Foreclosing a Dream - National Consumer Law Center · and social problems caused by the rising tide of foreclosures, states need to craft laws that can ... completely abandon the

State Laws Deprive Homeowners of Basic Protections

John Rao and Geoff Walsh

NATIONALCONSUM ER LAW

CENTER INC®

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February 2009

FORECLOSINGA DREAM

ACKNOWLEDGMENTS

The authors would like to thank Carolyn Carter,Elizabeth Renuart, Margot Saunders, Eric Secoy,and Tara Twomey of NCLC for valuable guid-ance, feedback, and editorial assistance in the preparation of this report. Particular thanksto Rick Jurgens, Mary Kingsley, and ShirlronWilliams for research and to Julie Gallagher forgraphic design.

This report was funded in part by the FordFoundation. We thank them for their supportbut acknowledge that the findings and conclu-sions presented in this report are those of the au-thors alone, and do not necessarily reflect theopinions of the Foundation.

ABOUT THE NATIONAL CONSUMER LAW CENTER

The National Consumer Law Center®, a nonprofitcorporation founded in 1969, assists consumers,advocates, and public policy makers nationwideon consumer law issues. NCLC works toward thegoal of consumer justice and fair treatment, par-ticularly for those whose poverty renders thempowerless to demand accountability from theeconomic marketplace. NCLC has providedmodel language and testimony on numerousconsumer law issues before federal and state pol-icy makers. NCLC publishes an 18-volume seriesof treatises on consumer law, and a number ofpublications for consumers.

ABOUT THE AUTHORS

John Rao is an attorney with the National Con-sumer Law Center, Inc. who focuses on consumercredit and bankruptcy issues. He is a contribut-ing author and editor of NCLC’s Consumer Bank-ruptcy Law and Practice; co-author of NCLC’sForeclosures; Bankruptcy Basics; Guide to SurvivingDebt; and contributing author to NCLC’s StudentLoan Law. He is also a contributing author to Col-lier on Bankruptcy and the Collier Bankruptcy Prac-tice Guide. He serves as a member of the federalJudicial Conference Advisory Committee onBankruptcy Rules, appointed by Chief JusticeJohn Roberts in 2006. He is a Fellow of the Amer-ican College of Bankruptcy, secretary for the Na-tional Association of Consumer BankruptcyAttorneys, and former board member for theAmerican Bankruptcy Institute.

Geoff Walsh has been a legal services attorneyfor over twenty-five years and is presently a staffattorney with National Consumer Law Center inBoston. Before that, he worked with the housingand consumer units of Community Legal Serv-ices in Philadelphia and was a staff attorney withVermont Legal Aid in its Springfield, Vermont of-fice. His practice has focused upon housing andbankruptcy issues, particularly foreclosures ofmortgages in government-subsidized housingprograms. He is a contributing author to NCLC’sForeclosures.

I. Executive Summary

In recent months, a wave of foreclosures hasswept millions of American families from theirhomes. The magnitude of this crisis defies easycomprehension: more than 8 million Americanfamilies are expected to lose their homes to fore-closure in the next four years. Much has beenwritten about the financial and economic causesof this disaster. Much less notice has gone to an-other factor that has accelerated and multipliedthis grave loss of homes and savings: antiquatedstate laws that in some ways afford fewer protec-tions to homeowners than to renters.

State foreclosure laws tilted against homeownersThis report examines the laws that govern mort-gage foreclosures in the 50 states, and evaluateshow well the laws of a given state protect home-owners facing foreclosure. Regulation of mort-gage foreclosures has always been a fundamentalprovince of state laws. Now, as families, commu-nities and states face an onslaught of financialand social problems caused by the rising tide offoreclosures, states need to craft laws that canmaximize the number of their residents who willbe able to keep their homes.

Provisions in existing foreclosure laws thathurt homeowners include:

� In 30 states and the District of Columbia,mortgage holders who allege that homeownershave fallen behind in their payments can by-pass the courts and move directly to takeaway and auction off homes. This denies

homeowners due process protection com -parable to that given many tenants. It alsoplaces upon homeowners the heavy burden toget a judge to review the mortgage holder’sclaims and stop the foreclosure.

� In every state but California and Connecticut,mortgage holders can move directly to fore -closure without being required by state lawto consider or discuss ways to avoid loss ofthe home with homeowners, such as throughmodification of the terms of the loan.

� In every state but Massachusetts, New Jersey,and Pennsylvania, a mortgage holder whoclaims a homeowner has fallen behind in payments can immediately impose defaultfees and costs that reduce the chances thatthe homeowner can catch up by making thepayments owed.

� In 29 states, a mortgage holder has no obli-gation under state law to stop foreclosureeven if the homeowner, just before the househas been sold, comes up with the money tocatch up on the owed payments and all in-curred penalties and fees.

� In 33 states and the District of Columbia,there is no requirement that homeownersbe personally served with a foreclosure no-tice or legal documents that start a court fore-closure case.

� In 36 states and the District of Columbia,mortgage holders can pursue so-called “defi-ciency judgment” claims against homeown-ers even after the foreclosed home has beensold at auction. These claims, seeking to re-

FORECLOSING A DREAMState Laws Deprive Homeowners

of Basic Protections

cover the difference between the amount owedon the loan and the amount collected fromthe foreclosure auction, can be pursued with-out conditions in 15 states and the District ofColumbia, and only under certain conditionsin the other 21 states.

States can and must do more to allow familiesto avoid foreclosure and preserve their homesand the wealth and savings embodied in them.By adopting the recommendations set out in thisreport states can level a playing field now tilted infavor of mortgage holders.

RecommendationsAction is urgently needed in these key areas toprotect homeowners and restore basic fairness tothe foreclosure process.

� Mandate judicial supervision over fore-closures of all residential mortgages.Many states now allow mortgage holders tobypass the courts and use non-judicial proce-dures to take away homes from their owners.These procedures create enormous barriers forhomeowners who want to assert legal claimsand raise defenses against lenders, servicers,and mortgage holders. States should eithercompletely abandon the power of sale methodand require judicial foreclosure, or they shouldincorporate essential due process protectionsinto the existing non-judicial procedure.

� Require mortgage holders to considerloss mitigation, including loan modifica-tion and other workout alternatives, as acondition to allowing the foreclosure of a home. States have broad authority to setconditions upon a mortgage holder’s right toforeclose. For example, states have always hadthe authority to require mediation in certaincategories of disputes, and they can require mediation in home foreclosure cases. Several

states, local governments and courts have al-ready taken steps to implement these types ofmediation systems. States should require thatbefore a foreclosure may proceed, the mort-gage holder must prove that it or its servicerexplored all reasonable options to avoid foreclosure with the homeowner before theforeclosure was initiated. Mortgage holderswho do not comply in good faith with thesemediation procedures should not be permit-ted to use public officials, records, and servicesto enforce their claims.

� Require that homeowners be given aright to cure a default by catching up onmissed payments, without penalty, atleast 60 days before a mortgage holderdemands immediate full payment of theentire mortgage balance and before be-ginning any foreclosure proceeding.Homeowners should be sent a notice thatclearly informs them that before the end ofthe designated time period, they can stop theforeclosure by paying up the installments theyare behind without payment of any default-related costs or fees.

� Guarantee homeowners the right to re -instate the mortgage by paying the arrearage and costs up to the time of aforeclosure sale. Nearly half of the stateshave enacted statutes that provide for thisright to reinstate after the mortgage holder demands payment of the entire loan balance(acceleration). Such laws are cost neutral forthe mortgage holder because borrowers typi-cally pay all reasonable foreclosure costs in-curred up to the time of reinstatement. Statelaw should mandate a form of notice tohomeowners that provides detailed informa-tion about the foreclosure process and stepsthe homeowner can take to avoid foreclosure, including the right of reinstatement and loanmodification options.

4 FORECLOSING A DREAM

FORECLOSING A DREAM 5

� Require that homeowners be personallyserved with the notice of sale or foreclo-sure complaint. State laws should requirethat no matter which type of foreclosure proceeding is permitted, the mortgage holdermust provide proof of personal service of thelegal documents which both commence theforeclosure proceeding and schedule the sale,or the mortgage holder must document re-peated good faith attempts to make personalservice on the homeowners.

� Create and adequately fund programsthat provide emergency financial assis-tance to homeowners facing foreclosure.At least eight states already have statewideprograms offering such assistance to home-owners experiencing temporary financial diffi-culties such as loss of employment, illness,disability, death, divorce or legal separation.As the foreclosure crisis deepens and broadereconomic problems cause the unemploymentrate to increase, more states should considerdeveloping programs that 1) assist home-owners with monthly mortgage payments fora period of 12 to 24 months; 2) provide interest-free or below market rate loans to be repaidwhen the home is sold, transferred, or refi-nanced; and 3) are designed as revolvingfunds, with amounts replenished by loan repayment.

� Provide homeowners with a statutoryright to redeem and reacquire title totheir home, for a fixed period of timeafter a foreclosure sale. “Redemption”after a foreclosure sale allows a homeowner afixed period of time in which to set the fore-closure sale aside and regain title to the homeby paying the sale price, interest and costs ofthe sale. The payment compensates the mort-gage holder or other purchaser for their finan-cial outlay. Approximately half of the states

have a law on the books allowing such post-sale redemptions. However, in a number ofstates the right to redeem is limited to certaintypes of foreclosures and applies only for cer-tain outcomes of the sale. The right to redeemafter sale should uniformly apply to all resi-dential mortgage foreclosures.

� Prohibit mortgage holders from pursuinghomeowners for deficiency judgmentsafter foreclosures. Deficiency judgmentscan drive former homeowners into bank-ruptcy or burden them with an insurmount-able debt obligation. Deficiency judgmentscan also create an unfair windfall for mort-gage holders and reward them when their lackof marketing and publicity leads to a fore -closure sale at a winning bid far below marketvalue. Ten states bar deficiency judgmentsafter residential foreclosures and 21 otherstates substantially limit deficiencies by re-quiring lenders to calculate deficiencies withmeasures such as the property’s fair marketvalue rather than the artificially low foreclo-sure sale price. All states should simply enactoutright bars on deficiency judgments afterhome foreclosures.

� Require judicial supervision over the ac-counting of foreclosure sale proceeds anda prompt release of any surplus to theborrowers. In many states, the accountingof sale proceeds and the distribution of anysurplus left after payment of the mortgagedebt are handled almost entirely by the mort-gage holder or a private trustee, without anyexplicit procedures or formal court review.States should require that the proposed dis -tribution of sale proceeds be reviewed and approved by a neutral public official and thatany surplus funds be disbursed promptly tothe borrower.

State Foreclosure Statutes at a GlanceStrengths and Weaknesses

AL AK AZ AR CA CO CT DE DC FL GA HI ID IL

Pre-Sale Protections

Access to Court Review � � � � � � � � � � � � � �

Loss Mitigation Requirement � � � � � � � � � � � � � �

before Foreclosure

Right to Cure before Acceleration � � � � � � � � � � � � � �

Right to Reinstate before Sale � � � � � � � � � � � � � �

Personal Service Requirement � � � � � � � � � � � � � �

for Complaint or Sale Notice

Housing Emergency � � � � � � � � � � � � � �

Assistance Fund

Post-Sale Protections

Right to Redeem � � � � � � � � � � � � � �

Deficiency Judgments � � � � � � � � � � � � � �

Accounting of Sale Proceeds � � � � � � � � � � � � � �

Prompt Return of Surplus � � � � � � � � � � � � � �

IN IA KS KY LA ME MD MA MI MN MS MO MT NE




before Foreclosure






Assistance Fund


Right to Redeem � � � � � � � � � � � � � �




Key: � = strong � = mixed � = weak or nonexistent



State Foreclosure Statutes at a Glance (continued)Strengths and Weaknesses

NV NH NJ NM NY NC ND OH OK OR PA RI SC SD




before Foreclosure






Assistance Fund


Right to Redeem � � � � � � � � � � � � � �




TN TX UT VT VA WA WV WI WY


Access to Court Review � � � � � � � � �

Loss Mitigation Requirement � � � � � � � � �

before Foreclosure

Right to Cure before Acceleration � � � � � � � � �

Right to Reinstate before Sale � � � � � � � � �

Personal Service Requirement � � � � � � � � �


Housing Emergency � � � � � � � � �

Assistance Fund


Right to Redeem � � � � � � � � �

Deficiency Judgments � � � � � � � � �

Accounting of Sale Proceeds � � � � � � � � �

Prompt Return of Surplus � � � � � � � � �

Key: � = strong � = mixed � = weak or nonexistent


II. Scope of the Foreclosure Crisis

We are facing the greatest foreclosure crisis sincethe Great Depression. The statistics are grim. For2008, foreclosure filings nationwide were up 81%over 2007 filings.1 Completed foreclosures in2008 will likely exceed the one million mark.2

That annual figure translates into more than3,700 foreclosures every business day. As of July2008, bank-owned property (REO) representedmore than 16 percent of the inventory of existinghomes for sale.3 In some communities, bank-owned properties make up nearly 40 percent ofexisting inventory.4

In both the prime and subprime markets, seri-ously delinquent5 loans have continued to rise atan alarming rate, increasing three-fold since early2006.6 The figures for adjustable rate mortgages(ARMs) are more shocking. Seriously delinquentARMs have more than quadrupled in the pasttwo and a half years.7 By the third quarter 2008,nearly 3 out of 10 of subprime ARMs were morethan 90 days late or in foreclosure.8

As of November, 2008 the FDIC had reportedthat 1.6 million loans were over 60 days delin-quent.9 The FDIC estimates that through theend of 2009, there will be an additional 3.8 mil-lion new loans over 60 days past due.10 Nation-wide it is estimated that 8.1 million mortgageswill be in foreclosure over the next four years,through the end of 2012.11

The consequences of this foreclosure crisis areenormous, ripping through both Wall Street andMain Street. Abuses in the subprime market haveundermined the efforts of hardworking familiesto acquire and maintain the dream of homeown-ership. Instead of building wealth, families arelosing equity.12 Worse yet, some foreclosed fami-lies are unable to find replacement shelter andbecome homeless.13 Renters suffer too, as lendersquickly evict tenants from foreclosed homes.14

More and more Americans are being driven intobankruptcy.15 Neighborhoods are deteriorating

as foreclosed homes are boarded up and left va-cant.16 Crime in high-foreclosure neighborhoodsis on the rise.17 Overgrown lawns and trash-strewn yards symbolize growing communityabandonment and disinvestment.18

III. The Role of the ForeclosureProcess in the DeepeningCrisis

State Foreclosure Laws Escape ReformMost Americans not well-versed in property lawwould assume that homeowners have greaterrights than renters, or at least equal rights. Thestark reality is that while most states updatedtheir landlord/tenant laws decades ago to giverenters basic due process protections in the evic-tion process, no similar reform effort has beenmade to assist homeowners in the foreclosureprocess.

