases, however, other tax relief provisions, such as insolvency, might be applicable. IRS Form 982 provides more details about these provisions.

Call for info: See more information on the act in IRS “Publication 4681, Canceled Debts, Foreclosures, Repossessions and Abandonments” on the IRS website. These forms and publication are also available by calling 800-829-3676.

Under some states’ Construction Lien Acts, a contractor must record a construction lien within 90 days after the subcontractor last furnishes labor or material for an improvement. In Stock Building Supply, L.L.C. v. Parsley Homes of Mazuchet Harbor, L.L.C., No. 294098, the Michigan Court of Appeals held this year that performing “warranty work” to correct deficiencies in work that a subcontractor had already performed, or to correct defects in fixtures installed, does not constitute an “improvement” under the Michigan Construction Lien Act. The Court of Appeals determined that the distinguishing factor is whether the work conferred any value beyond the value furnished by the completion of the original work. Therefore, work performed to repair a leak in a whirlpool tub and to fix a toilet was warranty work, because it was necessary to provide what was originally contracted for – i.e., fully functioning plumbing fixtures.

In Oklahoma, the Court of Appeals recognized that “(t)he applicable time to serve pre-lien notice is not prior to performing labor or supplying materials; but rather, no later than seventy-five (75) days after the last date of work.”  The Court went on to state that under 42 O.S. §142.6(B), “the time period for pre-lien notice is not 75 days after the last date of work; it is 75 days after the lien claimant last supplied lienable services or materials on the job.”  Jones v. Purcell Investments, LLC, 2010 OK CIV APP 15, 231 P.3d 706 (2009).  While the language the Court used is different than that of the Michigan Court, it could very well be the case that an Oklahoma court would find that warranty work does not constitute supplying “lienable services or materials on the job.”

Sub-contractors would be well advised to not rely solely on warranty work to extend the ninety day deadline to file a lien under Oklahoma’s Mechanics and Materialmen’s Liens Act (or the 75 day deadline to serve the pre-lien notice).

Brian Huddleston

by: GERALD L. JACKSON

As housing markets struggle to rebound, a new wrinkle has been thrown into the mix by the Massachusetts Supreme Court, which voided several foreclosures because the banks involved could not demonstrate they had an interest in the mortgages at the time of the foreclosure sales. This much-anticipated ruling could have a spillover effect on the real estate markets everywhere – including Tulsa – because the problems it highlights could be widespread. In the case of U.S. Bank Association, Trustee vs. Antonio Ibanez, after the closing on the home loans, both mortgages were transferred through a series of assignments, many of which were executed “in blank,” ultimately ending up pooled and securitized into mortgage-backed securities.  However, the mortgages were not assigned to the banks that conducted the foreclosures until more than a year after the properties were foreclosed and sold.

Relying on well-recognized and long-standing Massachusetts law, the court held that the statutory power to foreclose can be exercised only by the mortgage holder, and any effort to foreclose by a party lacking such an interest is void. The banks could not produce any documents demonstrating that they were the actual mortgage holders by a proper assignment at the time foreclosure was initiated. The banks’ reliance on the securitization documents for a sufficient interest on which to base the foreclosures was rejected by the court. The court also rejected assignments made in blank and reliance on post-sale assignments as a customary practice in the industry.

The problems experienced by the banks in this case may be common – as mortgages often moved through many banks before being pooled and securitized during the heady days of the real estate boom, the assignment paperwork may not have kept up. Some industry insiders and analyst believe many securitized mortgages may suffer from the kind of paperwork defects as in Ibanez, and banks with these mortgages may not be able to prove a good chain of title. This ruling should not come as a surprise, and its rationale could very well be adopted in Oklahoma – it relied on basic property law concepts most lawyers learn in their first-year property class. With Tulsa leading the state in the number of foreclosures, this paperwork problem could disrupt the orderly disposition of residential properties in default and continue to hold back a local real estate recovery.

Before initiating foreclosure proceedings, banks need to carefully examine the documents to ensure that it is in fact the holder of the mortgage and has the legitimate right to foreclose. Banks may also want to give additional consideration to pre-foreclosure alternatives, such as modifications, short sales and deeds-in-lieu as a way to avoid these foreclosure issues.

Ultimately, Ibanez serves as a useful reminder that getting the paperwork right is like that old lawyer’s adage of wearing a belt and suspenders – you can never be too sure.

It has recently come to light that a number of mortgage loan servicers have submitted affidavits or signed other documents in support of either a judicial or non-judicial foreclosure that appear to have procedural defects. In particular, it appears affidavits and other documents have been signed by persons who did not have personal knowledge of the facts asserted in the documents. In addition, it appears that many affidavits were signed outside of the presence of a notary public, contrary to state law. This process of signing documents without confirming their accuracy has come to be known as “robo-signing.” We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violate state laws.

In order to handle this issue in the most efficient and consistent manner possible, the states have formed a bi-partisan multistate group to address issues common to a large number of states. The group is comprised of both state Attorneys General and the state bank and mortgage regulators. Fifty state Attorneys General have joined this coordinated multistate effort. State bank and mortgage regulators are participating both individually and through their Multistate Mortgage Committee, which represents mortgage regulators from all 50 states. Through this process, the states will attempt to speak with one voice to the greatest extent possible. At the end of this statement is a list of the participating states.

Our multistate group has begun inquiring whether or not individual mortgage servicers have improperly submitted affidavits or other documents in support of foreclosures in our states. The facts uncovered in our review will dictate the scope of our inquiry. The Executive Committee is comprised of the following Attorneys General Offices: Arizona, California, Colorado, Connecticut, Florida, Illinois, Iowa, New York, North Carolina, Ohio, Texas, and Washington; and the following state banking regulators: Maryland Office of the Commissioner of Financial Regulation, New York State Banking Department, and the Pennsylvania Department of Banking.

“The banks involved in this, e.g., BOA, GMAC, OneWest, Wells Fargo, etc., need to negotiate settlements with their borrowers in all the cases where they’ve created exposure for themselves by committing fraud upon the courts.  In Oklahoma, if you think you have been a victim of lender foreclosure fraud, in addition to contacting an attorney, you can file a consumer complaint with the Oklahoma Attorney General at http://www.oag.ok.gov/consumer/complt.nsf/complaint.html” – Brian Huddleston