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Weathering the Storm: How Mortgage Servicers and Default Firms can Work Together to Survive COVID-19 Moratoria

by Christianna Kersey, Esq., Richard Solomon, Esq., Michael McKeefery, Esq. and Kevin Hildebeidel, Esq.
Cohn, Goldberg & Deutsch, LLC
USFN Member (DC, MD)

 

To date, over 3 million cases of COVID-19 have been reported worldwide. With no vaccine and no way of knowing when the curve will completely flatten, federal and local governments have taken drastic and unprecedented steps to ease the burden on borrowers affected by the virus. Moratoria on residential foreclosure actions imposed by various private investors, government sponsored entities and state and local governments have dramatically altered the needs of foreclosure servicing agents. These unparalleled governmental actions have both mortgage servicers and default law firms in a state of flux. With needs ever-changing, there is one common goal: withstand the storm.

Since the COVID-19 pandemic was first declared in the United States, there have been numerous federal and state moratoria imposed on both foreclosure and eviction actions.

On March 25, 2020, the U.S. Senate passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act. The U.S. House passed the bill on Friday, March 27, 2020, and President Trump signed the bill into law that same day. The more stringent CARES Act foreclosure moratorium supplanted all the prior federal moratoria that had been imposed between March 18, 2020 and March 19, 2020.

Section 4022(c)(2) of the CARES Act (“Foreclosure Moratorium and Consumer Right to Request Forbearance”) provides “Except with respect to a vacant or abandoned property, a servicer of a Federally backed mortgage loan may not initiate any judicial or non-judicial foreclosure process, move for a foreclosure judgment or order of sale, or execute a foreclosure-related eviction or foreclosure sale for not less than the 60-day period beginning on March 18, 2020.” The CARES Act defines a “Federally backed mortgage loan” as any loan that is secured by a first or subordinate lien on real property (including individual units of condominiums or cooperatives) designed principally for the occupancy of from one to four  families that is either insured by the Federal Housing Administration or the National Housing Act, guaranteed under Housing and Community Development Act, the Department of Veterans Affairs, or the Department of Agriculture, made by the Department of Agriculture or purchased or securitized by the Federal Home Loan Mortgage Corporation or the Federal National Mortgage Association.

On April 8, 2020, Fannie Mae issued an update to its previously issued LL-2020-02 indicating that “In response to the CARES Act, we are acknowledging that the servicer must now suspend foreclosure-related activities in accordance with the requirements of the CARES Act,” and Freddie Mac issued an update to Bulletin 2020-10, which indicated “As provided in the CARES Act, Servicers must suspend all foreclosure actions, including foreclosure sales, through May 17, 2020. This includes initiation of any judicial or non-judicial foreclosure process, move for foreclosure judgment or order of sale. This foreclosure suspension does not apply to Mortgages on properties that have been determined to be vacant or abandoned.”

Fannie Mae further indicated, “Fannie Mae generally requires servicers to file motions for relief from the automatic stay in bankruptcy cases upon certain milestones. In light of the CARES Act and other impacts resulting from the COVID-19 National Emergency, Fannie Mae is temporarily relieving servicers of the obligation to meet these timelines. This temporary suspension shall be in effect for not less than the 60-day period beginning on Mar. 18, 2020.” Freddie Mac had nearly identical language in its Bulletin 2020-10.

It should be noted that the CARES Act specifically exempts “vacant or abandoned” properties. However, notwithstanding the CARES Act, states, of course, may have more stringent prohibitions in place.

Maryland and the District of Columbia are two jurisdictions that have issued emergency measures and guidance in addition to the federal prohibitions. On March 18, 2020, the same day as most of the federal mandates, the Court of Appeals of Maryland issued an Administrative Order indicating that “Those foreclosures of residential properties and foreclosures of the rights of redemption of residential properties pending in the circuit courts shall be stayed effective immediately; and Residential eviction matters pending in the District Court of Maryland and all pending residential eviction orders shall be stayed effective immediately; and New foreclosure of residential property, foreclosure of rights of redemption after a tax sale, and residential evictions shall be stayed upon filing.”