Many state foreclosure laws were enacted inthe 19th and 20th centuries and have gonelargely unchanged since that time. These lawscame into effect at a time when the residentialmortgage industry, to the extent it existed at all,bore no relation to what exists today. Signifi-cantly, these laws pre-date the enormous changesin the mortgage market that began in the 1980s.The typical American pursuing the homeowner-ship dream before the 1980s would have ob-tained a mortgage made by a bank using acceptedunderwriting guidelines which considered thehomeowner’s ability to repay the loan. Risks tothe lender and the homeowner were kept incheck by ensuring that the loan amount did notexceed an appropriate loan-to-value ratio, basedon a sound property appraisal. Mortgage loansmade before the 1980s were typically kept in thebank’s own portfolio of loans and not assignedto another entity, and would have been servicedby that same bank.


The 1990s saw the increasing use of asset-based securities to fund an ever increasing supplyof mortgage credit.19 Creating capital flow in thisway, subprime mortgage lending took off duringthis period.20 Homeowners were encouraged,often through aggressive marketing campaignsthat deceptively touted lower payments and taxbenefits, to use their home equity to consolidatenon-mortgage debts. Practices such as charginghigh points and fees and flipping loans throughmultiple refinancings often stripped homeown-ers of their most valuable asset, the equity intheir homes, bringing many to the brink of fore-closure. The advent of today’s more dangerous“exotic” subprime mortgages sealed the fate ofmany homeowners, spiraling the mortgage mar-ket downward into the current full-blown fore-closure crisis.

The securitization process also brought aboutsignificant changes in the way homeowners dealwith their mortgage company. Servicing rights areoften assigned independently of the mortgage.Homeowners have no choice about servicing com-panies when taking out the mortgage and haveno ability to switch when problems arise.21 Someservicers have been too aggressive in pursuing fore -closure without offering workout options. Theymay also be the cause of the homeowner’s fore-closure problem due to negligent servicing or theimposition of excessive and unauthorized fees.22

MORTGAGE SERVICING ABUSES

Abusive servicing occurs when a servicer seeks tocollect unwarranted fees or other costs from bor-rowers, engages in unfair collection practices orthrough its own improper behavior precipitatesborrower default or foreclosure.23 Some well docu-mented examples include:

� misapplying payments;

� force-placing insurance for borrowers who havealready provided evidence of insurance;

� failing to pay property taxes when due, triggeringgovernmentally imposed late fees and penalties,or sometimes the forced sale of the home;

� charging late fees when borrowers are current ontheir payments

� engaging in coercive collection practices andfalsely claiming amounts due;

� failing to offer and respond to requests for lossmitigation alternatives.

Despite the enormous changes in the mort-gage market, our state foreclosure laws have re-mained frozen in the past. They have eludedmodernization that would ensure homeownerstheir basic constitutional rights before they aredeprived of their property and shelter.

States Should Act NowThe foreclosure crisis continues to spin out ofcontrol. Modernization and improvement of stateforeclosure laws can significantly help blunt theimpact of the crisis on individual homeownersand communities. The method by which homes areforeclosed in this country is almost exclusivelycontrolled by state law. States have historicallydecided under what circumstances a homeownercan lose a home to foreclosure and what proce-dure a mortgage holder must follow. This tradi-tional role for states presents a tremendousopportunity for state policymakers to take afresh look at their foreclosure laws. While reformof state foreclosure laws will not end the currentforeclosure crisis, it can significantly reduce thenumber of foreclosures. For example, researchhas shown that securitized mortgages in stateswith creditor-friendly foreclosure laws that per-mit quick foreclosure are less likely to be modi-fied and are foreclosed at a higher rate than instates that afford protections to homeowners.24

Too often foreclosures occur because home-owners are not aware of the process itself and ofthe options to avoid foreclosure. Rather thanadopt a triage approach in which homeownerswith an interest and ability to retain their homesare given a serious opportunity to explore loanmodification and other sustainable foreclosure


avoidance options, state foreclosure laws oftenshunt borrowers into complicated legal proceed-ings that in many states lack oversight by a judi-cial officer or other basic due process protections.Rather than promote reconciliation and settle-ment, the arcane procedures in many states fur-ther isolate homeowners and create a sense ofhopelessness. Importantly, states can take stepsthat will make it possible for large numbers ofneedless foreclosures to be avoided. This reportpoints out the strengths and deficiencies in statelaws and recommends ways they may be improved.

IV. Data and Methodology

For many years, the National Consumer LawCenter has compiled and reported informationabout state foreclosure laws. One of our publica-tions, Foreclosures (2d ed. 2007 and 2008 Supp.)contains an extensive discussion of foreclosurecourt decisions and a summary of each state’sforeclosure laws. In preparing this report, we re-lied upon this data and supplemented it with re-search on recent state initiatives involving loanmodification and foreclosure diversion programs.

To evaluate state foreclosure laws, we devel-oped a set of questions designed to determinewhether certain basic protections are providedfor residential homeowners. Each state was re-viewed based on the following questions:

1. Before losing their home to foreclosure, dohomeowners have access to a court proceed-ing in which they can present objections andpursue options to avoid foreclosure?

2. Are mortgage holders required to engage inmeaningful loss mitigation efforts before ahome mortgage may be foreclosed?

3. Are homeowners given a right to cure a mort-gage default for at least 60 days before theloan is accelerated and before any legal fees orforeclosure costs are incurred?

4. Are homeowners provided notice of the rightto reinstate after acceleration but before sale,by bringing the loan current including fore-closure fees and costs?

5. Are homeowners provided personal service ofthe notice of sale or foreclosure complaint?

6. Does the state have a housing emergency as-sistance fund or similar program to assisthomeowners in default due to temporary fi-nancial difficulties?

7. Are homeowners provided protections afterthe foreclosure sale, such as redemptionrights, limitations on deficiency judgments,and procedures for accounting and return ofsurplus sale proceeds?

The answers to these questions for each stateare compiled in Appendix A, Survey of StateForeclosure Laws. The results are based on lawsin effect as of December 2008. While many stateshave rarely made changes to their foreclosurelaws, as discussed earlier, we are pleased to reportthat a number of states have very recently en-acted new laws in response to the foreclosure cri-sis. We are hopeful that many more states willfollow this lead, perhaps after considering howthey appear in this report. Thus, we hope to con-tinue reporting on state law changes by regularlyupdating the Survey of State Foreclosure Lawsand making it available on the Center’s websiteat www.consumerlaw.org.

In Part V of this report we provide a detaileddiscussion of the homeowner protections ad-dressed in the survey questions. Results of thesurvey are provided for each question. Finally, weconclude the discussion of each topic with a setof recommendations state policymakers mightconsider in reforming state foreclosure laws.


V. Findings andRecommendations

1. Provide access to a court pro -ceeding in which the homeownerhas an opportunity to presentobjections and to pursue options to avoid foreclosure.

Access to justiceA fundamental due process protection is the “op-portunity to present objections” to an impartialdecision-maker before an individual’s propertycan be taken away.25 Recognition and wide ac-ceptance of this essential right led to reform ofstate eviction laws beginning in the 1960s andthe elimination of “self-help” evictions in whichlandlords could physically remove a tenant’s be-longings and padlock the door without any courtproceeding. In virtually every state, tenants arenow given the right to a hearing before a judge ina proceeding initiated by the landlord before theymay lose the right to possession of their resi-dence and be evicted. Although firmly acceptedin the rental context, our state laws have not em-braced this fundamental right for all homeowners.

In thirty states and the District of Colum -bia, homeowners can lose their homes to fore -closure with no court oversight over the processand without an opportunity to be heard. In thesestates, foreclosures are accomplished by the mort -gage holder’s exercise of the “power of sale” con-tained in the mortgage or deed of trust. Themortgage holder does not need to initiate a courtproceeding to foreclose and the homeowner hasno clear access to a court hearing. The holdertypically only needs to send a notice of sale to thehomeowner, place a legal advertisement in a localnewspaper, and hire an auctioneer to sell theproperty on the scheduled sale date.

If the homeowner disputes that there has beena default in a non-judicial foreclosure state, thereis often no one that a homeowner can turn to inthe foreclosure process to resolve the dispute. Tocontest a foreclosure by power of sale, the home-

owner must file an affirmative court action andrequest an injunction to stop the sale. If this stepis not taken, there will be no judicial involvementat all in the foreclosure. The homeowner willneed to satisfy the demanding pleading and proofrequirements which courts impose before issuinginjunctions, making it virtually impossible to ob-tain this relief without the assistance of an attor-ney. Most courts also require that a bond beposted prior to the issuance of any injunctive re-lief. In many cases, these bonds are set at anamount in excess of the amount that may be indispute and effectively shut the courthouse doorsto most homeowners.

Without some judicial oversight over the fore-closure process, mortgage servicer errors go un-challenged and homeowner defenses that couldprevent foreclosure are not addressed. For example,a homeowner in Massachusetts spent several yearstrying to get a straight answer from her mortgageservicer while it continued to foreclose on herhome.26 Shortly after she received notice that theservicer had taken over servicing of her mort-gage, she and a housing counselor assisting hermade numerous attempts to get informationabout the account and an itemized payoff figure.The servicer first sent a letter stating that thetotal payoff amount was $264,603.13, but thenone week later claimed it was owed $363,603.38.During the next two-year period, the servicer andits foreclosure attorneys quoted six different pay-off figures on the mortgage ranging from a lowof $121,948.38 to a high of $430,707.28. With nojudge overseeing the power of sale foreclosure,the homeowner eventually had to file bankruptcyto stop the sale and try to sort things out. It wasrevealed in the bankruptcy court that the servicerhad never obtained a payment history on the ac-count from the old servicer and did not even havea copy of the original loan documents. The bank-ruptcy judge found that the servicer had “in ashocking display of corporate irresponsibility, re-peatedly fabricated the amount of the Debtor’sobligation to it out of thin air.” None of thiswould have come to light if there had not been a


court proceeding to compel disclosure by the ser-vicer. And if there had been a judicial foreclosureproceeding, the homeowner could possibly haveavoided filing bankruptcy.

HOW JUDICIAL FORECLOSURE WORKS

In less than half of the states, mortgages are alwaysforeclosed by judicial action, either because of statelaw requirements or local custom. In these statesthe mortgage holder must file an action in court,usually in the county where the property is located,to obtain a judicial decree authorizing a foreclosuresale. Generally, to obtain a judgment, the partyseeking to foreclose must prove that there is a validmortgage between the parties, that it is the holderof the mortgage or proper party with authority toforeclose, that the borrower is in default, and thatthe proper procedure has been followed. Thehomeowner then has an opportunity to raise de-fenses to the foreclosure, such as the alleged de-fault did not exist, the mortgage is invalid based onviolations of state and federal consumer protectionlaws, or the servicer accepted but failed to processan application for a loan workout. The homeownercan also bring affirmative claims against the mort-gage holder which may offset amounts claimed tobe in arrears.

