Saturday, September 11, 2010

Gotta Love Foreclosure Law, Lawmakers!

I’ve been away from this space a while now, though not engaged in idle pursuits.  Since July 3rd, I’ve written two articles for publication of 12,400 and 16,400 words.  That’s a lot of characters, I guess, but what’s with the 400 extra words?  You can read such things on, if you’re so inclined.  I’ve pined for the informality of the blogosphere.  And I’ve been treated by our State Legislature to free material of interest to real estate lenders and owners, in the form of new Arizona statutes that went into effect at the end of July.  Both deal with residential foreclosure scenarios, and the lenders’ nemeses, the defaulting borrower and the occupants of the house.  These statutes are intended to protect the unwary and unfortunate.  Let’s see how they work.

The first statute is the new A.R.S. Section 33-1331.  This reads that the owner of a house in foreclosure can’t rent to a new tenant after owner gets a notice of sale, without first letting the tenant know that the property is possibly being foreclosed upon.  Failure to do that subjects the owner to damages and “injunctive relief”.  No explanation is afforded on what sort of an injunction would be involved – would it be an order to “not get your house foreclosed on?”  I suppose the real relief needed would be to get your security deposit back and to be fully released from any payment obligations under the lease.  The notice to the tenant has to disclose who you can contact (lender or attorney for lender) to get more information on the pending foreclosure.  Bulletin: You can’t get anyone from a lender or its legal eagles to discuss a pending residential foreclosure with anyone other than the defaulting borrower, no matter how serious a matter the renter thinks it is.  If you call the law office, the first question you’ll get is “what is that foreclosure file number?”- and good luck guessing the correct answer.  The legislature forgot to compel these foreclosing persons to address the foreclosure with the renter.

What the legislature remembered to do is to make the statute inapplicable to apartment projects of 4 or more units – why do those renters get less protection under the statute?  The other small omission in the new law is dealing with the circumstance where the rental agreement postdates when “the foreclosure action was initiated.”  Problem is, the recording of the notice of trustee’s sale, or NOTS, which initiates the foreclosure, isn’t simultaneous with the lender’s giving notice of that recording to the borrower; in fact, the foreclosure statutes provide the lender a few days to give its borrower notice of the recording.  Bummer for the borrower here; technically, it could lose the renter’s lease even if it tries to comply with the statute, if the timing of conditions is bad.

The other new statute is A.R.S. Section 33-807.01.  It obligates the lender, in certain circumstances, to “attempt to contact the borrower [in writing] to explore options to avoid foreclosure at least 30 days before” it records the NOTS.  Sounds nice, for sure – now, what is meant by these phrases: “attempt to contact” and “explore options?”  My problem with the first phrase is this:  What if the borrower has already moved out of the house (hey, he rented the place a week before the NOTS went out to the house), and left no forwarding address but a mail box number – or his mother in law’s house?  How heroic do the lender’s measures have to be to give that required written notice?  Hire a P.I. to find the borrower?  What if the borrower moved to Dallas?  Second, what does “explore options” mean, and how sincere does that options-exploration effort have to be, if the borrower can be found?  Must the “options” be contained in the written notice?  Is it enough to say “why don’t you consider paying the mortgage installments?”  Doesn’t this statute just invite discussion of (a) deeds in lieu of foreclosure and (b) short sales – and are those better alternatives to just walking away, if you’re the defaulting borrower?  Is the hit the borrower’s credit score will take from a deed in lieu or short sale necessarily less severe than if the foreclosure just runs its course?  You sure about that?

It’s noteworthy that the statute only applies to non-judicial foreclosures, since the triggering of the required notice is a function of recording a notice of trustee’s sale.  Hey, judicial foreclosures make for more work for lawyers – I’m not complaining, you know!  Note also that the statute doesn’t apply to casual lenders who made five or fewer loans in one year secured by real estate, or to lenders complying with “the United States department of treasury home affordable modification program.”  Whatever that means.  Okay, what it’s supposed to say is that the HAMP participants have to give notices under federal law, and federal law preempts state law, so the HAMP participating lenders (both of them) don’t have to comply with any conflicting state notice requirements.   Unfortunately, that isn’t what the provision says.  Regardless, the statute doesn’t require lenders to “provide a modification,” just discuss it.  Ultimately, this statute seems to be largely window-dressing allowing some lawmakers to campaign on the theme that they looked out for the little guys – borrowers and renters of houses.  Good show; thanks for the added landfill material.  


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