Spring 2001
A professional publication issued by
Cohn, Goldberg & Deutsch, LLC
Serving the legal needs of lenders and servicers throughout Maryland and the Disctrict of Columbia.
BALTIMORE CITY REQUIRES REGISTRATION
OF NON-OWNER OCCUPIED PROPERTIES
As If there were not enough traps out there, Baltimore has
added another one to the foreclosure golf course. Section
309 of the Baltimore City Code, requires the registration of
residential property and the designation of an authorized agent.
That ordinance states, “By September 1, 1981 and annually
thereafter, every owner of a non-owner occupied dwelling unit,
whether or not occupied or fit for human habitation shall file a
registration statement.” Although the ordinance contains an
exemption for unoccupied dwellings, last used as an owner occupied
dwelling, the City has recently taken the position that this
exemption does not apply to properties that were occupied by
owners prior to foreclosure. This potentially means that all REO
properties must be registered.
An annual registration
fee of $15.00 per property must be paid with a maximum fee of
$2,500.00 per owner. Governmental agencies are exempt from
paying the fee but are not exempt from the registration
requirements. Properties must be registered on the date of
the property transfer. Although we believe this means that
upon deed recordation, the City official we discussed this with,
stated that it was his opinion this means upon foreclosure.
A registered agent must
also be designated, who is a local for purposes of receiving
notices of violations and for receiving court process. If an owner fails to file
a registration statement or to designate a local agent for service
of process and notices, then a criminal misdemeanor proceeding may
be brought which shall be punishable by a fine of up to $500 for
each day of the violation. Additionally, civil penalties of
one percent (1%) per month, plus interest shall accrue.
Although we question whether a Maryland Court
would uphold this statute against a lender or servicer holding
properties solely as REO’s, given the seriousness of the potential
penalties that may be imposed, we would recommend such
registration. The City has already brought several suits.
Forms may be obtained from the Director of Finance at
(410) 396-4139.
COHN, GOLDBERG & DEUTSCH, LLC’s
FREE WEBSITE RECEIVES THOUSANDS OF HITS AND UNCOVERS
FRAUD
Spring
has returned to Maryland and with it the Orioles to Camden Yards.
We are looking forward to their record-breaking hits as well
as the hits to our web site. The web site has a number of
tools and resources that lenders have reported as being
indispensable. These include tax assessment records as well
as a nationwide database of real estate prices. This
information is extremely helpful in determining equity or pricing
for foreclosure or REO purposes. Resourceful lenders have
also found our web site un-matched in quickly discovering fraud
through flipping as a result of the reporting of sales during
a chosen time frame. By also tracking multiple property
ownership, restitution and deficiencies can be better effectuated.
Any questions on how to use it, please call. The web site
can be found at http://www.cohn-goldberg-deutsch.com/
We have also recently added a link to track multiple
property owners.
ENSURING YOUR INSURANCE
KNOWLEDGE
The general black letter rule is that a
lender who recovers on a fire insurance policy maintained by the
mortgagor for the lender's benefit may apply the proceeds to the
debt. This is axiomatic, where the debt instrument provides for
such application of funds. This right to apply the funds does not
violate the covenant of good faith and fair dealing.
Lenders,
however, should note, contrary to the black letter law, the
Restatement (Third) of Property: Security (Mortgages) states that
when parties have not contracted otherwise, and the lender
receives casualty insurance proceeds, the lender is under a duty
to restore the property, if the restoration is feasible, the funds
are adequate and the restoration would result in a property value
of at least equal to the property's pre-casualty value. This
provision therefore, suggests circumstances under which such
application of funds may also be improper.
The reasoning
contained in the Restatement is similar to the judicial decisions
found in the Maryland, Schoolcraft-Starkman cases in which
the court felt that it was unconscionable for lenders to apply
proceeds to debt and not facilitate the rebuilding of the
property, thereby causing borrower to fail to meet their ability
to repay the loan. In Schoolcraft, the borrower was unable
to pay rent on an apartment he was forced to relocate to and also
meet the mortgage payments on his home that was uninhabitable.