If the homeowner and mortgage holder are un-able to resolve the dispute, the court may acceptthe defenses, dismiss the foreclosure action, andaward other relief based on the homeowner’s affir-mative claims. If the court concludes, after consid-ering any defenses, that there has in fact been adefault and that the mortgage holder has the legalright to foreclose, the court will determine the totalamount owed. In some states the homeowner hasthe right to pay this amount to avoid foreclosure. Ifthis amount is not paid by a deadline set by thecourt, the foreclosure will proceed, usually accord-ing to local rules or statutes governing foreclosuresales. Typically the sale is conducted by the sheriffor other public officer appointed by the court. Inmany states after the sale the court must review thesale procedures and confirm that the sale was con-ducted in accordance with the law. (Additionalpost-sale protections are discussed in Section 7,infra.).

Survey Results As mentioned, in thirty states and the Districtof Columbia, the most common form of residen-tial home foreclosure is by non-judicial power ofsale.27 In these states, homeowners generally donot have a meaningful opportunity for court re-view before their home is lost to foreclosure.After the auctioneer’s hammer falls in most states,the sale itself is final and cannot be undone, re-gardless of any claims and defenses the home-owner might have been able to assert before theforeclosure.28 Only after the foreclosure sale isthere a court proceeding in these states to removea homeowner who does not voluntarily vacate,but by then it is usually too late to contest the sale.

States Which Do Not Require CourtInvolvement in Foreclosures

Alabama MontanaAlaska NebraskaArkansas NevadaArizona New HampshireCalifornia New MexicoDistrict of Columbia OklahomaGeorgia OregonHawaii Rhode IslandIdaho South DakotaMaryland TennesseeMassachusetts TexasMichigan UtahMinnesota VirginiaMississippi WashingtonMissouri West Virginia

Wyoming


In all of these states foreclosure occurs withoutjudicial involvement. Homeowners have no oppor-tunity to present any claims or defenses to a judgeunless they file an affirmative lawsuit in court.

Oklahoma is an exception as a power of salestate, offering a hybrid-type procedure. If anOklahoma mortgage includes a power of sale,which most do, the mortgage document itselfmust contain a warning that the mortgage holdercan “take the mortgaged property and sell itwithout going to court” upon default.29 The mort-gage document must also include a disclosurethat if the homeowner sends a written notice bycertified mail to the mortgage holder that a “ju-dicial foreclosure is elected” at least ten days be-fore the home is to be sold under the power of sale,the mortgage holder must stop the power of saleforeclosure and renew the foreclosure in a judi-cial proceeding.30 This right to elect a judicialproceeding must also be prominently disclosedin the notice of sale which is personally served onthe homeowner.31

Similar to Oklahoma, South Dakota also per-mits a homeowner to request that a power of saleforeclosure be converted to a judicial action.32

However, this conversion is not automatic uponnotification to the mortgage holder as the home-owner in South Dakota must first submit an ap-plication making the request to a court whichhandles foreclosures.

North Carolina is also unique in that severalprotections have been added to its power of saleprocedure. The mortgage holder in North Carolinamust first serve a “notice of hearing” on thehomeowner and file it with the clerk of court.33 Ahearing is then held before a clerk who deter-mines whether 1) there is a valid debt, 2) therehas been a default, 3) the mortgage holder legallyhas the right to foreclose, and 4) proper noticehas been given.34 If the clerk finds that all ofthese conditions have been met, the clerk can au-thorize the issuance of a notice of sale and themortgage holder can proceed under the power ofsale. The clerk’s decision can be appealed to ajudge. North Carolina’s procedure was enacted inresponse to a 1975 court decision which struck

down the existing procedures on constitutionalgrounds because they did not provide minimumdue process.35

Of the states which require judicial foreclosure,several have recently implemented mediation ordiversion programs as part of their foreclosureprocess. In each of these states, Connecticut,Florida, New York, New Jersey, Ohio, andPennsylvania, procedures implementing theprograms have been developed by the court sys-tem. These programs are discussed more fully inthe next section and summarized in Appendix B.

Recommendations for Homeowner ProtectionsThe current foreclosure crisis, with its devastat-ing impact on affected families, local communi-ties, and property values, presents a call to actionfor state policy makers. Now more than everstates should consider bringing their foreclosurelaws into the 21st century by ensuring that basicdue process protections and foreclosure avoid-ance procedures are afforded to all homeowners.At a minimum, residential homeowners must beafforded a meaningful opportunity to presentwhatever grievances they may have to an impar-tial and disinterested court official. States shouldeither completely abandon the power of salemethod and require judicial foreclosure, or theyshould look to ways in which essential protec-tions are incorporated into the existing non-judi-cial procedure. States which currently havejudicial foreclosure procedures should considerinnovations to facilitate foreclosure avoidancesettlements, such as court-mandated mediationprograms or settlement conferences. Specific rec-ommendations include:

1. Require Judicial ForeclosureThe most obvious way to give homeowners ac-cess to justice is to require judicial foreclosure, astwenty-one states currently do. In most statesthat permit power of sale foreclosures, a mort-gage holder currently has the option to bring aforeclosure action in court, so there already exists


a structure and legal framework for judicial fore-closures in those states. Thus, this change wouldnot require a substantial rewriting of a state’sforeclosure laws.

2. Create a Hybrid SystemStates wishing to retain the power of sale struc-ture can improve access to justice by enactinglaws which create a hybrid procedure in whichthe process would begin as non-judicial butwould convert to a court procedure if a home-owner seeks review of an unfavorable workoutdecision or responds by asserting foreclosure de-fenses. This process would require the mortgageholder to initiate a court action after some trig-gering event, such as receipt of a formal responsefrom the homeowner to a notice invoking thepower of sale. While many foreclosures wouldprobably still proceed without court involvementunder this regime, homeowners having legiti-mate foreclosure defenses and claims would notbe deprived of an opportunity for court review.

3. Establish Streamlined Procedure forHomeowner to Invoke Court Review

Another approach to reform in non-judicial fore-closure states would be to establish a simple andlow-cost alternative procedure for homeownersto seek judicial review of a mortgage holder’s rightto foreclose by power of sale. Borrowing fromlandlord/tenant procedures in many states, thelaw would create plain language legal forms thatcould be used easily by homeowners who are un-represented by counsel. It is essential that home-owners have an opportunity for court reviewwithout having to post a bond, and that no otherfinancial barriers to court access be imposed. More-over, homeowners under this procedure shouldnot be required to obtain a court injunction tostop the sale. The filing of the court action by thehomeowner should come with an automatic stayof the sale issued by the court, similar to the au-tomatic stay entered upon the filing of a bank-ruptcy case,36 at least until some preliminarycourt hearing can he held. Similar to bankruptcylaw, the procedure could include provisions to

prevent abuse if the homeowner invokes the pro-cedure more than once during a certain period oftime such as one year.37 While most homeownerswould not avail themselves of the procedure, itwould help eliminate wrongful foreclosures byproviding a meaningful check on a mortgageholder or servicer’s decision to foreclose.

4. Require Participation in Mediation Programs

Both judicial and non-judicial foreclosure statescan improve their procedures by requiring thatthe parties confer and consider all options to avoidforeclosure. The hearing procedure in judicialforeclosure states should recognize and treat sep-arately homeowners facing payment default whoare seeking to negotiate a loan modification orworkout agreement with the mortgage holder, orwho wish to access other loss mitigation options. Ifa resolution is not reached by the parties on theirown, they should be referred to a court media-tion program. A similar program can be set up innon-judicial foreclosure states. This recommen-dation is discussed more fully in the next section.

2. Provide that mortgage holdersmust engage in meaningful lossmitigation efforts before a homemortgage may be foreclosed.

Loss mitigation reduces investors’ lossesLoss mitigation was first developed by the Fed-eral Housing Administration (FHA) as a way ofbalancing its purpose of facilitating homeowner-ship with the need to be fiscally responsible withthe federal government’s funds.38 In the context ofpre-foreclosure practice, loss mitigation is essen-tially a mechanism that requires an evaluation ofwhether there is an alternative to foreclosure thatwill reduce the losses to the investor from thehomeowner’s default. The losses that are mea -sured in this context are the investor’s, ratherthan the homeowner’s. Nevertheless, homeownershave traditionally benefitted from loss miti -gation programs because they avoid the loss ofthe home.


Fannie Mae and Freddie Mac are both govern-ment sponsored enterprises (“GSEs”) created byfederal charter as private, for-profit entities withthe mission of facilitating and supporting home-ownership.39 In recognition of their public pur-pose, as well as the reality that loss mitigationefforts provide more income for the investor,Fannie Mae and Freddie Mac have followed thelead of the FHA in this regard. Both agencies haveloss mitigation regulations which servicers are re-quired to follow before initiating a foreclosure.

Investors and servicers of securitized, pri-vately-held mortgages have also come to recog-nize the benefits of loss mitigation strategies,though such efforts are generally encouragedrather than mandated. The servicing contractsfor loans held by private investors often include aloss mitigation plan and contain a standardclause allowing the servicer to modify seriouslydelinquent or defaulted mortgages, or mortgageswhere default is “reasonably foreseeable.”40

Despite widespread acceptance in the mort-gage industry that loss mitigation efforts can re-duce foreclosure rates, reduce investor losses, andsave homes, most state foreclosure laws fail to in-corporate any notice or opportunity for home-owners to access such options before or duringthe foreclosure process, and do not require thatthey be pursued by the mortgage holder as an al-ternative to foreclosure.

Loss mitigation optionsLoss mitigation covers a range of measures toavoid foreclosure. For homeowners who wish toretain their homes, the common options include:

� Repayment Plan—which allows the home-owner to get current by making regular mort-gage payments plus an amount on the arrearsspread out usually over a period of less thansix months;

� Forbearance Plan—which is also a paymentplan that may reduce or suspend the home-owner’s payments for a period generally nomore than twelve months;

� Loan Modification—which involves modify-ing the mortgage, such as by changing the interest rate or term of the mortgage, capital-izing arrears by adding them to the mortgage,and reducing the principal balance of themortgage.

For homeowners who no longer wish to keeptheir homes, the options include:

� Short Sale—which allows the homeowner tosell the home before the foreclosure at anamount less than the mortgage balance;

� Deed in Lieu—which involves the mortgageholder or servicer accepting a deed for thehome from the borrower in exchange fordropping the foreclosure process.

Voluntary efforts lacking Among the loss mitigation options, loan modifi-cation has been identified as one of the preferredstrategies for addressing the current foreclosurecrisis.41 In fact, because many of the loans in orsoon to be in foreclosure were made without con-sidering the homeowner’s ability to pay or wereunderwritten using inflated property appraisals,any plan to ameliorate the current crisis thatdoes not include some form of loan modificationas an essential component will fail. While the po-tential benefits of loan modifications are clear,42

the response from the financial services industryhas been lacking and is dwarfed by the magni-tude of the foreclosure problem.

Since the start of the current foreclosure crisis,there have been several efforts to encourage loanmodifications through voluntary measures. InSeptember 2007, the federal and state bankingregulators issued a joint statement on loss miti-gation strategies, referencing earlier guidanceand encouraging use of loss mitigation authorityavailable under pooling and servicing agree-ments.45 In October 2007, as part of the HOPENOW program, Treasury Secretary Paulson soughtvoluntary commitments from servicers to con-tact borrowers and explore new loan modification


approaches.46 Then in December 2007, SecretaryPaulson announced a plan for “fast track” loanmodifications.47

WHAT IS A LOAN MODIFICATION?

A loan modification is a written change to the agree-ment between the mortgage holder (or its servicer)and the homeowner that alters one or more of theoriginal terms of the note so that the loan will nolonger be considered in default. The goal of a loanmodification is to prevent foreclosure and facilitatethe homeowner’s ability to keep up with regularpayments on the loan.43 Loan modifications may befor short or long terms, or for the life of the loan.Modifications may do any or all of the following:

� capitalize the overdue amounts of interest, escrow items and fees in the mortgage amount(adding these amounts to the principal and mak-ing the payments higher than before);

� waive interest, late fees and other default relatedfees;

� reduce the interest rate and/or make it fixed (forthe life of the loan or for a set period of time);

� reduce the principal of the loan;

� defer payment of loan principal for a period oftime (resulting in a “balloon” payment at the endof the loan);

� extend the term of the loan, generally by re-amortizing the remaining amount due over a new 30-year term, or in some cases extending itto 40 years.44

Despite these efforts, the financial services in-dustry has failed to implement a loan modifica-tion strategy to stop the foreclosure crisis. TheHOPE NOW program issued its first data in early2008, demonstrating that little progress had beenmade.48 The Mortgage Bankers Association’s re-port on loan modifications issued in January2008 revealed similar results. The major findingwas that, in the third-quarter of 2007, mortgageservicers worked out 183,000 repayment plansand 54,000 loan modifications, while starting384,000 new foreclosures.49 Both reports con-firmed that servicers relied heavily during this pe-

riod on repayment plans rather than loan modifi-cations. Repayment plans require homeownersto make increased monthly payments to cure ar-rears. They do not address payment affordabilityproblems caused by high interest rates and rateresets on adjustable rate mortgages.