On March 25, 2020, the Court of Appeals of Maryland issued an Administrative Order rescinding its prior order, and indicating that “All proceedings related to foreclosures of residential properties, … pending in the circuit courts shall be stayed effective immediately, … ; and New foreclosures of residential property, … , and all other actions for possession (residential evictions) shall be stayed upon filing; … .” The only exception being “Where the parties can demonstrate that a delay of a residential foreclosure will place an undue burden on the defendant, a consent motion to lift stay to allow ratification, signed by the defendant, shall be considered on an expedited basis.”

Unlike with the federal mandates, there is no specific end date for the current Maryland Order (like the earlier order), and it merely states that the order “will be revised as circumstances warrant.” Also, conspicuously, there was no exception, as with the federal mandates, for vacant or abandoned properties. This order (also like the earlier order), left open the possibility of sending the Maryland Notice of Intention Foreclose, in addition to being able to at least file a foreclosure case.

However, on April 3, 2020, the Governor of Maryland issued Executive order 20-04-03-01, indicating that “The Commissioner [of Financial Regulation of the State of Maryland] is hereby ordered to suspend the operation of the Commissioner’s Notice of Intent to Foreclose Electronic System, and to discontinue acceptance of Notices of Intent to Foreclose until the state of emergency is terminated and the catastrophic health emergency is rescinded.” This had the practical effect of putting a stop to nearly all foreclosure related activity in the State of Maryland from the very beginning of the process to the very end.  Basically, at the current time, the only action permitted on Maryland residential foreclosure matters is the bare filing of foreclosures based on Notices of Intent to Foreclose (“NOI”) sent prior to the Governor’s order suspending the NOI registration database.

In the District of Columbia, the Chief Judge of the Superior Court initially continued all foreclosure hearings and stayed all evictions before May 1, 2020.  The Court of Appeals canceled all oral arguments before May 31, 2020.  The Mayor issued a series of Emergency Orders which stopped all foreclosures and evictions.  All of the Mayor’s Orders were later extended to May 15, 2020 (Order 2020-063).  The Council also considered legislation prohibiting evictions and requiring mortgage companies to offer 90-day deferrals of payments.  What emerged was D.C. Act 23-286, which excepted foreclosures which had already been initiated, or where the acceleration had already been exercised, before March 11, 2020.  All others, without regard to the type or nature of the loan (residential and commercial included) will have to comply with the Commissioner of the Department of Insurance, Securities and Banking (“DISB”) to grant a 90-day deferment and waive any late fees, processing fees or other fees accrued during the emergency.

Servicers cannot report delinquency or other derogatory information to credit agencies as a result of the deferral.  Servicers are required to approve all applications where the borrower demonstrates a financial hardship and agrees to pay within a “reasonable” time.  That length of time is defined as either the time which is agreed by the parties or, if there is no agreement, five (5) years after the end of the deferment period or the original term of the loan–whichever is earlier.  No lump sums can be required as a part of the deferral.  Servicers will need to take both the date of acceleration or filing and the new requirements into account before proceeding in the District.

The Act also addressed debt collection generally.  On April 24, 2020 the Office of the Attorney General of the District of Columbia provided guidance on the debt collection provisions and how they would interpret the same.  While the entire guidance is recommended reading to those who are interested, the major points are: the limitations last for the length of the Mayor’s Emergency Declaration and 60 days beyond; attempts to initiate contact with debtors in connection with debt collection are prohibited; and no suits for collection or threats of suits for collection may be issued during the provided term.  Repossession activity must also be halted

Virginia, a non-judicial state, is normally very “hands-off” when it comes to foreclosures. On March 30, 2020, Governor Northam issued Executive Order 55, a “stay at home” order which enumerated items for which people could leave their home.  The Order invoked VA Code Sec. 44-146.17 and threatened a Class 1 misdemeanor for violations of the Order.  Calling or attending foreclosure sales was not specifically listed among the enumerated items, leading one to believe it is not permitted.  Moreover, it was suggested that sales might be chilled if bidders could not lawfully attend or were deterred from attending.  The Order states it will remain in effect for ten (10) weeks, until June 10, 2020, unless amended or altered.  Courts were effectively closed, with each jurisdiction defining what essential functions would be handled during the emergency.