Moreover, the borrower had no ability to rehabilitate the home
without the insurance proceeds. The Restatement, asserts
that it might be possible to interpret loan provisions that divert
insurance proceeds away from rebuilding toward reduction of debt
as unenforceable since such provisions are either unconscionable
or violate the lender's duty of good faith and fair dealing.
Notwithstanding the
above, most courts have been slow to apply the implied covenant of
good faith and fair dealing. One New Jersey court held that
absent an express agreement or legislation, the borrower has the
absolute right to apply the insurance proceeds to the debt after a
casualty loss. To force the application of proceeds to
rebuilding would shift the risk to lenders by converting its
secured interest into a construction loan. Texas and Indiana
courts agree but California, New York, Arkansas and Illinois
courts do not.
FHNA/FHLMC instruments
give the borrower the ability to apply the proceeds to rebuild as
a matter of contract right. The applicable provision
states:
The Lender shall not
exercise its option to apply insurance proceeds to the payment of
the indebtedness if all of the following conditions are met (1) no
Event of Default (or any event which, with the giving of notice or
the passage of time, or both would constitute an Event of Default)
has occurred and is continuing. (2) The Lender determines, in its
discretion that there will be sufficient funds to complete the
restoration (3) The Lender determines in its discretion, that the
rental income from the mortgaged property after completion of the
restoration will be sufficient to meet all operating costs and
other expenses, imposition deposits, deposits to reserves and loan
repayment obligations relating to the mortgaged property and (4)
The Lender determines, in its discretion that the restoration will
be completed before the earlier of (a) one year before the
maturity date of the note or (b) one year after the date of the
loss of casualty.
This language is benign
and relates to the practicality of restoration of the security.
However, it may be argued that the one year limitations period may
be arbitrary, if a significant but repairable loss occurs.
Moreover, allowing the Lender to determine in its discretion
whether rental income is sufficient is overly broad, where no
payment problems existed before the loss.
Loss payable clauses
should be reviewed. They are divided into two basic types, the
open loss payable clause and the standard or union mortgage
clause.
The open loss payable
clause generally provides that either the proceeds will be paid to
the lender, or both the lender and borrower as their interests may
appear. If a loss occurs prior to the foreclosure auction
and the debt is satisfied at auction (full debt bid), the lender
may have no proceeds rights. If however, the auction does
not produce sufficient proceeds, then a lender should receive
proceeds to the extent of the deficiency. Some courts,
however, hold that under an open clause a lender would have no
claim to proceeds even if a deficiency exists. These courts
reason, that insurance proceeds are security for the debt and that
the security ceases when the debt is extinguished, even where the
full debt is not bid. If a loss occurs after foreclosure,
lenders under open clauses are barred from recovery since its
interest is only as a lender and not as an owner. Open
clauses also contain a risk that a borrower's conduct may void the
policy.
The standard or union
mortgage clause is far more beneficial to lenders. Lenders
have an independent insured interest and a separate contractual
relationship between the insurance company and the themselves,
which cannot be affected by the borrowers conduct. Prior to
cancellation, notice and an opportunity to cure must be provided
and because the lender has a separate interest, it survives
foreclosure until the premium period expires.
As to pre-foreclosure
losses, the lender is insured under the standard mortgage clause
to the amount of the debt as of the moment of loss. Lenders
therefore have two options. A lender may collect insurance
proceeds up to the policy limits or the full amount of the debt.
Alternatively, a lender may proceed with foreclosure, in
which case it will be entitled to the proceeds up to the policy
limits, which covers any deficiency. Thus, lenders must be
careful in bidding full debt, since insurance benefits may be
lost.
In the majority of cases
where a loss occurs following foreclosure and the lender buys in,
the courts view the lender under the standard clause as having an
insurable interest as owner, regardless of whether the foreclosure
sale extinguished the debt. There is a split of authority as
to whether the lender loses insurance benefits if it bids full
debt but was unaware at the time of sale that a casualty loss
occurred. The Restatement supports the position that the
lender who makes a full credit bid abandons any claim on insurance
proceeds. The burden according to the Restatement is for the
lender to make a last minute property inspection.
In certain states, such as Maryland, a ratification period exists
between the time of sale and legal title passing to the purchaser.
