The Foreclosure Process: If You Don’t Pay Your Mortgage, the Bank Will (Eventually) Take Your House
The standard work on foreclosure law in Maryland until recent history was Gordon on Foreclosures in Maryland, 4th Ed. (Micpel 2004). This reference work, written and edited by Alexander Gordon, IV, is a book of significant heft, containing 42 chapters and totaling 2,022 pages of thoughtful analysis and research by Gordon accumulated over many years. In an article written after Gordon’s death, a colleague recounted a story that Gordon would often tell about his mother, where she would ask Gordon why he needed to write an entire book on foreclosures when the concept was as simple as, “If you don’t pay your mortgage, the bank takes your house.” And he would always try to explain to her–it just wasn’t that simple. The Star Democrat, Obituaries, May 30, 2010 (www.stardem.com).
Today, consumers and creditors alike face an even more complex and sometimes bewildering foreclosure process than at any time in Maryland history. Throughout most of Maryland’s history, a non-judicial foreclosure process was in place, which tended to favor secured creditors because of its speed and limited judicial oversight. However, in response to the economic crisis of 2008, the legislature and the courts have made many changes to the process, judicial oversight has increased, and the pendulum has swung in the other direction. This shift in policy has been noted by the courts. For example, in Maddox v. Cohn, 424 Md. 379, 393, 36 A. 3d 426, 434 (2012), the court stated in its view that “the Legislature has effectively changed Maryland’s slanted in favor of secured parties foreclosure practices to one requiring compliance with much stricter standards, tipping the playing field to protect debtors.”
This article will break the Maryland foreclosure process down chronologically into seven sections, with the eighth section, bankruptcy, being the wildcard that can be played at any time: (1) default and the notice of intent to foreclose; (2) the order to docket; (3) mediation; (4) pre-sale motions to stay and dismiss; (5) the foreclosure sale; (6) post-sale steps; and (7) the audit. In addition, (8) bankruptcy can play a major role in the foreclosure process, and will be discussed as well.
- Default and the Notice of Intent to Foreclose
As Gordon’s mother clearly understood, there must first be a breach of contract. The terms of the Note and the Deed of Trust will define the default and the contractual notices required to be given to the borrower. Typically, a default is defined as one missed payment, and the borrower must be given a 30-day notice to cure. Once the demand period has expired, the lender may contractually accelerate the debt and demand that the balance due be paid in full.
In addition, the lender must send the borrower a Notice of Intent to Foreclose (NOI) on the form specified by the Maryland Commissioner of Financial Regulation. COMAR § 09.03.12.02 (2015). The NOI is normally sent out 45 days after the default. If the property is owner-occupied, under COMAR § 09.03.12.02(B), the lender must provide: (1) A loss mitigation application for loss mitigation programs that are applicable to the loan; (2) instructions for completing the application and a telephone number to call to confirm receipt of the application; (3) a description of the eligibility requirements for the loss mitigation programs offered by the secured party that may be applicable to the loan; (4) a list of housing counseling resources from Maryland Department of Labor, Licensing and Regulation (“DLLR”) website; and (5) an envelope preprinted with the address of the person responsible for conducting loss mitigation analysis for the loan.
Even though it may seem that an NOI is a standard form document that draws no scrutiny from the courts, there are two recent decisions regarding NOI’s, which should be considered. First, in Shepherd v Burson, 427 Md. 541, 50 A.3d 567 (2012) the borrower argued that the NOI failed to disclose all of the “secured parties,” and that the foreclosure had to be dismissed as a result of the defective NOI. However, the Court held that the secured party was sufficiently identified such that the borrower could have pursued a loan modification had she desired to do so. Shepherd v Burson, 427 Md. 541, 560, 50 A.3d 567, 578. Second, the court held in Granados v. Nadel, 220 Md. App. 482, 104 A.3d 921, 936-937 (2014) “the requirements of Md. Code Ann., Real Prop. § 7-105.1 must be effectuated to give borrowers an opportunity to avoid foreclosure. A lender who relies on an old, incorrect notice of intent to foreclose flouts this requirement.”
- The Order to Docket
An Order to Docket a foreclosure of a lien on residential property may not be filed with the court until the expiration of 45 days from sending the NOI or 90 days after a default, whichever is later, pursuant to Md. Ct. Rule 14-205(b). Under Md. Ct. Rule 14-207(b), the Order to Docket must be accompanied by the following exhibits:
- The original or a certified copy of the mortgage or deed of trust
- Any assignment of the deed of trust
- A statement of the debt
- A certified copy of the note
- An affidavit in compliance with the Servicemembers Civil Relief Act
- A copy of the NOI
- Applicable loss mitigation affidavit (preliminary or final)
- A copy of the deed of appointment of substitute trustees
- The applicable “Important Notice”
Under Md. Ct. Rule 14-209, service of process of the Order to Docket in a residential case must be made upon the mortgagor, borrower and record owner, all of which may be served at the property or their current residence. If the lender is unable to serve the parties, service may be made by posting and mailing, with leave of the court.
