August 11, 2014
by Adam Bendett
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)
By virtue of Connecticut Public Act 14-84, An Act Concerning an Optional Method of Foreclosure (Act), Connecticut foreclosure procedure will change in a significant way. The two most practical effects of the Act are that it requires a new 60-day foreclosure notice as well as another affidavit that must be filed as a condition of “first legal.” The effective date is January 1, 2015, so this will provide additional time for mortgage servicers to prepare any necessary templates and processes. In short, the Act will create an optional method of foreclosure: a foreclosure by market sale, which is summarized below.
Required 60-Day Notice — Effective January 1, 2015, a mortgagee (defined as the owner or servicer of the debt secured by the mortgage) who elects to foreclose on a residential first mortgage loan will be required to give a pre-foreclosure notice to a “mortgagor.” A “mortgagor” is defined as a borrower who occupies the subject residential property as a principal residence, the appraised value of which property, less any prior liens, is less than the subject mortgage debt. Such notice may be combined and delivered at the same time as any other notice, including the correct notice under the Emergency Mortgage Assistance Program (EMAP notice).
Similar to the EMAP notice, the notice must be sent by certified or registered mail to the property address. In addition, the notice must advise the mortgagor of the right to contact the mortgagee to discuss whether the property may be marketed for sale by a listing agreement under the Act by mutual consent of the mortgagor and mortgagee. The notice must also advise the mortgagor as follows:
(1) of the mailing address, telephone number, facsimile number, and electronic mail address that should be used to contact the mortgagee;
(2) of a date not less than 60 days after the date of such notice by which the mortgagor must initiate such contact, with contemporaneous confirmation in writing of the election to pursue such option sent to the designated mailing address or electronic mail address of the mortgagee;
(3) that the mortgagor should contact a real estate agent licensed under the Connecticut General Statutes to discuss the feasibility of listing the property for sale pursuant to the foreclosure by market sale process;
(4) that, if the mortgagor and mortgagee both agree to proceed with further discussions concerning an acceptable listing agreement, the mortgagor must first permit an appraisal to be obtained in accordance with the Act for purposes of verifying eligibility for foreclosure by market sale;
(5) that the appraisal will require both an interior and exterior inspection of the property;
(6) that the terms and conditions of the listing agreement, including the duration and listing price, must be acceptable to both the mortgagee and mortgagor;
(7) that the terms and conditions of any offer to purchase, including the purchase price and any contingencies, must be acceptable to both the mortgagor and mortgagee;
(8) that, if an acceptable offer is received, the mortgagor will sign an agreement to sell the property through a foreclosure by market sale; and
(9) in bold print and at least ten-point font, that, if the mortgagor consents to a foreclosure by market sale, the mortgagor will not be eligible for foreclosure mediation in any type of foreclosure action that is commenced following the giving of such consent.
Note that due to the manner in which “mortgagor” is defined in the Act, the notice only seems to be required in situations where there is no equity in the subject property above the mortgagee’s lien. However, it may be difficult to determine the equity position prior to sending the notice, and it appears an appraisal would be required as well, so it may be more practical to send the notice to all borrowers of residential first mortgages who occupy the property as their principal residence and combine it with the current EMAP notice or combined demand letter/EMAP notice.
The Affidavit Requirement — After expiration of the notice period provided in the required notice, the foreclosure may proceed only if the mortgagee files an affidavit stating that the notice provisions of the Act have been complied with and either the mortgagor failed to confirm an election to participate in the foreclosure by market sale by the deadline set forth in the notice, or that discussions were initiated but —
(1) the mortgagee and mortgagor were unable to reach a mutually acceptable agreement to proceed;
(2) based on the appraisal obtained pursuant to the Act, the property does not appear to be subject to a mortgage that is eligible for foreclosure by market sale;
(3) the mortgagor did not grant reasonable interior access for the appraisal required by the Act;
(4) the mortgagee and mortgagor were unable to reach an agreement as to a mutually acceptable listing agreement pursuant to the Act;
(5) a listing agreement was executed, but no offers to purchase were received;
(6) an offer or offers were received, but were unacceptable to either or both the mortgagee and mortgagor; or
(7) other circumstances exist that would allow the mortgagee or mortgagor to elect not to proceed with a foreclosure by market sale pursuant to the Act and other sections of the Connecticut General Statutes.
Importantly, it should be noted that the Act does state that nothing shall be interpreted as requiring the mortgagor or mortgagee to participate in further discussions.
