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The Conveyancers' Foreclosure Crisis Continues

On July 17 the Supreme Judicial Court entered its decision in Pinti v. Emigrant Mortgage Company, Inc., 472 Mass. 226, 2015 WL 4366801 (2015). By a 4-3 majority, the Court held that the foreclosure of a mortgage was void and as a result, an arm's length purchaser at the sale had obtained nothing.

Summary

Plaintiffs Phillips and Pinti filed an action against Emigrant, the mortgagee, and Wilion, the arm's length purchaser at the foreclosure sale, in which they challenged the validity of the foreclosure on the grounds that it did not comply with the notice requirements set forth in paragraph 22 of the mortgage.


There have been a number of recent foreclosure challenges in the lower courts based on paragraph 22, with inconsistent decisions. As the Pinti court states:

"Paragraph 22 of the mortgage provides that, prior to acceleration of the loan following any breach of the mortgage by the plaintiffs, Emigrant is required to notify the plaintiffs of '(a) the default; (b) the action required to cure the default; (c) a date, not less than [thirty] days from the date the notice is given to [the plaintiffs], by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by [the mortgage].' Paragraph 22 further provides that such notice must inform the plaintiffs 'of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of [the plaintiffs] to acceleration and sale' (court's emphasis), and adds that upon failure to cure the default, Emigrant may invoke 'the statutory power of sale.'"

The majority found as follows:

1)     The provisions of paragraph 22 are part of the statutory power of sale as defined in M.G.L.c. 183, 21:  

"Section 21 expressly requires ...that to effectuate a valid foreclosure pursuant to a power of sale, the mortgagee must 'first comply with the terms of the mortgage (emphasis added) and with the statutes relating to the foreclosure of mortgages by the exercise of a power of sale.'"

2)     Paragraph 22 is a "term of the mortgage", and strict compliance with all such terms is mandatory:

"...we agree with the plaintiffs that the 'terms of the mortgage' with which strict compliance is required - both as a matter of common law under this court's decisions and under §21 - include not only the provisions in paragraph 22 relating to the foreclosure sale itself, but also the provisions requiring and proscribing the preforeclosure notice of default."

3)   The notice sent by Emigrant was a notice applicable to judicial foreclosure proceedings and not applicable to non-judicial proceedings. Because strict compliance is mandatory, the foreclosure proceedings and subsequent sale to Wilion was void.

4)     The court held that its decision is prospective only:

"We conclude that in this case, because of the possible impact that our decision may have on the validity of titles, it is appropriate to give our decision prospective effect only: it will apply to mortgage foreclosures of properties that are the subject of a mortgage containing paragraph 22 or its equivalent (emphasis added) and for which the notice of default required by paragraph 22 is sent after the date of this opinion."

5)     The majority suggests documenting compliance with paragraph 22 by recording a 5(B) affidavit and a copy of the notice that was sent to the mortgagor; "...we presume that going forward, as a general matter, mortgagees will do so."

The dissenting opinion is emphatic in stating that the function of the preforeclosure notice of default in paragraph 22 is the same as the requirements of M.G.L.c. 244, §35A. In U.S. Bank Nat'l Assn. v. Schumacher, 467 Mass. 421 (2014), the court held that §35A is not part of the power of sale in foreclosure proceedings. As such, defective paragraph 22 notices - like defective §35A notices - should be voidable in equity, but not void.

The dissent is also emphatic in disagreeing with the majority's suggestion that future purchasers obtain and record paragraph 22 notices. It believes that it may not be easy to obtain this information, and even when it can be obtained,

"...requiring purchasers to engage in such a treasure hunt is contrary to the purposes of the recording system, which was intended to be 'self-operative and to notify purchasers of existing claims ...[through] a public record from which prospective purchasers of interests in real property may ascertain the existence of prior claims that may affect their interests' (case cited)" (emphasis added).

Future Implications

By ruling that off-record documentation which does not comply with the "terms of the mortgage" renders a foreclosure void, the SJC has extended the parameters set forth in its earlier decisions in Ibanez and Bevilacqua.

What are the implications going forward? Another recent decision has considered a different violation of the "terms of the mortgage" and c. 183, §21.

In Wells Fargo Bank, N.A. v. Cook, 87 Mass.App.Ct. 382 (2015), the Appeals Court considered paragraph 9 of an FHA insured Massachusetts mortgage, which included the following: "This Security Instrument does not authorize acceleration or foreclosure if not permitted by [HUD regulations]." The court held that these HUD regulations, which required face-to-face meetings with representatives who had the authority "to propose and accept reasonable payment plans", were incorporated by reference into the mortgage. It reviewed these regulations and concluded that its terms had been violated; as a result, the subsequent foreclosure proceedings were void. The Cook decision is cited in Pinti.

Where Do We Go From Here?

Clearly, any actions taken after July 17 by a mortgagee to comply with terms of the mortgage that are conditions precedent to foreclosure will be reviewed closely. Although there is still time before underwriting standards are developed for foreclosure transactions that are affected by the Pinti decision, there are 3 points that are necessary to pass along immediately: 

1)     When reviewing a transaction where title will be conveyed to an arm's length purchaser, either through a current foreclosure sale or REO, verify that any preforeclosure default notices were sent by the foreclosing Mortgagee on or before July 17. Verify that the attorney for the foreclosing Mortgagee has included a statement to that effect in a recorded Affidavit that is part of the foreclosure documentation.

2)     In both Pinti and Cook, as with almost every foreclosure challenge, the mortgagors remained in possession throughout the foreclosure proceedings and only asserted their challenges to the foreclosure in response to summary process evictions after the foreclosures were completed. As we have emphasized in the past, you must determine that the mortgagors, or any parties claiming under them, are no longer in possession of the premises or otherwise asserting any rights.

3)    S.1981 is a bill filed in the current legislative session that is under consideration in the Massachusetts Senate. It would protect arm's length third party purchasers for value, and those claiming under them, who purchase at the foreclosure sale or in a subsequent REO transaction. Essentially, it provides that an Affidavit of Sale pursuant to c. 244, §15 would become conclusive evidence of compliance with c. 244 and c. 183, §21 unless challenged by the mortgagors in a court action within 3 years. It is the result of years of negotiation, and represents an honest effort to balance the interests of third party purchasers with mortgagors who legitimately believe they have been wrongfully foreclosed upon. Lenders who have conducted defective foreclosures would remain liable to the mortgagors. This is the same bill that was passed by both branches of the legislature at the end of the legislative session last fall, but was sent back with amendments by Governor Patrick and died. We understand S.1981 should be voted on by the Senate soon after Labor Day. If passed, it will be considered by the House shortly afterward. We encourage our agents and members of their staffs to contact their legislators as soon as possible and voice your strong support for S.1981.


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We will continue to update you on these issues, and our underwriting criteria, as they progress. Please do not hesitate to contact any of our underwriters if you have any questions or comments; we are looking forward to continuing to resolve these very difficult issues.

 
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