Minnesota Senate Contemplating Two-Year Moratorium on Foreclosures

19 Mar

On Wednesday, February 24, 2010 the Health, Housing and Family Security Committee of the Minnesota Senate passed a bill that, if agreed upon by both houses and Governor Pawlenty, would allow owners or renters of residential property to stop a mortgage foreclosure for up to two years. You can read the proposed legislation, dubbed SF2242, here. If passed, the bill would allow owners or even tenants living in residential property to place a hold on any attempted foreclosure of their home by providing a notice of their intended application for the moratorium. The bill’s application is limited only to mortgages on residential property signed before the law becomes effective. An applying owner or tenant would then be permitted to stay in the property as long as they meet certain criteria.

Criteria Required of Applicant for Moratorium

Stay Home.

Owners who request this hold on foreclosure proceedings must continue to live in their property and maintain it as their homestead. Renters must continue to live in the property.

Sum 41.

An owner or tenant must continue to make payments to the foreclosing party or the party claiming rights under the foreclosure, but never more than 41% of that person’s “documented and verified monthly gross income.” This payment obligation is not automatic, however, and must be triggered by the party that has commenced foreclosure by giving notice to the person applying for the moratorium

Dissolving the Stay

A stay imposed on a foreclosing party may be dissolved, but only under certain circumstances and after the foreclosing party has first given 30 days’ notice to the resident of the property, and then obtained a court order permitting the party to proceed. To justify dissolving the stay, the foreclosing party must show that “the public interest is served by granting [an] order” doing so, and that the resident has failed to fulfill the above residency and payment requirements or that the owner has violated one of several conditions.

The conditions that a tenant must continue to satisfy are: obey the terms of his or her lease; ensure that he or she is not causing damage to the property or permitting a nuisance to exist in the premises and is not otherwise disturbing nearby residents; avoid conviction for using the unit for any illegal purpose; and permit the foreclosing party reasonable access to the property for inspection and showing to parties who might be interested in buying the property or the foreclosing party’s mortgage, or providing new financing on the property. An owner would have to follow these same guidelines except there would be no lease terms to follow, and it appears an owner is not required to make the property available for inspection by the foreclosing party.

Impact on Mortgage Lenders

If passed, such legislation obviously could have a substantial impact on the mortgage industry. Although many lenders have taken a hit on properties that are now worth less than the balance of the loan secured by the mortgage, this prevents mortgagees from recovering what money they were able to recoup for up to two years. On the other hand, the law requires that the resident of the property provide monthly payments to the foreclosing mortgage holder (but not more than 41% of the person’s gross income). If the payments aren’t made, the foreclosure may proceed. Perhaps the cash flow generated by this requirement will offset those circumstances where the property cannot be recovered and sold.

Impact on Housing Industry

What may be interesting to track, if this bill were in fact made into law, is whether it has a positive impact on housing prices. Presumably this law has the potential to allow more people to remain in their homes longer, perhaps until the market rebounds and they can sell their homes and pay off their loans, or perhaps until they find better jobs. Meanwhile, if the inventory on the housing market is reduced as a result of this suspension in certain foreclosures, housing prices previously driven down by markets saturated with bank-owned properties sold at fire-sale prices could start to rebound.

Impact on Common Interest Communities

Notably absent from the moratorium is any reference to the same moratorium applying to community associations. There is no provision in the bill requiring that an owner invoking this moratorium must remain current on his or her community association assessments. This may create interesting dynamics for community associations with owners in default whose units’ values are “upside down” in comparison to the amount they owe on the property. These community associations, which might in the past have opted not to foreclose on properties with no equity remaining after the mortgage lender is paid (meaning there is no value left to satisfy the associations’ liens), might now want to start foreclosing on these units again.

If the association sees a unit in its community may not be foreclosed on for two years while a substantial backlog in assessments is due may now be forced to take action to force the hand of the owner and/or the mortgagee. For example, if the association learns of a moratorium on a foreclosure where the unit owner is in default on assessments, it can foreclose on the unit itself, and force the owner out of the unit much sooner than the two years permitted by statute. By removing the owner from the unit, the owner now has violated a term of statute, and the moratorium is lifted. The foreclosing mortgagee may now resume its own proceedings to take possession of the unit and sell the premises.

Regardless what your opinions are about the interference with government on the marketplace, this bill must be recognized as having a potentially significant, and not always positive, effect on the various players involved. It will be interesting to see whether Governor Pawlenty would sign such a bill, and what those effects would then prove to be in real-world application

Entry by Matt Drewes.  Matt is a Shareholder with Thomsen Nybeck.  He is the head of the firm’s 10-member Community Association Representation Group and co-leads the firm’s construction litigation group.  Matt practices in the areas of business and real estate litigation, construction litigation, community association law, debtor/creditor law, insurance and employment, and has been included in Minneapolis/St. Paul Magazine’s list of Rising Stars for several years.  He can be reached at mdrewes@tn-law.com.

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