Where the property is owner-occupied residential property, the borrower may request foreclosure mediation under Md. Ct. Rule 14-209(c). Although pre-file mediation is possible, it is rarely used. The use of post-filing mediation is more common. In order to request post-filing mediation, the party must file the completed final loss mitigation affidavit form and timely file it with the court, along with a $50.00 fee.
Typically, the mediator will explain the mediation process to the parties, which includes both retention and non-retention options, such as loan modification, forbearance, a short sale or a deed in lieu of foreclosure. The mediation requires the parties to execute an agreement to mediate and to agree that the mediator will not be called as a witness.
It is rare for a mediation session to end with an actual loan modification or other final agreement. More typically, the lender will agree to stay the foreclosure sale until the lender is able to fully evaluate a completed loss mitigation application.
- Pre-Sale Motions to Stay and Dismiss
“Before a foreclosure sale takes place, the defaulting borrower may file a motion to stay
the sale of the property and dismiss the foreclosure action. The borrower, in other words, may petition the court for injunctive relief, challenging the validity of the lien or the right of the lender to foreclose in the pending action.” Bates v. Cohn, 9 A.3d 846, 852, 417 Md. 309, 318-319 (2010) (internal citations omitted).
As to the foreclosure of an owner-occupied residential property, the pre-sale motion to stay or dismiss must be filed within the specific time limits outlined under Md. Ct. Rule 14-211(a)(2)(A).
In the pre-sale motion, the borrower must assert “known and ripe defenses to the conduct of a foreclosure sale prior to the sale, rather than in post-sale exceptions.” Bates v. Cohn, 9 A.3d 846, 858, 417 Md. 309, 328. “A lender’s failure to comply with pre-sale loss mitigation requests is one such defense, which must be raised ordinarily presale in an effort to prevent the sale from occurring.” Id.
Because of the securitization of mortgages, an issue that is frequently encountered in pre-sale motions is the issue of whether the party seeking foreclosure of the deed of trust has standing to foreclose. In Anderson v. Burson, 9 A.3d 870, 879, 196 Md.App. 457, 471 (2010), this issue was largely resolved when the court found under Md. Code. Ann., Comm. Law § 3-301(ii) that a “non-holder in possession of a note who has the rights of a holder can enforce the instrument.”
In Svrcek v. Rosenberg, 203 Md. App. 705, 40 A.3d 494 (2012), the borrower argued that the substitute trustees did not have the legal right or standing to initiate the foreclosure proceeding because the appointment of the substitute trustees was executed by an attorney in fact without a power of attorney recorded in the land records, and the deed of trust was invalid because it failed to name an individual as trustee. The court found that the motion was not timely filed under Md. Ct. Rule 14-211 and that no good cause was shown as an excuse for non-compliance.
- The Foreclosure Sale
Under Md. Ct. Rule 14-210, notice must be given to the borrower, record owner, the holder of any subordinate lien, and “all occupants” not earlier than 30 days prior to the sale and not later than 10 days before the sale. The notice must be sent by certified and first class mail, except the notice to “all occupants,” which is sent first class only.
Notice must also be given to the Internal Revenue Service (“IRS”) if a notice of a tax lien was filed more than 30 days before the sale. 28 U.S.C. § 7425. The notice must be in writing, by registered or certified mail or personal service, at least 25 days prior to the sale and contain the information required under 27 C.F.R. 70.205. If notice is not given to the IRS, the tax lien will not be discharged. In addition, the IRS has a 120-day right of redemption after the sale.
As to the advertisement of the sale, notice of the time, place and terms of the foreclosure sale must be published in a newspaper of general circulation in the county where the action is pending. The notice must be advertised for three successive weeks, with the first publication to be not less than 15 days before the sale and the last publication not to be more than one week before the sale. Md. Ct. Rule 14-210(a).
- Post-Sale Steps
The sale must be reported to the court within 30 days and filed with an affidavit of fairness of the sale and the truth of the report under Md. Ct. Rule 14-305. Once the report of sale is filed, the court will issue an Order Nisi, which provides a notice of the sale and specifies the period by which a person must file exceptions to the sale. Md. Ct. Rule 14-305(c).