The primary focus of servicers during this unprecedented period has been, and will likely continue to be, loss mitigation assistance.  While foreclosure actions are on mandated holds, servicers are inundated with requests for loss mitigation assistance, including, but not limited to, requests for loan modification, repayment plans, forbearance agreements, deeds in lieu of foreclosure and short sales.  Servicers need to ensure that they not only compile the information and/or documentation necessary to fully review borrowers for any and all applicable loss mitigation alternatives to foreclosure, but servicers must also ensure that they are complying with the Consumer Financial Protection Bureau (“CFPB”) regulations regarding loss mitigation requests.  See 12 C.F.R. § 1024.41.  Furthermore, servicers need to review borrowers for eligible loss mitigation options, and issue decisions regarding each application.  During this entire process, servicers must ensure that they are fully compliant with all applicable CFPB guidelines and local regulations.  Due to the expected significant increase in requests for loss mitigation assistance, servicers may be hard pressed to timely review and respond to loss mitigation applications within the prescribed CFPB or local deadlines.

Servicers will also likely experience a significant increase in volume to their call centers.  As unemployment increases to historic levels, and as many Americans continue to be unsure about their economic future, borrowers will likely contact servicers’ call centers to discuss mitigation of any mortgage loan default, and alternatives to the normal repercussions of such default, i.e. foreclosure.  Borrowers will also contact the servicers’ call centers to determine the current status of their loan and to proactively inquire as to what options are available to them if income streams are impacted by the current pandemic.  All of these factors lead to a serious need for servicers to keep their call centers fully staffed with knowledgeable and experienced individuals who can answer borrowers’ inquiries and who can effectively and accurately usher borrowers through the loss mitigation process.  Servicers must ensure that they have plans in place to safeguard their call centers from being overwhelmed with borrower inquiries.

It may now seem far off, but, at some point not in the too distant future, the imposed moratoria will all be lifted.  When that occurs, it will behoove many servicers to be ready to proceed with files that have been on hold for a significant period of time.  As a result, it is important for foreclosing servicers to focus upon drafting and preparing necessary documentation during these mandated foreclosure holds.  Information and documentation that is needed in order to send out any state or contractually mandated notices that are required prior to initiating foreclosure, or to file first legal, can be completed and submitted to local foreclosure counsel while foreclosure holds are still in full effect.  Ensuring that such documentation is ready will guarantee that servicers and local law firms can work quickly to proceed with foreclosure actions once they are able to do so.

Furthermore, it is very important for servicers to gather information from their various local foreclosure counsel on what the foreclosure restrictions are for each state and/or jurisdiction.  While foreclosure moratoria are in place, servicers can determine what actions are legally permissible in each state to ensure that they are proceeding with their respective portfolios in a practical and legally responsible manner, and to ensure that they are prepared to proceed with foreclosure actions once the moratoria are lifted. 

During these uncertain times, the primary focus of local foreclosure counsel is to assist servicing clients with their ever-changing needs. Most law firm employees and attorneys have a significant amount of experience, that, in many cases, spans decades and covers the entire default process. Unfortunately, at the moment, many of these knowledgeable folks are sitting idle, as the numerous moratoria have brought default legal services to a screeching halt.

While foreclosure actions are on mandated holds, and requests for loss mitigation assistance continue to grow, experienced law firm staff could undoubtedly assist servicers with the processing and drafting of the loss mitigation documents such as loan modifications, repayment plans, forbearance agreements, deeds in lieu of foreclosure and short sale agreements.  Not only would servicers have the benefit of highly experienced and knowledgeable staff drafting documents, but there would also be attorney involvement each step of the way.  Since local counsel have considerable experience with CFPB guidelines and local loss mitigation laws, local firms can also ensure that servicers are fully compliant with all guidelines, laws and rules applicable to the loss mitigation process.  Local foreclosure counsel can also be tapped as a well-versed intermediary with regard to short sale communications, as interacting with borrowers, realtors and opposing counsel are all routine law firm functions. Law firm employees know the right questions to ask and how to properly communicate this information to servicers. Further, most firm employees and attorneys already have relationships with individuals at the servicing companies, so communication should be relatively seamless. Shifting some, or all, of this burden to local firms conserves resources for the variety of other loss mitigation activity which must be performed by the servicer.