A recent study illustrates that problems persistand that the industry has not yet engaged inmeaningful loan modifications.50 When loanlevel information from service remittance reportsfrom July 2007 through June 2008 was analyzed,the conclusion was inescapable that:

[W]hile the number of modifications rose rapidlyduring the crisis, mortgage modifications in the aggre-gate are not reducing subprime mortgage debt. Mort-gage modifications rarely if ever reduced principaldebt, and in many cases increased the debt. Nor aremodification agreements uniformly reducing pay-ment burdens on households. About half of all loanmodifications resulted in a reduced monthly pay-ment, while many modifications actually increasedthe monthly payment.

A report by Credit Suisse reaches similar re-sults in finding that loan modification progressis slow and that plans with higher payments aremore common than modifications with lowerpayments.50 As of August 2008, Credit Suisse re-ported that modifications accounted for just 3.5percent of the loans that are delinquent for sixtydays or more. Moreover, after modifications thatfreeze the interest rate at the pre-reset amount,the most common form of modification was onein which the payment increased.

Mortgage modifications which do not reduceprincipal balances or interest rates generally alsofail to reduce the monthly payments. This meansthat while there may be some delay, ultimately,these mortgage loans will still fail. Loan modifi-cations with higher payments re-default almosthalf of the time.52 Not surprisingly, modifica-tions involving principal reduction are much lesslikely to default again.53


AFFORDABLE PAYMENTS NEEDED

A Massachusetts homeowner’s failed attempt toget an affordable modification as reported in theBoston Globe helps illustrate that affordable pay-ments are needed:

Ask LaWanda Fils. This single mother was behind onpayments on her Dorchester two-family home whenshe asked for help from her lender, Option One Mortgage Corp. The solution Option One offered didn’t seem to make sense—she would pay $800 a month more, after rolling in past-due principal,taxes, and insurance. Desperate to save her home, Fils agreed to the deal anyway in February.

Two months later, she defaulted and now is againfacing foreclosure.

“I think it is more for them to pat themselves on theback to say at least they tried,” said Fils. “It’s not feasible and it doesn’t work and they end up havingpeople falling behind.”

* * *

“I don’t know why a lender would enter into that kindof agreement knowing what the outcome would be,”said Kevin Cuff, executive director of the Massachu-setts Mortgage Bankers Association. “Why would itnot go into foreclosure? Why would it not fail?”

Reworked Mortgages Not Working, Boston Globe, December9, 2008.

Unless mandated, homeowners can’t findthe decision-makerFrom the homeowner’s perspective one of thebiggest obstacles to loan modification is findinga live person who can provide reliable informa-tion about the loan account and who has author-ity to make loan modification decisions. Storiesabound of exasperated homeowners attemptingto navigate vast voice-mail systems, being bouncedaround from one department to another, and re-ceiving contradictory information from differentservicer representatives.54 For example, a Neigh-borhood Housing Services of Chicago surveyfound that “countless counselors shared storiesof having a client in the office ready to begindealing with long-deferred financial problems,

but then having to wait 30 minutes or more inorder to talk to an appropriate loss mitigationstaff person.”55 Unfortunately, things have onlygotten worse as servicers struggle to keep up withthe increased workload caused by the foreclosurecrisis.56 When asked to comment on the problems,one housing counseling agency stated the follow-ing about some mortgage servicers: “1. They donot return calls; 2. Take 30–60 days to give us awritten answer; 3. Require their own authoriza-tion to release information forms; 4. Take toolong to assign cases; 5. Keep changing officerswhen cases are assigned; 6. They give wrong in-formation regarding the loan; 7. Always have torefax and explain the situation to different peo-ple; 8. Customer Service sends us to the wrongdepartment; 9. They hang up; and 10. Never will-ing to work any details—they always have newpersonnel.”57

Court-ordered mortgage modificationsWhile federal bankruptcy law generally permitsclaims of secured creditors to be modified inbankruptcy cases, it currently singles out homemortgage claims and shields them from modifi-cation, other than through a plan which cures amortgage default. This provision in the Bank-ruptcy Code prevents homeowners from chang-ing the interest rate, amortization, or term ofmortgage loans in a chapter 13 case, the type ofbankruptcy consumers often file to save a homefrom foreclosure. Several bills pending in Con-gress would repeal this provision and allow mod-ification of home-secured loans in chapter 13cases.58 This change in the law would greatly as-sist homeowners and would complement statelaws that encourage loan modifications outsideof bankruptcy.

Survey ResultsWhile loss mitigation in general—and loan modi-fications specifically—have gained acceptance asstrategies for assisting all parties after mortgage


defaults, clear requirements have not been incor-porated into state foreclosure laws. No stateshave amended their foreclosure laws to requirethat mortgage holders engage in loss mitigationefforts before a home mortgage may be fore-closed. Although limited in scope, several stateshave taken steps in the right direction. Califor-nia and Connecticut have enacted laws requir-ing notice of an opportunity for a meeting beforea foreclosure. New York now has a law that man-dates mediation in many home foreclosures. Inaddition, several judicial foreclosure states haveimplemented court-annexed mediation programs.

Mandated Contact. In a law which went intoeffect in September 2008, California now re-quires that before sending a notice of default, themortgage holder or its servicer must contact theborrower in person or by telephone in order to“assess the borrower’s financial situation and ex-plore options for the borrower to avoid foreclo-sure.”59 During this initial contact, the holder orservicer must advise the borrower that he or shehas the right to request a subsequent meeting.The law does not specify what should occur atthe meeting or provide any clear enforcementmechanism if the holder or servicer does notoffer any meaningful workout options or negoti-ate in good faith. Also, California is a non-judi-cial foreclosure state, and the law fails to add anyprocess for court or some third-party review ifthe borrower is dissatisfied with the outcome.These significant limitations may cause the lawto have a limited impact.

During the initial contact under this new Cali-fornia law, the holder or servicer must also advisethe borrower that a subsequent meeting, if re-quested, shall be scheduled to occur within 14days and may be held telephonically. The noticemust also give the borrower the Department ofHousing and Urban Development (HUD) toll-free telephone number to find a HUD-certifiedhousing counseling agency. The borrower maydesignate a housing counselor or attorney to dis-cuss workout options with the holder or servicer.Assessment of the borrower’s financial situation

and discussion of options may occur during thefirst contact or at the subsequent meeting. Anynotice of default may not be sent until 30 daysafter contact is made with the borrower and thenotice must include a declaration that the holderor servicer contacted the borrower or diligentlytried to make contact.

The California law applies only to loans onowner-occupied residences made between Janu-ary 1, 2003 and December 31, 2007, and the lawwill remain in effect only until January 1, 2013unless extended.

Court Sponsored Mediation Programs. Anumber of states and cities have adopted media-tion programs in response to the current foreclo-sure crisis. Appendix B, infra. provides a summaryof the known programs.

Philadelphia’s program is the most ambi-tious and—by many informal accounts—quitesuccessful. It is mandatory for all mortgage fore-closure cases in which the property is residential,owner-occupied and located in PhiladelphiaCounty. Allegheny County, Pennsylvania courtsand those in several Florida judicial districtsalso have mandatory mediation programs.

The supreme courts of New Jersey, New York,and Ohio have established voluntary mediationprograms for local courts to modify and use aseach court determines is appropriate. Unfortu-nately, local courts are not required to use theprograms in all instances. New York has added anotice to the foreclosure complaint which ad-vises borrowers of the right to request a settle-ment conference.

Local advocates attribute the success of thePhiladelphia mediation program in substantiallyreducing foreclosures to a number of critical factors:

� There are several parties at every conference:1) the representative of the mortgage holderwho is required to have authority to modify themortgage; 2) an independent person (usually alocal attorney unaffiliated with the mortgageindustry) who acts as the mediator in the con-ference; 3) the homeowner, and 4) generally a


trained housing counselor who is familiarwith the dynamics of both the foreclosureprocess in the city and the different types of,and arguments in support of, the variety ofloan modifications which will make the loansustainable and affordable.

� The community group ACORN has beenhired by the City to go door-to-door to per-sonally explain the mediation process, its ben-efits and procedures to homeowners facingfore closure.

� Housing counselors—with the permission ofthe homeowner—prepare and submit a writtenproposal to the holder’s attorney before theconference outlining ways to mitigate theforeclosure.

� The program builds on the availability of thestate Homeowners’ Emergency Mortgage As-sistance Program (HEMAP)60 which has fundsavailable to make modified loans more afford-able to homeowners and acceptable to mort-gage holders.

Recommendations for Homeowner ProtectionsThe most effective way to ensure that mortgageholders and their servicers attempt in good faithto negotiate meaningful loan workouts withhomeowners is to incorporate the requirementinto the state’s foreclosure laws and make it acondition precedent to foreclosure. The lawshould require that before a foreclosure may pro-ceed, the mortgage holder must prove that it orits servicer explored all reasonable options toavoid foreclosure with the homeowner before theforeclosure was initiated.

States can employ a number of strategies tobridge the huge communication gap betweenmortgage holders and homeowners. These strate-gies include:

� Notice regarding the availability and benefitsof loan modification and other loss mitiga-

tion programs should be provided to home-owners very early in the foreclosure process,and other outreach efforts required. Careshould be taken to make the notice stand outfrom other notices, letters or solicitations(often from foreclosure rescue scammers) thehomeowner might receive.

� Loan modifications and workouts must beconsidered before a foreclosure can proceed.The failure to satisfy this requirement shouldbe treated in the foreclosure proceeding as adefense to foreclosure.60

� Diversion programs should be establishedand funded. If a resolution is not reached bythe parties after considering options to avoidforeclosure, they should be referred to a medi-ation program under the supervision of theforeclosure court or an appropriate stateagency. The procedure should ensure that theforeclosure process is stayed until a decision ismade on any pending workout applicationand any further mediation efforts are con-cluded. To be effective the program must re-quire that a representative of the mortgageholder with authority to approve a loan modi-fication or other workout be present or readilyavailable at the mediation sessions.

3. Provide notice of default and rightto cure, with a cure period of atleast 60 days, before accelerationand before any legal fees orforeclosure costs are incurred.

Pre-acceleration right to cure and noticeWhen a homeowner receives a letter from a mort-gage holder declaring that a home mortgage hasbeen accelerated, the impact can be devastating.A typical acceleration letter announces that theentire loan balance, along with an assortment ofcosts and fees, must be paid immediately. If thehomeowner does not pay the full loan balanceright away, the letter states that the mortgageholder will go ahead with the foreclosure and sale


of the home. Essentially, an acceleration noticeinforms homeowners that they have lost theright to pay off the loan in monthly installments.Just making up the missed payments will notstop the foreclosure.

Upon receipt of such a notice, which is oftensent by a lawyer who represents the mortgageholder, it is not surprising that many homeown-ers view their situation as hopeless. They do notknow where to turn, do not seek out alternativesto foreclosure, and simply await the inevitablesale and eviction.

Neither mortgage holders nor borrowers haveanything to gain from creating this prematuresense of hopelessness, particularly when a fore-closure can be prevented by some relatively sim-ple steps. State law requiring that the mortgageholder give the homeowner a notice of default be-fore accelerating the loan and charging defaultfees provides an effective antidote to an unin-formed borrower’s impulse to lose hope and walkaway from the mortgage obligation prematurely.Contrary to the unilateral fiat conveyed by manyacceleration notices, there are often optionsshort of full payment of the loan that can pre-vent foreclosure after a default in payments. Amandatory pre-acceleration notice informing thehomeowner of these options ensures that home-owners receive accurate information about themeans to avoid foreclosure.

Opportunity to cure when it can make a differenceIt is critically important that homeowners begiven an opportunity to cure early in the pro cessbefore default fees accrue and the costly formalforeclosure proceedings begin. If the homeowneris not given this right, the amount needed to cureimmediately before and after acceleration candramatically increase, often adding several thou-sand dollars in legal fees, property appraisal fees,legal advertising costs, and auctioneer fees. Whilemortgage holders in all states typically send bor-rowers pre-acceleration notices of default as required by the Fannie Mae and FreddieMac uni-

form mortgage documents, default-related feesare assessed during the cure period. The uniformmortgage documents do not prohibit assessmentof fees during the cure period.

ESCALATING FEES PREVENT CURE

Some temporary financial setbacks in the autumnof 2005 caused Jennie Richards of Columbus,Ohio, to fall behind on her monthly mortgage pay-ments of $780. Anxious to save the modest, 1,200-square-foot house she had bought a decade earlier,Richards scrambled to get caught up. On Hallow -een she went in person to drop off an overdue pay-ment to her lender, a subsidiary of Cleveland-basedNational City Corp., and left believing she hadbrought her account current.

But when Richards received her December state-ment from National City—whose website proclaims“We care about doing what’s right”—she received ashock: a demand that she pay $3,300. A few dayslater she got another shock: a foreclosure notice.

Richards, a 47-year-old insurance claims exam-iner, managed to come up with the full $3,300 andpaid National City a few days before its Jan. 16deadline. But that wasn’t enough. Instead, in earlyFebruary the bank sent her another demand—thistime for $6,800. And on Valentine’s Day, the bank’slawyer asked a judge to order that Richards’ housebe sold in a foreclosure auction.

