In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Saturday, April 12, 2008

Maryland Foreclosure Law Changes

by Tanta on 4/12/2008 12:02:00 PM

This post is going to be lawyer bait. I'm just warnin' you civilians.

Housing Wire reported the story yesterday:

Maryland governor Martin O’Malley joined with local elected officials and consumer advocates last week to sign emergency legislation that targets troubled borrowers in the state.

Perhaps the most immediate mortgage industry impact will be felt by just one of the three bills that was passed — the obscenely-long-named Real Property–Recordation of Instruments Securing Mortgage Loans and Foreclosure of Mortgages and Deeds of Trust on Residential Property bill. (Yes, that’s the actual name).

The legislation significantly lengthens the foreclosure process from 15 days to approximately 150 days, by requiring a lender to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action.

It also requires personal service to notify a homeowner of impending foreclosure action, and requires that a sale may not occur for 45 days after service. A lender must also produce “proof of ownership” when filing a foreclosure action, according to a press statement put out by the governor’s office. . . .

Longer foreclosure timelines are being considered in other states as well, as state and local governments grapple with a surge in borrower defaults, sources tell Housing Wire. Such changes can be bad news for investors and insurers, who see so-called carry costs increase beyond whatever expectations had been in place when a deal was originally structured or a particular loan pool was purchased.

For insurers, the new law may mean increased loss severity on borrower default claims in the state, sources said.
I hate to disagree with my friend PJ on this--or with Yves at naked capitalism, who also picked up the story--but I'm going to. (Y'all can use the comment thread to beat on me about it, if you want.)

This legislation does very substantially increase Maryland's FC timeline, but then MD had a shorter than national average timeline to begin with. (I really have no idea where Governor O'Malley came up with "15 days" as the current timeline--that's a bit of an exaggeration.) According to Freddie Mac economists Amy Crews Cutts and William A. Merrill, the "statutory timeline" for MD under the old regime was 249 days from date of last payment made by the borrower (last paid installment or LPI) to the final confirmation of the foreclosure sale. The actual average timeline was 274 days. That compares to a national "statutory" average of 292 days and an actual average of 355 days.

As a matter of fact, it doesn't look to me as if this adds more than about 45 days to the MD timeline at most. The trouble is that our good Governor is talking about an old legal regime that gave a servicer a statutory ability to begin FC much earlier than servicers, in actuality, do. As far as I can tell, the new MD law simply enshrines in statute what is a fairly typical servicer practice of waiting until a loan is severely delinquent before initiating foreclosure. The really significant change from the timeline perspective is the requirement that the foreclosure order be (attempted twice to be) served in person to the borrower (and sent by certified mail if that fails) no less than 45 days prior to the actual foreclosure sale. I'm not quite sure how long process service attempts in MD are likely to take in actual practice, but certainly if we are talking about owner-occupied properties, it shouldn't take long.

The new law says (if I am in fact reading the final version signed by the Gov) that a foreclosure action may not be filed until the later of 1) 90 days after a "default" as defined in the mortgage or deed of trust (one may use either security instrument in MD) or 2) 45 days after a Notice of Intent to Foreclose (a new requirement of this law) is sent to the borrower. (This timeline does not apply if the mortgage was fraudulent, no payment has ever been made on the mortgage, the property is destroyed, or the FC is commencing after a bankruptcy stay is lifted.)

The key is that this isn't 90 days plus 45 days. The actual foreclosure filing (which is a docket file in MD) cannot take place until the later of those two timelines, but the Notice of Intent can certainly be sent to the borrower long before the 90th day after default, so that really we're looking at the 90-day timeline to the docket order. In the interests of clarity and trying to line up these timelines with conventions of reporting on loans that you all may already be familiar with, here's my attempt to lay it out.

I put calendar dates in there as examples for those of you who like to see them. I included days from Last Paid Installment, since that's how servicers measure things. The last column translates this into the kind of category you see reported for MBS or mortgage portfolios.

I am assuming here that the servicer does not declare the loan "in default" for legal purposes until a payment is 30 days past due at minimum. The servicer then makes normal collection efforts for 15 days, and if the payment has not been received within 45 days of its due date, the servicer sends out that Notice of Intent (NOI). This establishes "default," from which the statutory 90 days begins.

The "June" timeline here is approximate; much will depend on the attorneys' and court's caseload and the time it takes to serve the borrower and schedule the sale. The three separate sale notices are no different, as far as I can tell, from old MD law. The big difference in the new law is that the foreclosure sale cannot be held earlier than 45 days from process service.

The 60 days for sale confirmation and audit is also approximate; I have seen estimates (like here) of 45 days. Freddie Mac uses 60 days. This period of time doesn't particularly matter to a borrower, unless the borrower did in fact have equity in the home (a borrower would not receive his proceeds until the sale is confirmed and audit complete) or, of course, if the lender were pursuing a deficiency judgment (which also can happen only after the audit when a deficiency is established). But it matters to servicers and investors, so I am including it here. The final "delinquency status" of the loan becomes REO if the lender takes the property, and "zero" or "default" if a third party does.

Thus, I come up with a "fastest case" timeline of 150 days from LPI to FC referral (or 120 days delinquency), which is pretty much what servicers do as a matter of policy anyway. As I said, the MD statute basically just builds that into law. Then the timeline is around 60 days from referral to sale, and around 120 days from referral to final completion.

At a total of 270 days from LPI, that puts Maryland right under the "statutory" or fastest-case national average. More importantly, it keeps Maryland in reasonable proximity to what the Freddie Mac researchers have called the "sweet spot" of foreclosure timelines: "short enough to give borrowers a strong incentive to cure out of foreclosure if they have the means and long enough to allow those who have a reasonable chance of economic recovery a chance to avoid the loss of their home." I have to agree with Cutts and Merrill that foreclosure timelines that are too long just don't end up helping borrowers; without the "strong incentive" of looming loss of the home, borrowers can fall into "waiting out" those long timelines, meaning that when the FC sale does actually arrive, they now owe too much back interest and fees and costs to be able to reinstate. On the other hand, timelines that are much too short simply don't give anyone--borrowers or servicers--enough of a chance to work things out or sell the home voluntarily.

I therefore really don't think it's worth getting up in arms over the MD law; I think it really just makes MD "typical" rather than relatively short. There are also a couple of other provisions in this law that I think are great ideas--and no doubt explain that unwieldy title. First, new recorded mortgages must contain the broker's name and license number, if the loan was originated by someone other than the actual mortgagee (that's the wholesale lender). This will help track FCs back to the originator of the loan, even if the loan changes hands several times afterwards.

Second, the law specifically does not "extinguish" a lease in a foreclosure: the new owner of the property has all rights vis-a-vis the tenants that the old owner did, but then again the tenants have all rights they had under the old owner. That seems perfectly fair to me, and it especially protects tentants "recruited" into a property by a desperate owner just before foreclosure.

Legal junkies may also be amused to note that this law specifically allows that "proof of ownership" of a loan required to be provided with the docket file may be certified copies of mortgages, notes, and assignments in lieu of the originals. That should end all the hoo-haw over missing originals. It will surely take a while for MD courts to clear up their "standing orders" in this regard in terms of exact requirements, but I hope that puts to bed some frivolous objections to copies, as well as servicers' temptation to keep submitting Lost Note Affidavits in order to get around having to file one's original note with the court.