REQUIRED READING: Even though homeowners hold more than 40 million mortgages in the U.S., it seems that relatively few of us are aware of clauses in virtually all mortgage documents that grant mortgagees the right to protect their collateral interest in a property when a homeowner breaches the terms of the contract. When the breach consists of a defaulted loan and abandonment, not only do mortgagees have the right to protect the collateral value of a property, but government-sponsored investors and insurers also hold mortgagees accountable to do so.
The guidelines of Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Housing and Urban Development state that mortgagees are responsible for protecting and preserving the value and condition of a property when it is in default. The responsibility of the mortgagee to protect a property's collateral value continues until the property proceeds through the foreclosure sale. Depending on the state, the foreclosure process may take as little as two months in nonjudicial foreclosure states and as long as two years in states with judicial foreclosure processes.
During this "pre-sale period" prior to the foreclosure sale, mortgagees, mortgage servicers and their field-service representatives are increasingly finding themselves in no-win situations with homeowners, neighbors, municipalities and courts when defaulted properties become the subject of high-profile attention, usually after they have been abandoned, or appear to have been abandoned, by homeowners.
The most significant issues revolve around questions of possession, scope of
responsibility, liability and homeowner protection.
Possession vs. responsibility
In the past few months alone, national television networks and daily newspapers have covered different stories with a similar twist – a homeowner returns home after being away for a while and calls the media claiming that the bank broke into his house and changed the locks. It makes for sensational news, but the truth is lost in the story.
What typically is not reported is that the homeowner's mortgage is in serious default and he has ignored all communications from his bank. Often, neighbors have not seen anyone at the house, nobody is mowing the lawn, and mail and newspapers may be piling up on the porch. In some cases, neighbors may have complained to the city about the condition of the house. In most stories, the bank is painted in a bad light and is accused of trying to kick the borrower out of the home. Occasionally, plaintiffs' attorneys have been the instigators of news tips on behalf of homeowners as a preamble to litigation against the mortgagee.
In most instances, what happened was that the bank found a seriously delinquent home unoccupied and, having had no response to repeated communications attempts, took steps to secure the property. The bank probably changed one door lock to gain entry for purposes of maintaining the property and removing food and other items to prevent safety and infestation problems. Outside, it likely cleared the yard of debris and put the property on a regular grass-cutting schedule so the property would not create a neighborhood nuisance. The mortgagee does not "seize" property or take possession; it only takes responsibility to protect and preserve the property in the absence of an occupant. The mortgagee only takes possession after the property has gone through a foreclosure sale.
While banks are often criticized for taking these actions on properties pre-sale, consider a different scenario. Let's say the homeowner had simply walked away from the house because the loan was underwater. The grass grows, the mail piles up and neighbors complain to the city, and someone calls the media. In this scenario, if the mortgagee had not taken responsibility to maintain the property, it would be the object of a different kind of negative news story.
The distinction between possession and responsibility is often overlooked, but it is important to understand. When a homeowner defaults on his loan and violates terms of the mortgage contract, government-sponsored investors hold mortgagees responsible for protecting the collateral value and condition of the property. For this reason, mortgage documents give mortgagees the right to take the actions necessary to protect a property's collateral value and comply with investor guidelines.
Investor guidelines do not identify the specific actions mortgagees must take, but generally, these actions begin with routine inspections to verify the occupancy status and condition of the property. If a defaulted property is believed to have been abandoned by the homeowner, mortgagees may take further actions that include, but are not limited to, changing a lock, entering the property for routine inspections and to make needed repairs, replacing or boarding broken doors and windows, draining water from pipes to prevent freeze damage, addressing and preventing code violations, and eliminating dangerous conditions.
Even a homeowner in serious default who has abandoned his property maintains the right to enter it, and even to reoccupy it any time prior to the foreclosure sale. Therefore, the mortgagee will change only one lock so that the homeowner maintains access. In some jurisdictions, attorneys for homeowners have challenged the rights of mortgagees to perform a lock change on a vacant property prior to foreclosure, arguing that mortgagees must first obtain a court order, even if the property has been abandoned and is no longer being maintained by the homeowner.
For mortgagees, the dilemma becomes whether to wait for a court order, which can take weeks and, meanwhile, expose the property to increased risk of major structural damage, or proceed with actions to secure the property and risk litigation.
In most cases, mortgagees will secure the property and take the risk that legal action will be brought against them, as the consequences of waiting for a court order are far more serious. Structural damages that may result from frozen and burst pipes, flooded basements, vandalism and other destructive events not only strip the value from the defaulted property, but also negatively impact nearby property values. Additionally, on FHA- and VA-backed loans, failure to secure a property on a timely basis constitutes mortgagee neglect and may expose mortgagees to significant financial risk if claims for reimbursement of repair expenses are denied.
The question of liability
Code-enforcement departments across the country generally support the actions of mortgagees to secure vacant properties prior to foreclosure. These officials are on the front lines when neighbors complain that a vacant property in the neighborhood has tall grass or debris in the yard and, even worse, when the property has been vandalized or is attracting criminal behavior. Code-enforcement officials do not distinguish between the pre-sale and post-sale status of a vacant property; they just want someone to take care of the property.