As indicated above, servicers have to ensure that they have plans in place to prevent their call centers from being overwhelmed.  In addition to assistance with loss mitigation, local counsel can be sourced as local call center support. Firms have been thoroughly vetted and are already integrated into numerous servicing platforms. Firm employees could quickly direct calls to the proper individuals within each servicing entity, benefitting the borrower by saving time, while also alleviating the servicers’ need to hire and vet additional staff. This would ultimately reduce out of pocket costs to the servicer. 

Another area where existing default operations should focus, is on pre-sale documentation. In more restrictive jurisdictions it is important for foreclosing servicers to carefully consult with local counsel on drafting and preparing necessary documentation to facilitate expedited first legal filing once moratoria are lifted. It is said that “proper planning prevents poor performance,” so pre-planning this process in conjunction with local law firms will minimize legal issues and restart time. Local counsel are experienced in their respective jurisdictions and can gather the necessary information to place each case in a proper posture for filing quickly once the moratoria lift.  Much of this information can be collected while holds are still in place. Substitutions of trustees can be executed, assignments can be executed and made ready for recording, and assignments can even be recorded in jurisdictions that have E-recording.  Title curative actions can proceed and probate petitions can be filed for deceased borrowers. In certain circumstances, under the CARES Act, where properties are vacant, the foreclosure process can continue, if permitted by state law. Servicers should communicate with counsel in various jurisdictions to see if the state moratoria are more restrictive. If they are not, counsel could assist with verification of vacancy on properties, to push the process forward.   Ensuring that such information and documentation is ready and being processed will ensure that servicers and local law firms can work quickly to move forward with foreclosure actions once they are able to do so, and will mitigate the shock to those departments when foreclosures resume.

Finally, while it remains very important for servicers to understand what actions are legally permissible in every jurisdiction, it is equally important to ensure that they are prepared to proceed with foreclosure actions once the holds are lifted. Although it may be difficult to shift perspectives to think of the delay as beneficial, in states where servicers have been given time to prepare, servicers should maximize that preparedness in cooperation with the local law firms.

We do not have a crystal ball and we do not know what the future holds for the default industry, but what we do know is that servicers and counsel can work in concert to prepare for the many shared challenges facing both before and after the lifting of the moratoria imposed as a result of the COVID-19 pandemic.

 

This article originally appeared in the USFN, on Tuesday, May 5, 2020 and is reprinted with permission.

The Solar Foreclosure Fixation

By:  Ronald S. Deutsch
Cohn, Goldberg & Deutsch
Towson, MD

With the torrid pace of solar energy equipment installations, it has become more common to experience legal and practical issues resulting from the financing of such equipment. Such installations and financing have increased by nearly 500% in the last several years, with homeowners taking advantage of falling prices and tax credits. An average homeowner, it has been estimated, will recoup the costs of their system in approximately seven years.

Foreclosure attorneys must analyze several legal issues when discovering solar equipment financing on a property. Paramount in the analysis is whether a solar panel is a fixture or whether it is a separate property or a chattel. Priority is another critical issue that must be reviewed.

It is blackletter law that when a bank forecloses on a property, it takes the land, the building, and all permanent fixtures attached. Fixtures are improvements or items of separate property that are attached to a building, making them part of the building. Fixtures are defined in Article 9 of the Uniform Commercial Code “UCC” to include “goods that have become so related to a particular property that an interest in them arises under real property law.” State law must also be reviewed to determine whether a particular “good” is a fixture. Although not uniform, most states have adopted the critical factors established by the Ohio Supreme Court in Teaff v. Hewitt when analyzing whether a good is a fixture or a chattel. These factors are: (1) whether the good is attached to the real property, (2) whether the good has been adapted for the use of the real property, and (3) whether the parties intended a good to be permanently attached.

Hornbook fame, Professors White and Summers, proposed a half-inch formula stating that “anything which could be moved more than a half-inch by one blow with a hammer weighing not more than five pounds and swung by a man weighing not more than 250 pounds would not be a fixture”. Many examples of property found not be a fixture include such extremes as twenty-ton machines anchored in with screws. On the other hand, a mobile home was a fixture, where the intent of the parties demonstrated such an intent.

