Foreclosure of a mortgage can be a strong tool available to lenders to enforce their rights when a loan secured by a mortgage is in default. Massachusetts is somewhat unique in its mortgage foreclosure process and there are more than a few pitfalls to be wary of when conducting a foreclosure sale. This article addresses the steps and procedures for foreclosing a mortgage given to secure a commercial loan and covering real property in Massachusetts. There may be additional steps if a defaulted mortgage secures a residential consumer loan.
Foreclosure of a mortgage can be a strong tool available to lenders to enforce their rights when a loan secured by a mortgage is in default. Massachusetts is somewhat unique in its mortgage foreclosure process and there are more than a few pitfalls to be wary of when conducting a foreclosure sale. This article addresses the steps and procedures for foreclosing a mortgage given to secure a commercial loan and covering real property in Massachusetts. There may be additional steps if a defaulted mortgage secures a residential consumer loan.
Massachusetts is a nonjudicial foreclosure state, meaning that it does not require a lender to go to court and obtain judicial authorization prior to commencing the foreclosure process on a mortgaged property. Since at least the beginning of the nineteenth century, Massachusetts has allowed lenders to foreclose without a judicial proceeding provided that the form of mortgage specifically references that the mortgage holder (i.e., the lender) has the right to exercise the so-called “statutory power of sale.” While most modern-day forms of mortgage include the statutory power of sale language, we have occasionally found that the statutory power of sale language has been missing in mortgages used by out-of-state lenders, perhaps where they may not have retained Massachusetts counsel to close the mortgage loan. When the statutory power of sale language is missing in a mortgage, the lender has a few options to attempt to cure the defect based upon current law. Ideally, the lender can try to amend the mortgage with cooperation from the borrower to include such language. If the borrower is uncooperative, the lender may need to file an action in the Massachusetts courts seeking a judgment declaring that the statutory power of sale language is incorporated in the mortgage through other language or requesting judicial approval to foreclose the mortgage.
SCRA
It may be necessary, even when enforcing a mortgage securing a commercial loan, that the lender file an action with the Massachusetts Land Court or Superior Court to determine if the owner of the property (i.e., the mortgagor) is entitled to the benefits of the federal Servicemembers’ Civil Relief Act, previously known as the Soldiers’ and Sailors’ Civil Relief Act of 1940 (“SCRA”). The purpose of the SCRA is to determine whether the mortgagor is a member of the armed services at the time that a foreclosing lender is seeking to foreclose its mortgage, and if so, to shield active-duty service members from foreclosure of their homes. Thus, it is only necessary to comply with the SCRA if the mortgagor is an individual or is a real estate nominee trust. If the mortgaged property is owned by a corporate entity such as a limited liability company, corporation, or limited partnership, the lender is not required to obtain a SCRA judgment and can skip this step. Service of an SCRA action upon a mortgagor can also be a helpful tool to demonstrate to the debtor that the lender is serious about exercising its rights as a mortgagee, since it is the next step in the path to foreclosure (if previously issued default and demand letters have failed to get a satisfactory response from such debtor) and may motivate the debtor to either bring the loan back into compliance or pay off the loan without the need to proceed with a foreclosure auction.
Foreclosure By Entry
“Foreclosure by entry” in accordance with G. L. c. 244, §1 is usually done only as a protective measure, in case there was some defect in the foreclosure sale already conducted pursuant to the statutory power of sale language in the mortgage. Foreclosure by entry requires an entry on the property which is documented by two witnesses who certify the entry, under oath, in a signed notarized document recorded with the appropriate registry of deeds. This is the so-called “break the twig” process where the lender’s counsel will require that the foreclosing lender’s representative read a short announcement while standing on the mortgaged property prior to the auctioneer commencing the actual foreclosure auction. After three years, if there is no challenge to the entry, the foreclosure by entry will become effective (often referred to as “ripen”) thus vesting title in the foreclosing mortgagee as of the date of entry (and rendering moot any potential inadequacy in the prior foreclosure sale made pursuant to the power of sale), and terminating any potential right of redemption (i.e., the ability of the owner to reinstate ownership by paying off the loan) by the foreclosed original owner.
Most lenders, rightly so, are wary of engaging in a three year “waiting game” of a foreclosure by entry and therefore this option is simply regarded as a back-up “cure-all” to the standard foreclosure via power of sale, or if necessary, judicial foreclosure process. We previously reviewed the pitfalls of a lender becoming a mortgagee in possession in another Why Do We Care article which is available on our website here.
Foreclosure by Sale
The Massachusetts courts have found that a foreclosing lender exercising a power of sale must comply with the Massachusetts foreclosure statute and act in good faith and with reasonable diligence to protect the interest of the mortgagor. When foreclosing a mortgage pursuant to a statutory power of sale, here are some of the basic requirements and potential issues:
- Conducting a foreclosure by sale requires publishing a notice of sale once per week for three consecutive weeks in a newspaper in the city or town where the mortgaged property is located. The first publication must be at least 21 days prior to the scheduled foreclosure sale date.