Facing the imminent loss of her house and un-able to halt the inexplicably growing mountain offees, Richards sought help from Rachel Robinson, alawyer for the Equal Justice Foundation, a non-profit organization that provides legal representa-tion to low-income people in the Columbus area.

“I worked hard to own a home and I do notwant to lose my home,” Richards wrote in an affi-davit submitted to support Robinson’s motion tooverturn the foreclosure order. “I can afford mymortgage payments but I do not have the money topay everything that National City has demanded inforeclosure fees and costs and the extra interestthat National City has demanded.”

As of November 2008, Richards remained in herhome pending an appeals court’s ruling on her bidto overturn the foreclosure. She also remained inlimbo. “I can’t move forward because my life is onhold, not knowing if I’m going to have a home ornot with my kids,” she said in an interview. “Thishas been a physical torment on me.”


Particularly for low and moderate incomehomeowners, the inclusion of collection chargesover and above the overdue installments can cre-ate insurmountable barriers to a cure.

Requiring a pre-acceleration notice before de-fault fees may be imposed can provide positiveincentives for both servicers and homeowners.Rather than allowing the mortgage holder toincur unnecessary fees and costs and then shiftthem to the borrower, a clear pre-accelerationcure right will encourage the holder or servicer towork with the homeowner. The pre-accelerationnotice may also inform the borrower that if thecure is not made by the deadline date and fore-closure goes ahead, then fees and costs could beassessed against the homeowner in the future.This information gives an incentive to the home-owner to cure during the period when no feesand costs can be assessed.

Time period for cureHomeowners should be given a period of at least60 days to cure an alleged default before themortgage can be accelerated and before defaultfees may be charged. In some cases, the mortgageservicer may be wrongly claiming that the ac-count is in default due to its misapplication ofpayments or some other account error. If this oc-curs it can often take weeks if not months for thehomeowner just to get an answer from the ser-vicer after attempting to resolve the dispute. Inaddition to not prohibiting assessment of fore-closure fees during the cure period, the 30-daycure period provided under the FannieMae andFreddieMac uniform mortgage documents is notlong enough.

The timing of the cure period should coincidewith the important dispute resolution procedurefor mortgages available under federal law. If thehomeowner exercises legal rights under the federalReal Estate Settlement Procedures Act (RESPA) todispute a mortgage account error or to seek ac-count information, by sending a written “qualifiedwritten request,” the servicer is given 60 businessdays (almost three months) to provide a re-

sponse.62 It makes no sense to give homeowners apre-acceleration cure period which is signifi-cantly less than the time period servicers have torespond to a RESPA qualified written request.

Example from Spencer Savings Bank, SLA v. Shaw,2007 WL 1964676 (N.J. Super. Ct. Chancery Div.July 6, 2007), aff ’d 401 N.J. Super. 218, 949 A.2d218 (N.J. Super. Ct. App. Div. 2008):

The Shaws were three months behind in theirmortgage payments when they received a “Noticeof Intention to Foreclose” from their lender. TheNotice had been sent to them in accordance withthe New Jersey statute which grants homeownersthe right to cure a mortgage default for at leastthirty days from the date of the Notice without lia-bility for any fees and costs. (N.J.S.A. 2A:50-56). Arelated provision of New Jersey law allowed a lenderto require a homeowner to pay fees and costs if thehomeowner cured after a foreclosure lawsuit wasstarted. However the statute was silent on the ques-tion of whether the lender could add fees and coststo the cure amount if the homeowner paid duringthe period between the end of the thirty-day noticeperiod and the time the lender actually filed a fore-closure case in court.

The answer to this question made a significantdifference for the Shaws. After the initial thirty-daycure period, but before the lender filed a foreclo-sure case in court, the Shaws offered the lender thethree monthly payments due. The lender refused toallow the cure, demanding instead an additional$1,174.50 in fees and costs. These fees and costsincluded charges for an appraisal and legal fees in-curred in anticipation of filing a foreclosure case incourt.

The New Jersey trial and appellate courts ruledthat the Shaws had effectively cured their mortgagedefault and the lender had no right to proceed witha foreclosure in court. The courts found that thestate legislature intended that no costs and fees ofany kind could be charged to homeowners if theypaid up their missed payments before the lenderfiled a foreclosure action in court.

In some states the entire foreclosure processtakes only three to four months. Allowing a 60-dayperiod before acceleration and commencementof foreclosure gives homeowners the time to findthe funds for repayment. The time can also be


used to negoti ate, gather required financial in-formation, and finalize a workout agreement,loan modification, or some alternative to foreclo-sure that is mutually beneficial to all parties.

TIME TO FIND SOLUTION

Texas has some of the quickest foreclosures in thecountry. Homeowners are initially given only a 20-day cure period before the process begins. Thenthey are given a 21-day advance notice of the intentto sell the property. If the homeowner is unable tocure the default within the 21 days, the property issold at the county courthouse at a public auctionheld on the first Tuesday of the month. While theTexas non-judicial foreclosure process from defaultto foreclosure sale generally takes about threemonths to complete, it can be as short as 41days.63 This brief time period gives little opportunityfor some homeowners to find a solution, as de-scribed in this Dallas Morning News story:

Mr. Brannon, a 78-year-old veteran, is running out oftime to save his home after he got behind on his monthlypayments, which almost doubled in recent months,from $379 to $700.

Mr. Brannon said his finances were imperiled whenhe and his wife had to spend more money on healthcare, including a $3,000 bill for dental work. He gotbehind on his mortgage, then received a notice hishome would be sold about a month ago.

First Franklin Loan Services, his servicer, has agreedto work with him, Mr. Brannon said. But he has lessthan a month to find a solution, he said.

“I can’t hardly write, and now I’ve got to send bankstatements and fax forms,” said Mr. Brannon, a for-mer postal worker who lives off disability from an in-jury he sustained on the job. “I feel I should havemore time to get these mortgage payments together.The thing about it is, I could pay a little extra and getcaught up.”

Texas’ swift foreclosure process puts struggling homeowners in abind, Dallas Morning News, December 10, 2008.

Content of noticeAn effective notice of default should inform thehomeowner of the serious nature of the situa-tion. It should go beyond a routine dunning letterand accurately describe the foreclosure proceed-

ings that lie ahead if the homeowner does notpay the arrears within a time limit set by the statute.The notice should state the basis for the mortgageholder’s claim of default, itemizing the paymentsand other charges allegedly due. The homeownershould be directed to appropriate individualsemployed by the mortgage holder or servicer whocan help to resolve any disputes over charges. Thenotice should inform the borrower of rightsunder the federal Real Estate Settlement Proce-dures Act and similar state laws to invoke formaldispute and information gathering procedures.

As discussed in the previous section, the noticeshould also provide information about the ser-vicer’s loss mitigation programs, again providingcontact information that will direct the home-owner to someone who can effectively respond toa workout request. Information about state orlocal mortgage assistance programs, mediationprograms and other resources should be in-cluded. The notice should also direct the home-owner to appropriate agencies for legal and hous-ing counseling. A well-designed notice shouldstress the benefits of resolution of the default atan early stage, before an unmanageable arrearagein installments, costs and fees makes a cure ofthe default impossible.

WHERE TO TURN?

In 2005, Freddie Mac conducted a survey of home-owners to learn more about how they interact withtheir mortgage lenders and servicers.64 The surveywas updated again in 2007 after the foreclosure cri-sis had begun. Not surprisingly, most homeownersare not aware of options to avoid foreclosure:

� The majority of homeowners (57% of borrowersin default and 65% in good standing) were notaware of loss mitigation options

� One-quarter (25%) of homeowners in defaulthad not contacted their mortgage servicers todiscuss their difficulties and nine in ten (92%)said they would be more likely to contact theirservicers if they knew alternatives could be offered

� More than half (57%) said they did not knowabout forbearance agreements


� Only 52% said they knew their mortgage holdercould extend the mortgage term

� More than half (56%) said they were unaware offoreclosure counseling, while 74% indicated will-ingness to use such services once they becameaware they existed

Survey Results The vast majority of states do not have any lawsmandating a pre-acceleration notice and a rightto cure. Although servicers do send borrowerspre-acceleration default notices based on the uni-form mortgage documents, these notices typicallydo not include the important protections de-scribed above. Most notably, without a state lawrequiring that the cure amount be limited to themonthly installments that the homeowner is be-hind, mortgage holders and their servicers typi-cally demand costly property inspection fees,broker price opinion fees, legal fees and otherfees related to the alleged default.

Massachusetts, New Jersey, and Pennsylva-nia are the only states that give all residentialhomeowners the right to cure a default before ac-celeration and before default fees may be charged.The Massachusetts statute prohibits the mort-gage holder from accelerating the mortgage untilthe borrower is given a 90-day period to cure thedefault without being required to pay any charge,legal fees or penalty related to the default, exceptlate fees. New Jersey and Pennsylvania law givethe homeowner the right to cure without pay-ment of default fees for thirty days before com-mencement of a judicial action to foreclose. ThePuerto Rico statute also expressly prohibitsmortgage holders from charging fees and costs asa condition to a cure before acceleration.

Although they do not place effective limits oncosts and fees, the statutes of Hawaii, Iowa,Maine, Maryland, Nevada, North Carolina,North Dakota, Oklahoma, Texas, and WestVirginia provide for a type of pre-accelerationnotice of default that includes many of the pro-tections described above. The required informa-

tion typically includes an itemization of theamounts due and the identity of contact personsfor dispute resolution and consideration of work-out agreements. These statutes prohibit the lenderfrom proceeding with acceleration and foreclo-sure until the notice period has passed without acure. The Maryland and New Jersey statutes di-rect that proof of compliance with the notice requirement be included in later judicial foreclo-sure filings. Massachusetts requires that the notice be filed with the state division of banks.

States Which Mandate a Notice to Homeowners of

Pre-Acceleration Right to Cure

Hawaii New JerseyIowa North CarolinaMaine North DakotaMaryland OklahomaMassachusetts PennsylvaniaNevada Puerto Rico

Texas

Several states including Florida, Illinois, In-diana, Kentucky, New Mexico, Tennessee, andVirginia, have enacted laws extending a pre-acceleration right to cure to homeowners whohave high-cost mortgages.65 These cure and feelimitation provisions are generally included aspart of more comprehensive legislation dealingwith predatory lending. However, due to the lim-ited definition of high-cost loans in many ofthese states, the protections are applicable onlyto a small percentage of home mortgages. Thesestates should consider amending their foreclo-sure laws to include these rights for all home-owners, not just those with high-cost mortgages.

During 2008 a number of states enacted legis-lation requiring mortgage holders to give home-owners new pre-foreclosure notices. The noticegives homeowners contact information regard-ing the mortgage holder’s loss mitigation officeand refer the homeowner to housing counsel-ing programs. Recent enactments in Georgia,


Minne sota, and North Carolina require thatthis type of notice specifically identify employeesof the mortgage holder or servicer who have au-thority to negotiate workouts and loan modifica-tions. A California law discussed earlier imposesnew requirements for notice and a meeting withan authorized representative of the mortgageholder to “explore options for the borrower toavoid foreclosure” before the statutory notice ofdefault leading to a sale may be sent. Recent Col-orado and New York enactments require thatmortgage holders give homeowners pre-foreclo-sure notices containing contact information tofind out about housing counseling services.While this information can certainly be helpfulto homeowners, the recent enactments do not es-tablish a right to cure for a specific time withoutassessment of costs and fees.

States with Laws Mandating LimitedNotice of Loss Mitigation And

Counseling Options

California MinnesotaColorado New YorkGeorgia North Carolina

Recommendations for Homeowner ProtectionsWhile no single law in effect in any state providesa truly comprehensive set of protections forhomeowners before foreclosure, a combinationof elements found in several of them can maxi-mize these protections. The following items arerequired content in notices mandated by one ormore of the laws in effect in Hawaii, Maryland,Massachusetts, New Jersey, and North Caro -lina. These items should be required content inthe pre-acceleration notices mandated by eachstate’s statute

1. A specific description of what the homeownermust do to cure, including an itemization ofall cure amounts and directions on how to obtain updated statements of any additionalsums coming due during the cure period (HI,MD, MA, NJ, NC);

2. A clear statement that fees and costs will notbe charged to cure before the specific deadlinedate, with an indication that cure after thatdate could require payment of costs (MA, NJ);

3. Adequate time to cure, a minimum of 60 to 90days (HI, MA);

4. Correct names, addresses and phone numbers,and state licensing numbers of the holder, ser-vicer and the person authorized to approvework outs, loan modifications, or other op-tions to avoid foreclosure (MD, MA, NJ, NC);

5. The name of the originating lender and anysubsequent assignees (MD, MA);

6. A brief plain language description of the lossmitigation options that are alternatives toforeclosure (MD);

7. Referral information for housing counseling,legal services, and financial assistance pro-grams that can help the homeowner avoidforeclosure (MD, MA, NJ, NY, NC);

8. A plain language description of the foreclo-sure procedures under state law (HI, NJ);

9. A plain language description of the disputeand information request rights under RESPAand applicable state law;

10. A requirement in each case to file a copy ofthe pre-foreclosure notice and proof of servicewith a state regulatory agency, court or countyrecords office when the mortgage holder startsa judicial or non-judicial proceeding to foreclose(HI, MD, MA, NC (for subprime mortgages)).


