Gov. Martin O'Malley, D-Md., recently signed emergency legislation that brings sweeping changes to Maryland's foreclosure process. This legislation not only lengthens the timeline to foreclose but also requires at least two attempts at personal service of the first legal (docket) and requires additional notice to homeowners by lenders/servicers.
Like many states, Maryland has experienced a substantial increase in foreclosures during the past year. This increase has happened despite the state's low unemployment rate.
As a result, the legislature – desiring to be viewed as helping its constituents – spent countless hours on drafting new protective legislation. Whether this protective goal will result is yet to be determined.
After the legislation was enacted, the Washington Post trumpeted, ‘Maryland lawmakers passed some of the nation's most ambitious legislation to control the housing crisis yesterday by toughening oversight of the mortgage-lending industry and establishing preemptive measures to help people at risk of foreclosureâ�¦The bills include making the most egregious mortgage schemes subject to criminal prosecution, extending the foreclosure timetable from 15 to 150 days and prohibiting prepayment penalties and transactions in which homeowners are tricked into signing over their houses to third parties.’
Under Maryland's century-old previous law, foreclosures previously were accomplished on average 35-45 days from referral to sale and required that the first legal (docket) be filed with the court prior to the first advertisement of sale. Notice was effectuated in part through newspaper advertisements which were published once a week for three weeks.
Additionally, statutory notice was also required to be sent via regular and certified mail to the borrower and all persons with an interest in the property. After the auction sale, a report of sale was filed with the court, by the trustees, along with all necessary post-sale affidavits so that ratification was effectuated.
The new law will vastly change Maryland procedures. On any foreclosure action in which the first legal has not been filed before April 4, 2008, the first legal action may not occur until the later of 90 days after default or 45 days after a notice of intent (NOI) to foreclose is sent certified and regular mail return receipt requested to the mortgagor(s), the record owner(s) and the Commissioner of Financial Regulation.
The notice of intent must include the following information:
- the name and telephone number of the secured party, the mortgage servicer (if applicable) and an agent of the secured party who is authorized to modify the terms of the loan;
- the name and license number of the Maryland mortgage lender and originator (if applicable);
- the amount required to cure the default and reinstate the loan, including all past-due payments and fees; and
- any other information that the commissioner of financial regulation requires.
If a mortgagor cannot reach the named loss mitigation contact, then the ability to file an exception to the foreclosure sale may exist.
Additionally, the statute provides that a lender need not wait until the loan is 90 days in default, if a petition alleging that the loan was procured by fraud, that a first-payment default exists, that the property subject to the mortgage has been ‘destroyed,’ or that the default occurred after a stay has been lifted in a bankruptcy proceeding is filed with the circuit court.
It has yet to be seen whether the court can act on such petition in a shorter time than the required wait. The court, however, can rule on the petition without the necessity of holding a hearing, and if the petition is granted, the secured party may proceed without the necessity of sending the written notice of intent to foreclose otherwise required.
Lenders must additionally decide as to how early in the default they may wish to send the NOI to borrowers and record owners. A record owner refers to the person holding title to the property as of the later of 30 days before the day on which a foreclosure sale of the property is actually held and the date on which an action to foreclose the mortgage or deed of trust is filed.
Some may wish to send the NOI as early as 60 days after non-payment. Others may decide that may be too early. Lenders must also decide whether they will be sending the NOI directly or using their agents or attorneys.
The drafting of the statute contains many technical problems that cloud the issue of who the proper party is to even send the NOI. The statute states that ‘The secured party shall send a written notice of intent,’ but in another section of the statute dealing with another issue, it states ‘The secured party or an authorized agent shall.’
Why the difference in wording? Unfortunately, the final regulations have not been prescribed by the Maryland Commissioner of Finance, which might provide much needed guidance on several issues.
Finally, will borrowers be confused after receiving a 30-day demand letter and a 45-day NOI? If so, will increased Fair Debt Collection Practices Act litigation ensue?