- A form of notice of sale is set forth in G.L. c. 244 § 14. The notice must include the following:
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- The time, date, and place of the sale;
- A recitation of the chain of mortgage assignments (if applicable);
- The identification of the mortgage by names of the mortgagor and mortgagee, date, and recording reference (book, page);
- A legal description of the mortgaged property; and
- The terms of the sale (e., deposit amount, closing date, etc.).
Because some of the sale terms can be in flux or change as the auction date approaches, we also recommend that the notice state that, “Other terms to be announced at sale”. This language acts as a “catch-all” and permits the foreclosing lender to make changes or announce additional terms on the day of the foreclosure sale.
- The lender must ensure that all parties entitled to notice of the foreclosure sale under Massachusetts law have received such notices within the required timeframes. The lender will need to obtain a title report identifying all lienholders and other interested parties who are entitled to receive notice of the foreclosure sale. All owners of the property and the holders of all subordinate encumbrances or liens of record as of 30 days prior to date of the foreclosure sale must be notified via registered mail at least 14 days prior to the sale.
- In order to preserve a lender’s right to recover any deficiency remaining under a mortgage loan after the foreclosure sale has occurred (e., any amounts remaining unpaid under the loan after the application of the sale proceeds from the foreclosure sale), the foreclosing lender must send written notice of its right to collect a deficiency (typically sent to borrowers or guarantors of the mortgage loan) at least 21 days before the foreclosure sale occurs. In addition, there is a shortened statute of limitations providing that any action for a deficiency must be brought by the holder of the mortgage loan note within 2 years of the foreclosure sale.
- Federal law also governs the required notice to the IRS in the event that there is a federal income tax lien affecting the mortgaged property. If applicable, the IRS must receive notice mailed at least 25 days before the sale date with specific information required by federal law to be included in that notice.
Once the lender complies with the notice and publication provisions, the lender can then proceed to conduct the foreclosure sale at the scheduled time and date at the mortgaged property. We often see last-minute attempts by a mortgagor to stop or delay a foreclosure sale by seeking a forbearance arrangement with the lender. A borrower may also seek to enjoin a foreclosing lender in state court or may file for bankruptcy which then halts the foreclosure. If this occurs, the foreclosure is then postponed to a later date by the auctioneer’s public proclamation. The lender, through its attorneys, should always try to confirm the bankruptcy status of the mortgagor prior to the start of a foreclosure, in order to avoid violating the automatic stay of foreclosure resulting from the filing of bankruptcy.
Paying attention to the details in a mortgage foreclosure is critically important. Making sure that the mortgage references and the property description are correct in the foreclosure documents is paramount as mistakes in these items could later invalidate the foreclosure sale and force the lender to re-do the sale process thus causing duplication of expenses and delay.
The foreclosing lender must be the current holder of the mortgage, due to the lender being either the original mortgagee or the holder by a recorded assignment, at the time of the first publication of the foreclosure notice. Any failure of the foreclosure notice to properly identify the current holder of the mortgage may render the notice defective and the foreclosure sale void. In addition, under Massachusetts law, the foreclosing lender must also be in possession of the original wet ink promissory note throughout the foreclosure process and will need to attest to such possession in an affidavit recorded with the applicable registry of deeds. Compliance with this requirement has become more challenging in recent years due to the increasing frequency of lenders to accept so-called “e-notes” or pdf copies of signed loan documents
A lender must also follow specific statutory as well as common-law requirements when conducting a foreclosure auction. The auctioneer must be properly licensed, the deposit amounts must be reasonable, and the foreclosing lender has a fiduciary duty to junior lienholders and a responsibility not to discourage the highest and best bid (i.e., to not “chill the sale”). It is important for the lender to have made clear calculations of the loan amount, foreclosure expenses, and anticipated costs to later resell the mortgaged property (if the lender ends up being the highest bidder at the auction) and to provide its attorneys or representatives with clear bidding instructions. If the lender is the highest bidder, it will obtain title to the property, which is typically held in a single purpose entity owned by the lender. At the close of the auction when the auctioneer’s “gavel comes down”, the lender and the highest bidder must execute a memorandum of sale which summarizes the purchase price and other details for later closing on the purchase of the mortgaged property. Typically, the closing must occur within 30-45 days of the auction sale, at which time, a foreclosure deed and accompanying documents are recorded with the applicable registry of deeds.
The foreclosure process in Massachusetts is quite complex with myriad deadlines and details to be observed. Failure to conduct a proper foreclosure sale can result, in a best-case scenario, in the need to re-do the sale at increased expense and delay for the foreclosing lender. In a worst-case scenario, an improper foreclosure sale can result in litigation against the foreclosing lender for not conducting the foreclosure in a commercially reasonable manner. Our firm has handled numerous commercial foreclosures and we are very experienced in guiding our lending clients through the various minefields involved in foreclosure practice in Massachusetts and achieving the best results possible in a troubled loan situation.
This communication is for informational purposes only and is not legal advice on any specific facts or circumstances. In addition, the firm undertakes no obligation to update the information discussed in the foregoing article.