4. Provide notice of the right toreinstate after acceleration butbefore sale, by bringing the loancurrent including foreclosure feesand costs.

Right to reinstateThe concept of allowing a borrower to “cure” amortgage arrearage and avoid foreclosure has itsroots far back in American and English propertylaw. Traditionally, the courts looked at a foreclosureas a drastic remedy because it meant the irrevoca-ble loss of an owner’s interest in prop erty.66 Thecourts have always exercised broad discretion inapplying principles of equity and fairness in fore-closure proceedings. When deemed appropriate,courts have construed legal rules strictly againstthe foreclosing creditor.

As an outgrowth of this historic reluctance ofthe courts to approve a forfeiture of propertyrights, many state legislatures crafted statutesthat embody the same principles of fairness andequity in regulating foreclosures. A common typeof statute that enforces these principles is onethat allows the borrower to stop a foreclosureafter acceleration of the obligation by curing thedefault at any time before the foreclosure hasbeen completed, thus reinstating the mortgageand returning the homeowner to pre-default sta-tus. Many states have enacted statutes that re-quire lenders to accept such a cure and terminatea foreclosure despite contrary terms in the mort-gage documents.

Not only do many state statutes already cod-ify a post-acceleration right to reinstate a mort-gage, but many mortgages by their own termsallow the borrower to exercise this right. For ex-ample, Federal Housing Administration (FHA)regulations in effect since 1971 mandate a rightto reinstate provision for all mortgages in FHA-insured programs.66 The standard mortgageform approved by Fannie Mae and Freddie Maccontains a term allowing for termination of apower of sale foreclosure by payment of the ar-rears and costs up until five days before the sale.68

The approved Fannie Mae and Freddie Mac formmortgage allows the borrower to reinstate after adefault in a judicial foreclosure up until the entryof a court judgment in the foreclosure case.69

Time period for reinstatementIn the context of judicial foreclosures moststatutes allow the homeowner to reinstate themortgage at any time until the sale takes place.This cut-off is appropriate for sound policy rea-sons. It is the sale that significantly changesthe nature of the relationship between the bor-rower and the mortgage holder. Once the saletakes place the rights of a potential third party,namely the purchaser at the sale, may come intoplay. Until the sale the rights of the borrower andthe mortgage holder can be reinstated to theirpre-default status quo without disruption of therights of any third parties. Allowing the home-owner to reinstate only up until the time the courtenters a judgment of foreclosure makes less sense,as the judgment of foreclosure merely authorizesthe sale of the home to proceed at a later date.

Congress has already adopted this principlefor bankruptcy cases. A homeowner who files achapter 13 bankruptcy case has the right to cureand reinstate a home mortgage after default aslong as the bankruptcy case is filed before a fore-closure sale has been completed.70 But this rightonly helps homeowners who file bankruptcy.Homeowners should not have to file bankruptcyin order to obtain the right to reinstate and pre-vent foreclosure.

A statute allowing the homeowner to reinstateafter a mortgage default until the foreclosure saleoccurs typically provides that the homeownermust pay all costs and fees associated with the acceleration and foreclosure. These costs may include court filing fees, advertising fees, record-ing fees, title search charges, and attorney fees.However, an appropriate statutory provisionshould limit assessment of attorney fees and othercharges against the homeowner to reasonable feesand costs actually incurred by the mortgageholder.


Content of noticeA right to reinstate after acceleration has littlevalue if homeowners do not know about the op-tion. In many cases homeowners’ initial lack ofknowledge about their legal rights is not the onlyproblem. When state law does not require a spe-cific form and content for a notice, homeownersrely on information received from the mortgageholder or servicer. National mortgage servicers oftenuse generic forms and notices that fail to takeinto account the special features of a particularstate’s foreclosure laws. Unless a state statutemandates otherwise, homeowners may receiveonly notices and dunning letters that are silent asto many important rights under their state’slaws. In some cases the notices from mortgageholders blatantly contradict the provisions ofstate law. This can be especially true when an ex-tended right to cure is involved.

Like the pre-acceleration notice discussed pre-viously, a meaningful post-acceleration noticeshould summarize simply and accurately the stepsa mortgage holder must follow in order completea foreclosure under state law. The notice shouldexplain alternatives available to avoid foreclosureand direct the homeowner to individuals who canprovide assistance, both legal and, where available,financial. The amounts claimed to be in arrearsand any fees and costs should be itemized in dis-tinct categories. It is particularly important thatthe notice identify individuals from whom thehomeowner can obtain clarifying information.The notice should also inform the borrower of theright under the federal Real Estate Settlement Pro-cedures Act (and any similar state law) to send aqualified written request to dispute account er-rors and request information, and the servicer’saddress where such requests should be sent.

Because the notice of right to reinstate is oftencombined with the notice of acceleration (andnotice of sale in non-judicial foreclosure states),it is often sent by the attorney who represents theforeclosing mortgage holder. Attorneys that spe-cialize in this area typically handle large volumesof foreclosures and have little ability to explore

options that take them outside the scope of theirroutine paperwork. These attorneys often claimto be unable to obtain basic information aboutan account from their clients. In this era of mul-tiple assignments of mortgages and securitiza-tion of debt obligations, it is not unusual forforeclosing attorneys to be unsure who theirclients really are. This problem has been noted bythe courts with increasing frequency. Recently anumber of courts have denied foreclosure reliefor threatened and imposed sanctions upon attor-neys when they could not establish their pur-ported clients’ ownership of the mortgages andnotes at issue.71

Given the widespread problems in identifyingthe entity ultimately responsible for a particularmortgage, it is not surprising that individualhomeowners are often frustrated in their at-tempts to find a human being authorized to re-view a workout proposal or clarify a disputedcharge. It is therefore essential that a notice in-forming the homeowner of the right to cure dis-close the identity of the servicer and the holder ofthe note and mortgage. The notice should con-tain the phone numbers and addresses of indi-viduals with authority to implement a cure andconsider other workout options, including loanmodifications. Local housing counseling agen-cies often assist homeowners facing foreclosure,and these agencies also need to know the identityof the relevant staff of the lender and the bor-rower’s recent payment history. Providing thiscontact information with the notice of a right tocure will allow the counselor to review accountinformation and promptly begin to assess howbest to help the homeowner.

Proof of complianceIn addition to requiring that the mortgage holderserve a clear and accurate notice of the right toreinstate, the statute should contain a provisionwhich ensures that the mortgage holder com-plies with the requirement to serve the notice.The most appropriate means to enforce compli-ance is to require that the mortgage holder file


copies of the pre- and post-acceleration noticesin land records as a condition to completion of avalid power of sale foreclosure. Similarly, thestatute should mandate that the mortgage holderinclude a sworn statement in a judicial foreclo-sure complaint to the effect that the notices ofthe right to cure were timely served, with copiesof the notices attached to and incorporated intothe foreclosure complaint.

Survey ResultsIn twenty-eight states, there is no state law whichguarantees that a homeowner may cure a defaultand reinstate the mortgage after acceleration.

States Which Do Not Require Right to Reinstate after Acceleration

Alabama, Connecticut, Delaware, Georgia, Iowa,Kansas, Kentucky, Louisiana, Maine, Massachusetts,

Michigan, Missouri, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota,

Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Tennessee,

Texas, Vermont, Virginia, West Virginia, and Wyoming.

Twenty-two states, the District of Colum-bia, and Puerto Rico provide by statute that thehomeowner can reinstate by paying the amountdue, plus any permissible costs and fees, by atime certain before the sale. If the homeowner becomes current by the deadline, the foreclosureis stopped and the mortgage is reinstated.

States with Laws Giving Right to Reinstate after Acceleration

Alaska (until sale)Arizona (in judicial foreclosure until sale, in non- judicial

foreclosure until day before sale)Arkansas (until sale)California (until five days before sale)Colorado (until 15 days before sale)District of Columbia (until five days before sale)

Florida (until entry of judgment in judicial foreclosure)Hawaii (until three days before sale)Idaho (until 115 days after recording of notice of

default)Illinois (within 90 days of service of summons and

complaint)Indiana (until judgment with further stay conditioned on

making timely payments)Maryland (until one day before sale)Minnesota (until sale)Mississippi (until sale)Montana (for “small tract” properties, until time of

sale)Nebraska (within one month of filing of notice of default

in non- judicial foreclosure)New Jersey (until entry of judgment in judicial foreclosure)New York (until entry of judgment with further stay upon

continued payments)Oregon (until five days before sale)Pennsylvania (until one hour before sale)Puerto Rico (by full payment within 30 days after initial

court review of foreclosure documents)Utah (within three months of filing of notice of default)Washington (until eleven days before sale)Wisconsin (until entry of judgment with further stay

subject to continued payments)

Several states which do not grant a reinstate-ment right, such as Oklahoma and Massachu-setts, do however have pre-acceleration right tocure laws. While these states should retain thoselaws for the reasons stated in the earlier section,they should consider providing homeowners witha post-acceleration right to cure and reinstate.

Some states place limits on the number oftimes a homeowner can take advantage of theright to cure and reinstate. For example, theOklahoma statute provides that the homeownercannot reinstate more then three times intwenty-four months, and the Pennsylvania lawlimits exercise of the right to three times in oneyear. Alaska, the District of Columbia, Illinois,and New Jersey also place limits on the fre-quency with which homeowners may reinstateafter a foreclosure has been initiated.


As mentioned above, if the state law does notgrant a more generous time period, borrowersgenerally have the right under the standard Fred-die Mac and Fannie Mae mortgage documents tocure up until five days before the foreclosure salein non-judicial foreclosure states. With respect tojudicial foreclosures, there is a split between statestatutes that permit a cure until the foreclosuresale and those that allow a cure only until entryof judgment in the foreclosure lawsuit. Severalstatutes allow for a more limited stay of proceed-ings after the entry of judgment in a judicial fore-closure case, with the continuation of the staydependent on the homeowner’s making futurepayments on schedule.

To be effective, a statute granting the home-owner an extended right to reinstate must re-quire that the mortgage holder provide thehomeowner with a notice of this right. Unfortu-nately, several of the states which grant this right,such as Arizona, Arkansas, the District of Co-lumbia, Iowa, Idaho, Minnesota, Mississippi,Nebraska, Nevada, New York, North Dakota,Utah, and Wisconsin do not require that mort-gage holders inform borrowers of the right.

Several state statutes contain specific languageto be included in the notice of the right to rein-state. The California statute mandates a form ofnotice with a clear explanation of rights and re-quires the lender to identify staff who can re-spond to requests for information. Maryland’sstatute describes the relevant time frames, pro-vides contact information, and requires that theforeclosure documents attest to compliance withthe notice provision. The form mandated by theWashington statute requires a clear itemizationof amounts due and categories of charges. TheHawaii and New Jersey statutes also require spe-cific information about homeowner rights in thetext of the notice. Statutes from other states,such as Oregon, Pennsylvania, Texas, and Utah,do not contain a precise model text to be incor-porated verbatim into a notice, but instead listthe general items to be included in the notice.

Georgia and Tennessee have enacted lawsthat apply special cure provisions to loans that

are defined as “high cost” under their statutes.These statutes allow cure and reinstatement ofthese particular loans until the time of sale orwithin a few days of the sale. As mentioned in theprevious section, these high cost loan statutesapply to only a small portion of all loans beingforeclosed today. States should expand the scopeof covered loans to include all loans secured by aprimary residence.

Recommendations for Homeowner ProtectionsThe reinstatement statutes in several states in-clude one or more elements that can be very help-ful for homeowners seeking to avoid an ongoingforeclosure. An effective statutory scheme shouldincorporate as many of these protective terms aspossible. They include:

1. A right to reinstate until the date of the fore-closure sale;

2. A limitation on fees and charges to those rea-sonably and actually incurred, or a strict mon-etary cap on fees;

3. A requirement that the foreclosing mortgageservicer or holder respond promptly and inwriting to requests for an itemized statementof the reinstatement amount;

4. A requirement that the mortgage servicer orholder serve the homeowner with a plain lan-guage written notice which gives such essen-tial information as:a. The duration of the right to cure and rein-

state, and the acts which must be per-formed in order to do so;

b. The names, addresses and phone numbersof legitimate agencies providing fore-closure counseling and related financial assistance;

c. The name, address and phone number ofthe mortgage servicer’s or holder’s staffwho can provide written updated state-ments of amounts due and authorize work-out and loan modification agreements;


d. The right to make a formal request underRESPA and the name (or office) and ad-dress to whom the request should be sent;

5. A requirement that the mortgage holder fileof record a proof of service and copy of thenotice with any judicial foreclosure complaintand notice of non-judicial sale.