Assuming the new 45-day NOI is sent and the loan delinquency is not resolved, a foreclosure action may be commenced by filing an order to docket. That docketing, now in addition to requiring the certified copy of the deed of trust, a copy of the note, a statement of debt, a military affidavit and an executed copy of the substitution of trustee, must now also include the following information:
- the license number of the originating lender, broker (said information is hoped to be provided on Department of Labor and Licensing Web site). Under Maryland law, ‘originator’ means the individual licensed loan officer. In the future, that information will be contained on the recorded deed of trust as title companies will be required to insert this information on the recorded document;
- an affidavit as to the date of default and the nature of the default and that notice of the default was sent;
- an affidavit certifying ownership of the note;
- an original or certified copy of the recorded SOT; and
- an advisory notice to the mortgagor.
Additionally, the order to docket now needs to be filed with the court and personally served (or at least attempted to be served on a good faith basis) on the mortgagor. Personal service will require two good faith efforts at service on different dates.
No definition is found for good faith efforts in the statute and whether that might require service to be attempted at a place of employment. Thereafter, if personal service cannot be effectuated, an affidavit may be filed and the required documents can be posted in a ‘conspicuous place on the residential property’ and mailed by certified mail return receipt requested and regular mail.
Service is deemed good if the papers to be serves are left with a ‘resident’ of suitable age and discretion at the mortgagor's or grantor's dwelling house our usual place of abode. If a mortgagor ‘resides’ outside of the state, service will still need to be completed at that out-of-state residence.
Once docketed, the sale cannot be scheduled earlier than 45 days from the completion of service of process. The same requirements for publication and all other pre- and post-sale Maryland procedures remain in effect. That is, the foreclosure sale must be advertised once a week for three weeks in a newspaper that is published in the county that the property is situated.
Also, the notice of sale cannot be sent earlier than 30 days before the auction date nor later than 10 days before the date of sale. The person giving the notice shall file – in the proceedings – a return receipt or an affidavit that the provisions requiring notice have been complied with, or that the address of the record owner is not reasonably ascertainable.
Notice must also be sent to the holders of subordinate interests and may additionally be required to be sent to any condominium council or unit owners or homeowners associations. The subordinate interest must be on record at least 30 days before the day on which the foreclosure sale was actually held.
It should also be noted that one of the documents to be served upon the mortgagor is notice outlining information with respect to various options the mortgagor may have, including the filing of an injunction to stop the sale and/or filing a bankruptcy petition.
The statute gives the mortgagor the right to reinstate the loan by paying all past-due payments, penalties and fees any time up to one business day before the sale, and the secured party is required to provide reinstatement or pay-off figures within a reasonable time after a request by the mortgagor or his attorney.
Mortgagors have the right to bring an action against culpable parties, for the failure to comply with the provisions of this statute, within three years of the order ratifying the sale.
The new foreclosure process only applies to residential real estate – that is, properties that are classified as one-family to four-family residences. This stipulation means that some loans that were typically thought to be a commercial loan may now, in fact, be a residential loan subject to the new process.
As a result of the new law, the timeline from referral to sale, the amount of labor to process a foreclosure, and the costs and expenses to effectuate a mortgage proceeding in Maryland will all increase.
In addition, Maryland's legislation can be argued to intrude on federal preemption rights with respect to a number of issues. Principally, legislation has passed, affecting the contract that was signed by the borrower in the deed of trust and also affecting the ability to charge prepayment penalties.
With all rushed legislation, uncertainty as to meaning and what is required exists. This legislation is no exception and is ripe for creating litigation with respect to many issues.
Finally, just as we are all dealing with Maryland's overhaul of its foreclosure law, the District of Columbia is now also contemplating new proposed legislation, called the Fairness in Foreclosure Act of 2008. While it may be too early to predict the final outcome of this legislation, it almost surely will pass.
Overall, approximately 22 states have either changed their laws during this most recent session or, in the alternative, have proposed changes. So as not to leave out the federal government, the Senate and the House of Representatives have also joined into the fray. Even one of the presidential candidates has also discussed a proposal. Clearly, the topic has become quite popular and change is inevitable.
Ronald S. Deutsch is a principal in the Maryland-based law firm Cohn, Goldberg & Deutsch LLC. He can be reached at (410) 296-2550.