Until the sale is ratified, the risk of loss due to fire is
on the borrower and in effect on the lender. Third party
purchasers at foreclosure may petition the court for an equitable
abatement of the purchase price for a casualty loss experienced
after the sale but before ratification. Therefore, it is
important to insure the premises with a standard lender
endorsements, “as its interests may appear”.
THE DOWER HOUR
At common law,
“dower” is the legal right or interest that a wife acquires in the
estate of her husband. It consists of the right to use,
during the wife’s natural life but after the death of the husband,
one third of all the real property of which her husband was
beneficially seized, at any time during a valid marriage.
During the lifetime of a husband the right is
“inchoate” and after his death it is “consummate”. This
right has been abolished in most jurisdictions, including
Maryland, but it is alive and well in the District of Columbia.
D.C. Code Ann. Section 19-101 to 19-115.
The purpose of dower is to ensure that widow will not be left
disinherited and destitute and to provide for the nurture and
education of young, fatherless children. Because dower
continues to exist in the District of Columbia, both spouse’s
signatures are required to convey real estate interests, even if
the property is held by one spouse solely.
This means that both spouses must execute a
Deed of Trust, even if one spouse owns the property. Failure
to obtain both signatures may significantly delay a foreclosure
proceeding. Jointly owned property with a non-spouse is not
subject to dower claims of any of the party’s spouses.
Although
Section 19-102(b) provides language to protect claims for purchase
money liens, title companies rarely rely on this language.
Therefore, the claims of creditors, heirs, devisees and
legatees are also generally subordinate to the widow’s right of
dower, unless the mortgage was given before the marriage.
Any transaction during the marriage by which one spouse
attempts to convey or encumber property without obtaining a
release of dower is ineffective as to the dower interest.
Lenders facing defective grants on Deed of Trusts should lay
a claim with the title insurance company, insuring the
transaction.
NEW ANTI-PREDATORY LENDING BILL
AND FORECLOSURE PROCEDURES FOR DC
As reported in our
last issue, the D.C. City Council enacted new legislation that
will drastically affect the manner that foreclosures are
conducted. Mayor Anthony Williams, signed that legislation.
Because Washington, D.C. does not have home rule, the D.C.
Control Board, an independent watchdog group created by Congress
to manage the city and budgetary affairs, has approved this bill
in order to update the District’s 99 year old foreclosure laws.
Only the procedural rules are necessary to finalize this
legislation.
Vocal opposition had
arisen by various groups to a provision exempting loans sold to
FNMA and FHLMC from the anti-predatory lending requirement, which
also meet the GSE’s guidelines. The National Home Equity Mortgage
Association also along with the American Financial Services
Association and the Consumer Mortgage Association wrote a joint
letter to the Mayor stating that the bill would not provide
adequate protection to lenders who seek to take advantage of the
anti-predatory exemption.
Lenders argued that
if a loan sold to Fannie or Freddie later fails to meet the GSE’s
underwriting and servicing guidelines, the exemption could be
lost. Once lost, the loan would be subject to judicial
review if it goes into foreclosure and place the lender at risk
with regulators. It was thought that Lenders should have the
exemption not the GSE’s since the GSE’s can always force lenders
to repurchase problematic loans. Trade groups therefore believed,
that lenders with assets exceeding $10 million should be exempt
from the bill¹s anti predatory lending requirements. It was
argued that the bill in its present format would result in a
decreased flow of credit to the District's homeowners,
particularly low and moderate income individuals.
Foreclosure
attorneys, including this firm, have also argued during the
debates in the legislation's drafting, that the bill will cause
significant delays and expense in conducting foreclosures in the
District. Under the legislation as presently drafted,
personal service and judicial hearings may be required before a
lender can foreclosure under a certain Deeds of Trust. Such
hearings will cause delays as a result of the significantly
overloaded court dockets in the City and much added expense.
Moreover, hearings can be abused by borrowers seeking delays
for frivolous reasons.
We
were hoping that a more definitive review could be provided
herein. However, since the rules have not been finalized
prior to this printing, such review is not possible. Once
more is learned, a more comprehensive review will be
provided.
Back to Newsletter directory
Firm Description