6. A requirement that the mortgage holder fileof record all prior assignments of the mort-gage before any judicial foreclosure complaintis filed and notice of non-judicial sale is sent.

5. Provide personal service of the notice of sale or foreclosure complaint.

Due process requires adequate noticeForeclosure irrevocably deprives individuals ofwhat is typically the most important property interest they have. Beyond the immeasurable emo-tional value the home holds for many consu mers,home equity may also represent the consumer’ssole savings and security for retirement. Lawsmust operate with the greatest possible care toensure that homeowners have notice of ongoingproceedings and can make informed decisions inresponse to them. Non-judicial sales raise themost significant concerns about notice.

Unfortunately, when homeowners fall into de-fault and suspect that a foreclosure proceeding isimminent, they often believe there is nothing theycan do to avoid loss of their home. Many home-owners who are in default, almost one-half ofthose surveyed in a 2007 Freddie Mac survey, de-scribe their contacts with their mortgage holderor servicer as “embarrassing” or “frustrating.”72

About one in four of these homeowners also con-sidered their discussions with mortgage servicers as“scary,” “intimidating,” “confusing,” and “pointless.”

It is therefore not surprising that many home-owners ignore initial letters they receive from mort-gage servicers. This understandable “head in thesand” approach might also cause some home-owners to not claim certified letters. They mayalso incorrectly assume, perhaps based on knowl-

edge of judicial landlord/tenant proceedings intheir state, that they do not need to act until per-sonally served with legal papers by a court official.Others who are most intimidated by the process orfind their situation to be hopeless may move outabruptly. And there will always be cases in whichmistakes will be made by mortgage servicers andnotices will be sent to the wrong address. For avariety of reasons then, homeowners may not re-ceive or review notices of ongoing proceedingsthat are simply mailed to the foreclosed property.

Gary Holden, a retired purchasing contract nego-tiator for the state of Arkansas who lives in the tinytown of Glenwood, remembers that it was “scary”when a man in a uniform came to his door in theearly evening in late autumn of 2007. The man, adeputy sheriff, handed Holden a “notice to vacate”the house he lived in ever since it was built 20 yearsearlier. In an affidavit, Holden said he was “shocked,scared, sick to my stomach and absolutely terrifiedthat I was going to lose my house.”

Unbeknownst to Holden, his house had beensold in a foreclosure auction a month earlier. Thelawyers for the holders of his mortgage had com-plied with the state’s notice requirements for anon-judicial foreclosure by sending letters to anaddress for his home which had not been usedsince street numbering changes related to a newemergency 911 telephone system went into effecta decade earlier.

Not that Holden was so hard to find. Monthlymortgage payment notices were being sent by themortgage servicer to Holden’s current, correct address.

Kathy Cruz, Holden’s lawyer, says that she wasable to save her client’s house despite an Arkansaslaw that precludes legal challenges to a foreclosureunless those challenges are raised prior to a fore -closure sale. Fortunately for Holden, documentsfrom another court case showed that Holden’smortgage servicer knew and used his current ad-dress, Cruz says.

Still, Holden remained in limbo during monthsof legal wrangling required to persuade the holderof Holden’s mortgage to agree to give him back hishouse. And he and his family had to endure a sum-mer thunderstorm season without insurance cover-age because he couldn’t demonstrate an insurableinterest in the property. Only after a judge issued anorder that the title be returned to Holden was heable to buy property insurance.


Many states’ non-judicial foreclosure laws re-quire mortgage holders to do nothing more thanmail a notice of an upcoming sale to the borrowersat the property address, usually by regular andcertified mail. Mortgage holders can comply withthis service requirement even when they knowthat key documents such as the notice of salehave been returned as undeliverable or un-claimed. Curiously, many of these same statesprovide greater notice when a consumer is beingsued on an unpaid personal debt. In those cases,the debt collector is typically required to have acourt summons personally served on the con-sumer; a court official will go to the consumer’shome and hand the summons to the consumer orleave it with an adult member of the household.

THE MARYLAND EXPERIENCE

Excerpt from brief on behalf of Joyce Griffin beforethe Maryland Court of Appeals in Griffin v. Bier-man, 941 A.2d 475 (Md. 2008):

Joyce Griffin, and her children, lost their home be-cause Ms. Griffin did not receive notice until it was toolate to contest the foreclosure. Following the death ofher fiancé, Ms. Griffin had difficulty making paymentson her home mortgage, which she had refinanced withAmeriquest, a now-defunct predatory subprimelender. Without Ms. Griffin’s knowledge, the com-pany, through its trustees, initiated foreclosure proceedings. Ms. Griffin did not learn of the foreclo-sure until after her house was sold for $223,000 atan auction on the courthouse steps, and then only be-cause the purchaser took it upon herself to tack ahandwritten notice on Ms. Griffin’s door.

The trustees responsible for prosecuting Ms. Grif-fin’s foreclosure did the bare minimum under theMaryland rules: They published notice in a newspaperand sent letters by certified and regular mail, onceafter docketing the action and again in the weeks im-mediately preceding the sale. Even though each one ofthe certified letters were returned as unclaimed, thetrustees did nothing in response during the eightmonths preceding the sale. They took no additionalsteps to notify Ms. Griffin and instead held the fore-closure sale just one day after one of their certified let-ters was returned unclaimed. The trustees did noteven wait to see whether the official notice of the fore-closure sale itself was delivered; that notice was

promptly returned unclaimed fifteen days after thesale had already taken place. Indeed, the trustees tes-tified that their official policy is to do nothing in re-sponse to certified-mail foreclosure notices that arereturned unclaimed by the post office.

The trustees’ practices leave Maryland homeownersin Ms. Griffin’s position in a much worse position thanthe defendants in tax foreclosures, summary evictionproceedings, small-claims disputes, and even routine debtcollection actions where the stakes are far, far lower. Ifshe had been a defendant in virtually any other type oflegal proceeding in the State of Maryland, in fact, theprocedures employed would have been better calcu-lated to provide notice to Ms. Griffin than they werein the proceedings to foreclose on her home.

* * *Sadly, the Maryland Court of Appeals rejected

Ms. Griffin’s attempt to get her home back. In find-ing that the Maryland procedure satisfied mini-mum due process requirements, the Court ofAppeals noted that “[p]erhaps some changes inthe foreclosure process would be beneficial to thecitizens of the State of Maryland.” Aware that sev-eral bills were pending in the Maryland Legislaturethat would reform the foreclosure process, theCourt said it would defer to the legislative process.In fact, soon after the case was decided, a new lawwas enacted in Maryland requiring personal serviceof the foreclosure sale notice. However, in manystates there is still no requirement of personal service.

Survey ResultsAmong the states that rely primarily on judicialforeclosure, nine allow service of the foreclosurecomplaint by mail or by means other than per-sonal service. Of the judicial foreclosure statesConnecticut, Delaware, Florida, Illinois, Iowa,Maine, New Jersey, New York, North Dakota,Pennsylvania, Vermont, and Wisconsin re-quire personal service of the legal documentsthat start a foreclosure case.

Of the thirty states and the District of Colum-bia where non-judicial foreclosures predominate,twenty-six allow service of the notice of saleupon the borrower by mail or means other thanpersonal service. Maryland, Minnesota, Okla-homa, Oregon, and South Dakota now require


that mortgage holders serve the notice of salepersonally upon the homeowner in all non-judi-cial foreclosures. This practice creates the great-est likelihood that homeowners will receiveactual notice and act to protect their rights. TheOregon statute requires three attempts at per-sonal service of the notice of sale before themortgage holder can rely on mail service andposting. The Maryland law requires at least twoattempts to serve the “order to docket the com-plaint” for the sale. If these two attempts fail, themortgage holder must file an affidavit describingthe efforts at personal service and send the orderby first class and certified mail to the property aswell as post it at the property.

Recommendations for Homeowner ProtectionsRepeated efforts at personal service of the fore-closure complaint and the notice of sale have thegreatest chance of impressing upon the home-owner the seriousness of the situation. It shouldbe in the mortgage holder’s interest to have thehomeowner actively engaged in the process. Statelaws should require that before a sale of a homeis allowed to take place under any type of foreclo-sure statute, the mortgage holder must file proofof personal service of the notice of sale or elsedocument repeated good faith attempts to makepersonal service on the borrowers. Alternatively,states may consider a procedure which providesfor service by mail with an acknowledgementform to be filled out and returned by the home-owner. If the form is not returned, then personalservice would be required.

Judicial foreclosure actions proceed through astate court system subject to the rules that applyto most civil cases. To the extent personal serviceof a summons and complaint is required underthe state’s rules of civil procedure, the judicialforeclosure complaint is served in the same way.However, some added protections must apply todocuments related to a foreclosure sale. Home-owners who did not file a written “answer” or re-sponse to the foreclosure complaint with the

court should not be treated the same as other de-fendants who have defaulted in a civil lawsuit.The default should not be deemed as a waiver ofservice of all future documents related to thecase, such as a later notice of sale. The require-ments for personal service of the notice of sale,similar to those under the Oregon and Marylandstatutes described above, should apply to judicialforeclosure sales as well.

6. Provide a state housing emergencyassistance fund or similar programto assist homeowners in defaultdue to temporary financialdifficulties.

Housing assistance fund programsSeveral states have programs to provide smallemergency loans or assistance to homeownerswho are facing foreclosure. Most of these pro-grams are aimed at assisting homeowners whoare experiencing temporary financial difficultiessuch as loss of employment, illness, disability,death, divorce or legal separation. Homeownersare usually required to have a good payment his-tory prior to the delinquency, and they must beable to resume the mortgage payments after theassistance.

Typically the programs provide short termloans ranging from $3,000 to $60,000, either in-terest-free or at rates less than 6%. Generally,there are two types of loans: 1) a continuing loanwhich pays the homeowner’s delinquent balanceand assists the homeowner with his or her monthlypayments for a period of time that ranges from12 months to 24 months, or 2) a non-continuingloan with a one-time disbursement which per-mits the homeowner to pay off the delinquentmortgage balance.

These rescue fund programs can help home-owners avoid foreclosure, especially when theyare combined with state laws which give thehomeowner the right to cure defaults before ac-celeration and the imposition of excessive feesand costs. Since rescue fund programs are gener-ally most effective in helping homeowners who


have experienced a temporary loss or reductionin income, they work best in conjunction withtraditional loss mitigation options such as for-bearance or repayment plans. However, theseprograms alone are inadequate to deal with fore-closures caused by mortgage loans which wereunaffordable for the homeowner when made orwhich have become unaffordable due to a changein the monthly payment on an adjustable ratemortgage. Homeowners in foreclosure because ofoppressive loan terms affecting their ability topay will need a loan modification in addition toany assistance provided by a rescue fund pro-gram. Still, these programs can play a valuablerole as part of a comprehensive solution for fore-closure avoidance.

Survey ResultsAt present, a small number of states have createdemergency assistance programs to assist home-owners who are at risk of foreclosure. Statewideprograms currently exist in Connecticut,Delaware, Maryland, Michigan, Minnesota,New Jersey, North Carolina, Pennsylvania,Vermont, and Washington. There are also sev-eral local programs that provide small emergencyfunds, such as in St. Louis, Missouri; Syracuse,New York; Waco, Texas; and New York City.Appendix C, infra, provides details about the re-quirements for some of these programs.

Recommendations for Homeowner ProtectionsAs the foreclosure crisis deepens, more statesmay wish to consider developing such programs.Due to the escalating unemployment rate causedby the housing crisis and broader economic fac-tors, a second wave of foreclosures over the nextfew years will likely fall upon homeowners withprime mortgages whose payment problems werenot caused by the mortgage terms. These unem-ployed homeowners could greatly benefit by aloan program which would help them get through

tough times until the economy rebounds andthey can find new jobs. States should considerprograms that:

� assist homeowners with monthly mortgagepayments for a period of 12 to 24 months;

� provide interest-free or below market rateloans to be repaid when the home is sold,transferred, or refinanced;

� are designed as revolving funds, with amountsreplenished by loan repayment;

� provide that foreclosure is stopped pendingapplication for funds.

7. Provide protections for home -owners after the foreclosure sale,such as redemption rights,limitations on deficiencyjudgments, and procedures for accounting and return ofsurplus sale proceeds.

A. Post-Sale Right of RedemptionSome states have enacted laws that allow a home-owner to undo the effect of a foreclosure for a setperiod of time after a foreclosure sale by payingthe amount of the winning bid at the sale. Theright to set aside a foreclosure sale in this manneris typically created under a state statute and isoften referred to as a “statutory” right to redeem.Unlike the right to cure discussed in Section 3and the right to reinstate discussed in Section 4,supra, the statutory right to redeem comes intoplay only after a foreclosure sale. It allows theborrower a final opportunity to save the home.

To exercise a statutory right to redeem, theborrower pays the amount of the successful bidat the foreclosure sale. The borrower must makethis payment during the time defined by thestate’s statute. In addition to the bid amount, theborrower usually must compensate the buyer forany costs it incurred as a result of the purchase.These costs may include interest at a statutory


rate, taxes and insurance premiums paid, as wellas maintenance and repair expenses. The pur-chaser at the sale, whether it be the mortgageholder or a third party, should be made finan-cially whole through this payment.