Post-sale exceptions are governed by Md. Ct. Rule 14-305(d) and must be filed during the 30-day period provided for in the Order Nisi. Exceptions will only be granted if the party can demonstrate a procedural irregularity with the sale. The court held quite clearly in Bates v. Cohn, 9 A.3d 846, 857, 417 Md. 309, 327 that “Rule 14-305 is not an open portal through which any and all pre-sale objections may be filed as exceptions, without regard to the nature of the objection or when the operative basis underlying the objection arose and was known to the borrower.”
For example, a procedural irregularity could include an insufficient advertisement, fees improperly included as a condition of settlement that could chill the bidding, see Maddox v. Cohn, 424 Md. 379, 36 A.3d 426 (2012), a sale held too early or very late, see Ashley v. Burson, 131 Md. App. 576, 750 A.2d 618 (2000), or a price that shocks the conscience (as low as 35% of market value was found acceptable in Hurlock Food Processors, Inv. Associates v. Mercantile-Safe Deposit and Trust Co., 633 A.2d 438, 98 Md.App. 314 (1993)).
Then, the sale must be ratified. Under Md. Ct. Rule 14-305(e), if no exceptions were filed or any exceptions were filed and overruled, then the court must ratify the sale, so long as it is satisfied that the sale was fairly and properly made.
- The Audit
After the court enters an order ratifying the sale, the court will then refer the matter to the auditor to state the account. Md. Ct. Rule 14-305(f). Once the proposed account is filed, the auditor will then file the proposed report and will issue a notice to all parties that exceptions to the auditor’s report can be filed within 10 days, but that if no exceptions are taken, then the report will be ratified.
Bankruptcy is the wildcard. At any point in the foreclosure process, a debtor can file for bankruptcy and automatically stay any further collection or foreclosure activities under 11 U.S.C. § 362. The stay broadly applies to the “commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor.” 11 U.S.C. § 362(a)(1).
If a debtor files a Chapter 7 bankruptcy, a so-called liquidation bankruptcy, the relief of the automatic stay may be short lived. In a Chapter 7 bankruptcy, the only way the debtor can keep the real property is if he can become current on the mortgage, or resolve the default by some other means, such as a loan modification or a forbearance agreement. Under 11 U.S.C. § 521(a)(2), a debtor must specify whether he intends to retain, redeem or surrender the property. “A bankruptcy discharge extinguishes only one mode of enforcing a claim—namely, an action against the debtor in personam—while leaving intact another—namely, an action against the debtor in rem.” Johnson v. Home State Bank, 501 U.S. 78, 84 (1991).
However, a debtor who files bankruptcy under Chapter 13 of the Bankruptcy Code can propose a plan of reorganization by which he can de-accelerate the default and cure the mortgage arrears over the course of 36 or 60 months. 11 U.S.C. § 1322(b)(3). The Chapter 13 Plan in Maryland provides that “pre-petition arrears on [secured] claims will be paid through equal monthly amounts under the plan while the Debtor maintains post-petition payments directly.” Para. 2(e)(ii), Chapter 13 Plan, Md. Local Bankruptcy Form M.
In addition, debtors may propose a plan of reorganization under Chapter 11 of the Bankruptcy Code. Although generally used for commercial bankruptcies, an individual may be required to file Chapter 11 if the exceed the Chapter 13 debt limits, for example. Under 11 U.S.C. § 109(e), the current Chapter 13 debt limits are $383,175 in unsecured debt or $1,149,525 in secured debt.
Another issue frequently encountered is the timing of the bankruptcy filing in order to stop the foreclosure sale of the property. Under 11 U.S.C. § 1322(c), the mortgage default can be cured “until such residence is sold at a foreclosure sale.” Courts in Maryland generally adhere to the rule that a bankruptcy petition “filed subsequent to the falling of the auctioneer’s gavel simply comes too late” to stop the sale. In re Denny, 242 B.R. 593, 599 (1999).
No matter what Chapter of the Bankruptcy Code the debtor files under, a secured creditor may file a motion for relief from stay in order to proceed with further collection activities, including foreclosure, under 11 U.S.C. § 362(d). The typical scenario in a Chapter 13 or Chapter 11 case is that the creditor seeks to lift the stay because the debtor fails to remain current on his post-petition mortgage payments.
Well, so much for “if you don’t pay your mortgage, the bank takes your house.” In Maryland, the foreclosure process has evolved into a complex process, which represents an attempt by the courts and the legislature to balance creditor and consumer rights. One thing is clear, however, is that both debtors and creditors require the assistance of experienced counsel to guide them through the process and obtain the best result possible under the circumstances.
By: Fred Nix
BP Fisher Law Group, LLP
Fredrick E. Nix is an associate attorney at the BP Fisher Law Group, LLP where he manages the D.C. foreclosure department and the evictions department for Maryland and D.C. He may be reached at email@example.com.