With respect to solar panels, attachment can occur through means such as nails, screws, bolts, adhesives, moldings, tiles, and other fastenings. Even if not physically attached, panels can have a constructive attachment when it permanently rests upon the building, and it is necessary for the use of the building.

In analyzing whether a solar panel has been adapted for use for the real property, a court generally reviews several factors. These include whether the solar panel is an integral and indispensable part of the property, whether it would damage the structure if it were severed, and whether the solar panels are highly customized in fabrication and installation to meet the specific criteria of the property where it is installed. The more generic and less customized, the more likely the solar panel would be found to be separate property or a chattel.

Intent is also a critical factor. That is, do the parties intend a solar panel to remain separate or mere personal property or instead intend the panel to become a fixture? The clearest way to demonstrate intent is where a lender and the property owner document their intent through the execution of an agreement in writing. Intent, however, can be overridden when a court finds that a solar panel cannot be removed without substantially damaging the structure or whether it has become essential to the property to which it is attached.

Lenders generally perfect their security interest in chattels by filing a financing statement with the applicable Secretary of State or such other office where it would normally file a financing statement covering personal property. Alternatively, a fixture filing may be filed in the local office where it would normally record a mortgage to encumber the real estate property. Fixture filings contain the same contents as a personal property filing, but includes additionally, (a) a specification that the collateral includes fixtures, (b) indicates that it is to be recorded in the real property records, (c) provides a description of the related real property and, (d) provides the name of the record owner if the debtor does not have an interest of record. Most jurisdictions also permit the recordation of a mortgage that fits the requirements of a fixture filing. Each of these steps results in a lender having a perfected security interest in the fixtures. That said, personal property and fixture filings may lapse after five years unless renewed. Mortgages offer the advantage of having a greater initial life.

In any event, if a solar energy installation is a fixture, a foreclosing bank may be able to reap the benefit of any property value accretion upon completing its foreclosure action. Lenders who finance solar energy installations that remain chattels are also protected, as they can repossess such items through a replevin action filed in the county courts.

The priority of solar panel financing must additionally be reviewed closely. With the advent of government-approved Property Assessed Clean Energy (PACE) loans, enacted in more than 30 states and the District of Columbia, mortgage lending priority rules, have been upended. No longer is the axiom that first to file is first in right controlling.

PACE financing, as defined by Wikipedia, is a means of financing energy efficiency upgrades, disaster resiliency improvements, water conservation measures, or renewable energy installations of residential, commercial, and industrial property owners. PACE enables property owners to defer the upfront costs that are the most common barrier to energy efficiency installations and thereby facilitate increased installations.

PACE loans are paid by an additional special assessment on the property’s tax assessment over an agreed number of years, while energy costs are simultaneously lowered, providing the borrower with a net financial benefit. Because the solar panels are attached to the property, the consumer can sell the property leaving the debt to be paid through the tax assessment on subsequent owners. Critical to parties handling actions involving a default in a typical mortgage is how the solar panel security interest affects their action and potential claims of priority. The analysis involves reviewing whether the asset is a fixture or not, and also whether the loan product is a PACE loan. A major problem associated with PACE loans is that it takes priority over other lien-holders and those lien-holders may not have been notified or given an opportunity to object.

Another issue arising from solar panel financing is the differing treatment of government and GSE loans at origination and or resale. Fannie Mae and Freddie Mac have refused to purchase or underwrite loans for properties with existing PACE based tax-assessments. However, the Veterans Benefits Administration (VA) in mid- 2016, announced guidelines on managing the financing of properties with PACE obligations. The Federal Housing Administration (FHA), on the other hand, will not allow a property encumbered with a PACE obligation to be eligible for its financing programs unless the lien remains subordinate to the insured mortgage. The ineligibility of a property for a new FHA loan may impact the resale of a home that has been encumbered with PACE loan by prospective Sellers.

There is a myriad of paths that must be analyzed when determining the rights of a foreclosing party or determining the advisability of financing solar energy installations. The analysis can be complex but is necessary to determine the various practical implications as well as the rights of any secured party.

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