Assuming responsibility to protect the condition and value of properties prior to foreclosure raises questions about mortgagee liability. Specifically as it relates to code enforcement, mortgagees struggle with the dilemma of compliance when municipalities impose vacant-property registration ordinances.
By registering properties they do not own, mortgagees run the risk of additional fines if municipalities attempt to hold them liable for code requirements that should only be an issue if a property is occupied. An example would be a code requirement to maintain clean water in an in-ground pool. When a vacant property has an in-ground pool, the industry standard is to cover it and secure it to prevent accidents and discourage trespassing. A code requiring that a pool at a vacant property be cleaned regularly goes beyond the responsibility to protect the value and condition of the property.
While some municipalities will waive fees once they understand the circumstances, others may be more stringent. In all cases, establishing effective communications with code enforcement departments is a good idea to reduce the potential fees and fines for vacant properties.
Another liability challenge relates to the presence of personal property. In pre-sale, the mortgagee does not have the right to remove personal property that the homeowner leaves behind, except items or debris that pose a hazard. Items such as swing sets, barbecue grills, picnic tables, bird baths, clothes lines and yard ornaments are examples of personal property that defaulted homeowners often leave in their yards when they vacate their properties prior to foreclosure.
Yet mortgagees and field-service companies have been subjected to legal action by neighbors and other parties that incur injuries and damages involving personal property at vacant homes. In such cases, claimants are advised that they must seek remedy from the homeowner who maintains the possession, rights and liability for real and personal property prior to foreclosure.
Protecting the homeowner's privacy
Investor guidelines require that mortgagees attempt to make contact with a borrower and verify occupancy when a loan payment has not been received within 45 days of its due date. The challenge for mortgagees and their representatives is to conduct borrower outreach and occupancy verifications in a way that does not violate the borrower's privacy.
Accordingly, mortgagees and mortgage servicers will leave notices for homeowners in plain, sealed envelopes. Field-service contractors performing inspections and maintenance services also receive training and scripts to follow if approached by neighbors asking about their business. Mortgagees do not want to discourage neighbors from being curious and keeping a watchful eye on the property; on the other hand, contractors are prohibited from disclosing information that could violate the homeowner's privacy. Industry best practices suggest that contractors politely inform the neighbor that they were sent by the bank to maintain the property, with no mention of the homeowner.
Verifying the occupancy status of a property also presents potential privacy challenges. Field-service contractors are required to provide both written and photo documentation in their reports. If the contractor observes signs that a property thought to be vacant may be occupied, he must provide photo documentation to support this observation. If the evidence is a car in the driveway or toys in the yard, privacy is not an issue. However, a contractor is not allowed to take a photo through a window to document that a property is occupied, as that may be an invasion of the homeowner's privacy.
Field-service contractors, in general, have no contact with homeowners or other occupants of defaulted properties, and their actions must in no way involve collections. Mortgagees and their mortgage service companies take careful precautions to ensure that the actions and communications of their field-service contractors relate strictly to the protection and preservation of the property.
When properties are in bankruptcy, the mortgagee and servicer are further prohibited from taking any action to seek payment. In some cases, lawyers for plaintiffs in bankruptcy, even at vacant properties, have argued that the act of changing a lock is equivalent to the field-service company's making a demand for payment on behalf of the mortgagee.
Reducing risks, pre-sale
In many ways, carrying out property preservation and mortgage field services is more art than science. Mortgagees and investors provide broad guidelines to direct the actions of their servicing partners, but allow for discretion in how those guidelines are carried out. There is good reason for this. The circumstances around each defaulted and vacant property are unique, and no handbook could effectively address every circumstance. Instead, the industry relies on professionals to develop effective procedures and exercise good judgment within legal and business parameters.
From a field-service perspective, good judgment begins with hiring experienced contractors and providing them with ongoing training to reduce the risks associated with pre-sale property preservation. Well-rounded training should encompass courses on standard policies and procedures, communications regarding changes and updates to guidelines and procedures, and alerts on trends and addressing new issues occurring in the field. At the same time, field-service companies should routinely engage contractors in two-way communications to obtain their unique perspective and suggestions for improving processes and reducing risk.
Supporting contractors in the field with systems and technology that help them do their jobs better and that provide timely and accurate property data is critical. As property volumes have increased, tools such as electronic checklists have helped contractors work more efficiently and maintain quality by ensuring that all required services are performed at a property. Systems improvements have helped to ensure that contractors have access to the latest property status and information to avoid potentially costly errors. New smartphone and PDA applications enable contractors to submit photo documentation and reports immediately, receive instant quality-control feedback, and address outstanding issues quickly without multiple trips and delays.
As the field-service industry has expanded and matured, quality-control procedures have become more sophisticated as well. By establishing and evaluating metrics on all aspects of property-preservation services, companies are better able to identify both deficiencies and best practices and take appropriate actions to mitigate risks.
Alan Jaffa is CEO of Cleveland-based Safeguard Properties, a national provider of field services. He can be contacted at (800) 852-8306.