The Appraisal Requirement, Listing Agreement, and the Contract — If discussions are pursued regarding a foreclosure by market sale, the mortgagee shall have an appraisal performed by a licensed Connecticut appraiser, and the mortgagor shall promptly provide both interior and exterior access to the property. If the appraisal indicates the mortgage is eligible for a foreclosure by market sale (there is no equity in the property after the mortgagee’s lien), the mortgagor and mortgagee may reach an agreement concerning the listing of the property. The listing agreement will require that all offers be communicated to the mortgagor and mortgagee as soon as practicable. The mortgagee must provide a name, mailing address, telephone number, fax number, and email address to be used to report offers to the mortgagee. The mortgagee may not require a particular licensee or group of licensees as a condition of approving a listing agreement. Please note that the Act provides that nothing requires any party to reach an agreement on an acceptable listing agreement.
If a listing agreement is executed pursuant to the Act, and an offer is received that is acceptable to both the mortgagor and mortgagee, the mortgagor shall execute a contract for sale with the purchaser on those terms, which will include that the offer is contingent upon the completion of the foreclosure by market sale in accordance with the Act. If the offer is acceptable to the mortgagor but is not acceptable to the mortgagee, the mortgagee shall issue a written notice of its decision, which shall include the general reason for the decision. After execution of the contract, the mortgagor will provide the same to the mortgagee within five days along with written consent to the foreclosure by market sale. The Act specifically imposes no duty on either party to accept any offer made.
Procedure for Foreclosure by Market Sale — Not later than 30 days after the receipt of the contract and consent, or the satisfaction of all contingencies in the contract, whichever is later, the foreclosure may be commenced. The foreclosure complaint shall contain a copy of the contract and the appraisal acquired pursuant to the Act.
Ten days following the return date, the mortgagee may move for foreclosure by market sale. Thereafter, the court, with consent of the mortgagor, may order a foreclosure by market sale. The only issues at the hearing are to be the finding of the fair market value of the property and of any priority liens, a determination of the fees and costs of the sale (including any broker’s commission), the person appointed by the court to make the sale, the costs and expenses of the purchaser of the property, and the mortgagee’s debt, as well as whether the debt and priority liens exceed the fair market value of the property.
Note that it is unclear how the court would determine the purchaser’s costs and expenses, which is a required finding. Also, it is assumed that the person appointed to sell the property would be similar to a committee of sale that is presently ordered in a foreclosure by sale in Connecticut, who is typically a local attorney. This will be an extra expense to, presumably, be deducted from the sale proceeds.
After the sale takes place, the procedure will be similar to the current foreclosure by sale process in Connecticut. The sale proceeds will be deposited in the court and the plaintiff will have to file a motion for supplemental judgment, have the motion granted by the court at a hearing calendar, and await expiration of the 20-day appeal period before the court will be able to disperse the sale proceeds, after netting out the approved costs of sale.
If the mortgagor consents to a foreclosure by market sale, the mortgagor is not eligible for foreclosure mediation. However, if the court denies the motion for a foreclosure by market sale, or circumstances develop that make it reasonably likely that a sale will not be consummated under the Act, the mortgagor may, if otherwise eligible, apply for foreclosure mediation, provided the mortgagor did not substantially contribute to the court’s denial. In determining whether foreclosure mediation will be allowed, the court shall consider whether the petition for mediation is motivated primarily by a desire to delay entry of a judgment of foreclosure and if it is highly probable the parties will be able to reach an agreement through mediation. Also, in such a situation, the mortgagee will have the right to request another form of foreclosure judgment.
If a foreclosure by market sale is granted, the court will schedule not later than 30 days from the date of judgment, right of first refusal law days for defendants that hold subsequent encumbrances in the inverse order of priority, at which time they can tender the purchase price to the person appointed to make the sale to preserve their lien and acquire the property. If a subordinate lienholder takes no action, its lien will be extinguished. If a lienholder purchases the property as aforesaid, the purchaser in the contract will be entitled to reimbursement, from the proceeds of the market sale, of the fees and costs associated with the contract that have been determined by the court.
Please note that there appears to be a technical error in the Act in this regard, as it seems to give subsequent defendant lienholders a superior right to prior lienholders who are also defendants, as it does not state the subsequent lienholder that takes title in this manner would take such title to the property subject to the rights of defendants in the action (other than the plaintiff), with prior liens, who did not have an opportunity to exercise a right of first refusal under this statutory scheme. This may cause the Act to be constitutionally suspect. Another issue with the Act is that it states that the purchaser takes title to the property free and clear of all parties to the action. It does not state that the purchaser takes the property free and clear of any liens filed after the lis pendens. Therefore, such a post lis pendens-filed lien could have the effect of disrupting the closing of transfer of title to the purchaser, like it would in a typical real estate transaction.
It should also be noted that property transferred by this method will not be subject to state conveyance taxes. Additionally, the provision of the current statute that provides a reduction in the deficiency judgment for any party filing a motion for foreclosure by sale does not apply to this type of foreclosure.
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