August 1, 2016
by James Pocklington
and Richard Leibert
USFN Member (Connecticut)
On May 3, 2016 the Connecticut Legislature adopted a comprehensive piece of legislation that created three new types of loss mitigation foreclosure judgments, heavily modified a fourth, altered the way mortgage servicers account for and process escrow funds, and slightly changed the mediation statute. On May 26, 2016 the governor signed Public Act 16-65 into law. The effective date of the new law is October 1, 2016 for the matters related to foreclosure, and July 1, 2016 for the matters related to escrow.
The highlights and intention of this legislation, as they relate to foreclosures, are to provide in a judicial foreclosure proceeding: mortgage modification, deed-in-lieu, and short sale loss mitigation options in the form of a judgment of loss mitigation. This form of judgment will be available to mortgagors and mortgagees on a voluntary basis when there are junior lienholders who otherwise might challenge priority to the foreclosing mortgagee or refuse to release or subordinate subsequent liens.
All three options necessitate a formal agreement with written consent of both the mortgagee and mortgagor, require that the mortgage be a first mortgage and not a reverse annuity, require that a property be underwater as to the first mortgage and any other liens which are prior to the first mortgage, and that the mortgagor have limited net liquid assets (less than $100,000; excluding retirement and health savings plans). The court will then hold a hearing to determine the debt and fair market value, as well as to ascertain whether the property is underwater and whether the net liquid asset test is satisfied.
Mortgage Modification — A judgment of loss mitigation by modification has the effect of automatically subordinating any junior liens as a matter of law to the modified (and presumably increased) principal balance of the senior mortgage. The legislation does not distinguish between types of junior liens and expressly does not invalidate the underlying debt or judgment associated with an affected junior lien. A judgment of loss mitigation that modifies the mortgage must be recorded on the land records after the 20-day appeal period has run.
Deed-in-Lieu — A judgment of loss mitigation by conveyance has the effect of conveying all ownership interest in the subject property, except for those interests reserved to the mortgagor in the transfer agreement, interests held by encumbrancers prior in right to the subject mortgage, and interests held by junior lienholders who are not named as parties to the action or subject to Connecticut’s lis pendens statute to the mortgagee. This form of transfer agreement is permitted to include a cash contribution or promissory note from one party in favor of the other, permitting both relocation assistance for a mortgagor, separate consideration for the mortgagee, and may be in full or partial satisfaction of the debt owed to the foreclosing plaintiff. If the court approves the deed-in-lieu, the liens — but not the debt of junior lienholders — are eliminated, allowing the conveyance to occur. A judgment of loss mitigation that conveys the mortgage property by deed-in-lieu must be recorded on the land records after the 20-day appeal period has run.
Short Sale — A judgment of loss mitigation by sale conveys all ownership interest in the subject property (except for those interests discussed above) to a third party, for full or partial satisfaction of the underwater mortgage. This form of transfer agreement is permitted to include a cash contribution or promissory note from one party in favor of the other, permitting both relocation assistance for a mortgagor and separate consideration for the mortgagee. The sale is to occur by the date specified in the transfer agreement, which may be voluntarily extended by the parties. If the court approves the short sale, the liens — but not the debt of junior lienholders — are eliminated, allowing the conveyance to occur. A judgment of loss mitigation that conveys the mortgage property by short sale must be recorded on the land records.
Foreclosure by Market Sale — The legislation significantly alters the timelines for this relatively recent and, to date, rarely used foreclosure alternative. Previously, the market sale option existed only pre-foreclosure, and a foreclosing mortgagee was required to issue a notice of market sale (pre-foreclosure) to the mortgagor and file an affidavit regarding its efforts if the mortgagor failed to choose a market sale to dispose of his or her property. The legislation removes the pre-foreclosure notice and affidavit requirements. Now, market sale may be chosen as an option during an already pending action. There has been additional language added to the foreclosure by market sale statute that solidifies the voluntary nature of the program. The legislation also eliminated the notice requirement of the little utilized application from protection from foreclosure, which was provided in or along with the complaint.
Further, the Act alters the timelines in relation to the execution of an “execution of ejectment.” The state marshal is charged with executing an ejectment to gain possession of the premises after completion of a foreclosure. Under the legislation, in order to eject those parties that can be ejected without commencing a summary process action in housing court (typically borrowers and mortgagors), the state marshal must provide 24 hours’ notice to the chief executive officer of the applicable town and — at least five business days before giving that notice — must use reasonable efforts to locate and notify the persons in possession of the premises of the date and time of the ejectment.
The Act also makes slight, but important, changes to Connecticut’s foreclosure mediation program. Mortgagors that are relevant and necessary to the mediation and to any agreement being contemplated in connection with the mediation will need to attend and participate in the mediation. The mediator may excuse a mortgagor from attending a mediation, provided the mortgagor shows good cause for not attending (such as no longer owning and residing in the home due to a divorce) and not being a necessary party to any agreement being contemplated in connection with the mediation. The bill also eliminates the requirement of a mortgagee to provide a certificate of good standing, upon request, to a mortgagor who has completed the foreclosure mediation program and remained current on the payments for three years.
Finally, the legislation requires that whenever a mortgage servicer who is licensed to service mortgages in the state of Connecticut receives funds from a mortgagor to be held in escrow for the payment of taxes and insurance, the mortgage servicer must deposit those funds in one or more segregated deposit or trust accounts, and be reconciled monthly. The funds are not to be commingled with any other funds and may not be used to pay operating expenses.
Authors’ Note: Contributions to this article by Bendett & McHugh, P.C. are appreciated.
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