Purposes behind the statutory right to redeem The statutory right to redeem after a foreclosuresale serves two important purposes. First, it givesthe borrower a realistic period of time withinwhich to seek alternative financing to pay the saleprice and keep the home. Reemployment, recov-ery from illness, or the availability of assistancefrom government programs may come into playduring this time. The personal and social costs ofsubjecting a family to eviction and permanentloss of a home are significant. Providing a finalopportunity to save the home and avoid theseconsequences is clearly a goal that many statelegislatures have considered important. The bor-rower may also sell the property during the re-demption period. With the benefit of a longerperiod to arrange a private sale, the borrower ismuch more likely to pay off all or a substantialpart of the mortgage holder’s original claim (ifthe mortgage holder is the purchaser at sale) andpotentially recover the value of any equity lost atthe sale.

A second purpose in allowing borrowers to re-deem after sale is to deter mortgage holders fromstrategically offering low bids at foreclosuresales. A mortgage holder should not be encour-aged to acquire a property at a foreclosure sale,then resell it for a significantly higher price at alater date by using more effective marketing tech-niques. By means of intentionally low bids, mort-gage holders can acquire a former homeowner’sequity in the property as a windfall. Even whenthe borrower has no equity in the home, themortgage holder’s purchase of the propertythrough an unreasonably low bid can have detri-mental effects. An artificially low foreclosure saleprice can saddle the borrower with a much higherthan appropriate deficiency debt in the future. By

contrast, when mortgage holders know that bor-rowers can redeem after sale by paying theamount of the winning bid, they will be morelikely to avoid letting the sale end with a bid solow that it allows for an easy redemption.

Arguments against redemption rights are based on stereotypes and unsupported claimsExercise of the statutory right to redeem ulti-mately causes little concrete harm to mortgageholders. The statutory formulas for redemptionrequire payment of sums that compensate eitherthe holder or the third party purchaser for allcosts they incurred as a result of the foreclosureand sale. Because it sometimes preserves any sec-ondary liens, the redemption may also protectthe rights of junior lienholders who might other-wise lose their interests in the property if the salewere not set aside.

Objections to the statutory right to redeemhave often focused on a presumed uncertaintycreated in the minds of bidders when there is apossibility of redemption after a sale. This “chill-ing effect” has never been documented. If theychoose to use them, mortgage holders can alwaysemploy an array of truly effective practices thatwill encourage competitive bidding at foreclo-sure sales. Mortgage holders can always invest inbasic advertising and marketing strategies thatwill lead to substantially higher bids. Despite thecost effectiveness of these marketing tools, mort-gage holders routinely ignore them and end upbuying the properties with their own low bids.The low bid problem is nationwide and appearsin all forms of foreclosures. Simply blaming post-sale redemption statutes for this phenomenon isnot a serious attempt to address the need fortruly effective solutions that would allow foreclo-sure auctions to benefit from market forces.

In some respects, the lack of a right to redeemafter sale is just as likely to cause uncertainty asdoes the existence of the right. Absent a right toredeem after sale, borrowers will be more likely tochallenge irrevocable sales through other means,


such as lawsuits alleging a gross inadequacy ofsale price or non-compliance with foreclosure pro -cedures. Because of the lack of judicial supervision,power of sale foreclosures and other non-judicialsales are particularly susceptible to this kind ofattack. Allowing the right to redeem after sale willdirect borrowers to concrete measures designedto allow them to keep their homes and compen-sate creditors, rather than pursue time consum-ing and expensive litigation over sale procedures.

Finally, some critics have pointed to the bor-rower’s right to continue to reside in the prop-erty during the post-sale redemption period as afactor that possibly leads to lower bids at foreclo-sure sales. Mortgage holders argue that home-owners will vandalize properties or deliberatelycause waste during redemption periods. Again,this supposed chilling effect on bidding has notbeen documented. Most often, this claim is sim-ply the product of a demeaning stereotype ofdebtors. Property inspections can determinewhether, in fact, homeowners are deliberately de-stroying property. Purchasers can seek equitableremedies from the courts to prevent waste in therare instances when this type of conduct truly oc-curs. Moreover, it is possible to draft statutesthat allow the shortening or termination of re-demption rights upon a verified showing thatborrowers are causing deliberate damage to aproperty during a redemption period. Thesestatutory provisions can adequately address themortgage holders’ and sale purchasers’ concernsabout property condition during a statutory re-demption period.

Survey Results Approximately half the states have enacted lawsthat allow a homeowner to set aside a foreclosuresale by redeeming for a set period of time afterthe sale has taken place. These laws vary a greatdeal from state to state in how they operate andwhen they apply. Some states have more thanone redemption law. For example, a state mayhave one statute that applies to judicial foreclo-

sures, another that applies to non-judicial fore-closures, and a third one that regulates executionof judgment liens against real property.

The following states which rely primarilyupon judicial foreclosures have a statutory rightto redeem after a foreclosure sale:

Illinois (redemption until later of seven months after ser -vice of complaint or three months after judgment withadditional thirty days for a home mortgage if the mort-gage holder is the purchaser at sale and the sale pricewas less than specified amount)

Iowa (one year under general sale provision)Kansas (twelve months from date of sale)Kentucky (one year from date of sale if sale did not bring

at least two-thirds of property’s appraised value)North Dakota (sixty days after sale)South Dakota (one year for judicial foreclosures and 180

days for certain power of sale foreclosures if provided inloan documents)

The following states in which mortgage hold-ers predominately use non-judicial foreclosurehave a right to redeem after foreclosure sale:

Alabama (one year from date of sale) Michigan (varies from one month to one year depending

on size of parcel, number of units, percentage of originalloan outstanding)

Minnesota (one year from sale)Missouri (twelve months from date of sale, but only if

mortgage holder acquired the property at sale andhomeowner posts bond)

Montana (twelve months from sale)New Mexico (nine months from sale)Tennessee (two years, but may be waived by loan docu-

ments)Wyoming (three months)

A number of states have statutes allowingpost-sale redemption after judicial foreclosures,but these laws rarely help homeowners becausenon-judicial foreclosures are the predominatemethod of foreclosure:

Alaska (twelve months for judicial foreclosure and nonefor power of sale unless loan document authorizes it)

Arizona (twelve month redemption from sale after courtjudgment, none after power of sale foreclosure)


Arkansas (one year after judicial foreclosure, none forpower of sale)

California (two year redemption applies in certain judicialforeclosure, if plaintiff seeks deficiency; none for non-judicial foreclosure)

Michigan (six months for judicial foreclosure, varyingtimes for non-judicial foreclosure)

Utah (six months after judicial foreclosure, none afternon-judicial foreclosure sale)

Washington (eight months after judicial fore closure sale,none for deed of trust foreclosure)

Several states allow a very limited right to “re-deem” for a short period after a judicial foreclo-sure sale and until certain post-sale formalitiesare completed. These states include North Car-olina, Florida, Ohio, and South Carolina. Be-cause the time periods to redeem under thesestatutes typically run for a matter of weeks, theselaws differ significantly from the statutory rightto redeem discussed generally in this section.

Although many states have statutes on thebooks that allow a property owner to redeemafter a foreclosure sale, most allow a homeownerto redeem only in limited circumstances. Anarray of factors set conditions on the right to re-deem and otherwise limit its effectiveness. Someof these limitations may have been based uponwhat appeared to be reasonable policy grounds.However, in practice the rationales routinely ig-nore the real needs of most homeowners whoface the threat of home loss.

For example, the length of time allowed to re-deem varies under some statutes depending onfactors such as the percentage of the underlyingdebt that the borrower has paid, the extent of anyequity the homeowner has in the property, andthe intent of the mortgage holder to sue the bor-rower for a deficiency in the future. In Michiganand North Dakota, borrowers have more time toredeem the greater the portion of the underlyingdebt they have paid. In Illinois, Kansas, andKentucky, the relation of the foreclosure saleprice to the current market value of the propertyaffects the time allowed to redeem. Finally, understatutes such as those in effect in California,

Iowa, and New Jersey, the intention of the mort-gage holder to pursue a deficiency claim againstthe homeowner after the sale triggers greater re-demption rights.

In states that allow both judicial and non-judi-cial foreclosure a fairly common developmenthas been to retain the right of redemption as partof the traditional judicial foreclosure practice,but preclude redemption after non-judicial fore-closure sales. Other states, such as Illinois andMissouri, allow more extensive redemptionrights if the mortgage holder, rather than a thirdparty, purchases the property at the sale. In a fur-ther variation, under some redemption laws,such as those in Illinois and California, home-owners with mortgages used to purchase theproperty receive greater protections than dohomeowners with other types of mortgages.

Recommendations for Homeowner Protections 1. Make redemption applicable to all types

of foreclosure sales involving a primaryresidence

Restrictions that limit redemption based uponthe identity of the purchaser at sale, the methodof foreclosure used, or whether the mortgage wasfrom a purchase money transaction or a refinanc-ing, deny effective relief to many homeowners with-out regard to their need. Similarly, limitationsbased on the value of the property or the percent-age of the debt paid can be arbitrary, complexand expensive to apply. Nor should the right toredeem depend on a factor such as whether themortgage holder will later claim a deficiency.

In most jurisdictions, foreclosure legislationhas developed over time and in a piecemeal fashion.Over the years, the laws have allowed mortgageholders to rely more extensively on non-judicial andpower of sale foreclosures. This trend has left behindsome of the significant borrower protections thatwere available to homeowners under traditionaljudicial foreclosure systems. The need today is


for a comprehensive approach to borrower pro-tections, and the right to redeem for a set periodof time after a foreclosure sale has typically beenone of the core rights of homeowners under judi-cial foreclosure systems. Many states recognizethis right in one form or another and have doneso for many years. A simple redemption statutethat applies across the board to all home foreclo-sures in a state works best to protect homeown-ers in foreclosures. For example, the Iowaredemption statute is straightforward and avoidssome of the unnecessarily complex variationsand exceptions that have developed under otherstates’ laws.73

2. Allow the homeowner to continueresiding in the property during theredemption period

Most statutes that authorize redemption aftersale permit the borrower to live in the home dur-ing the redemption period. This is consistentwith the goal of allowing the borrower an oppor-tunity to refinance or otherwise take advantageof an improved financial situation during the ex-tended redemption period. Burdening the home-owner with relocation and moving expensesduring the redemption period only diminishesthe likelihood of a successful redemption.

3. Allow the homeowner to redeem andsatisfy the mortgage obligation bypaying the sale price with interest andcosts of sale

A typical redemption statute permits the bor-rower to redeem upon payment of the foreclo-sure sale purchase price plus the costs of the saleand any interest accrued on the sale price. Thispayment, particularly when the sale has beenconfirmed by a court order, should satisfy all thehomeowner’s obligations under the mortgage.California’s statute applicable to redemptionfrom judicial sales recognizes this effect of re-demption.74 The stated purpose of this statutoryprovision is to discourage mortgage holders fromletting private auctions end in low sale prices

when the foreclosing lender is the only bidder.Provisions like those in the California law requiremortgage holders to look at the auction as theultimate source of payment of their debt. Withthis understanding they should take appropriatesteps to maximize bid amounts. This result is fairin view of the mortgage holder’s election to fore-close and liquidate the property under what pur-ports to be a competitive bidding auction.

Not all states follow this rule. For example, theSouth Dakota statute requires payment of anydeficiency as a condition to redeeming.75 The bet-ter rule, as under the California law and the Iowastatute referred to above, recognizes that the pay-ment of the sale price satisfies the borrower’s ob-ligation under the mortgage.

4. Declare the right to redeem to be non-waivable by any terms of loan documents

One provision that invariably undermines theright to redeem is a statutory authorization forthe waiver of the right. The Alaska and Ten-nessee statutes expressly allow the waiver of theright to redeem. If a statute allows redemptionrights to be forfeited by contract language, thenit is inevitable that boilerplate language to thiseffect will appear in all loan documents devel-oped for use in the state. An effective statutoryredemption provision must declare that any pur-ported waiver of redemption rights by contractterms is unenforceable.

B. Limitations on DeficiencyJudgments

Destructive effect of deficiency judgmentsA mortgage foreclosure can be one of the mosttraumatic experiences that an individual or fam-ily ever endures. The dream of homeownershipends in eviction, forced relocation, and loss of thefamily’s most significant investment. Yet thismay not be the end of the hardships. Months oryears later, after sustaining these losses, the for-mer homeowners may encounter what seems likethe ultimate cruelty. They discover that the mort-


gage holder is suing them to recover a substantialmoney judgment. This lawsuit, called a deficiencyaction, seeks to recover the difference betweenthe price the house sold for at the foreclosure saleand the total debt that was due under the mort-gage and note at the time of foreclosure. To makematters worse, the mortgage holder may havebought the property at the foreclosure sale for afraction of its real market value, then garnered asubstantial profit by selling it to a third party fora price much closer to its true value. Now themortgage holder is suing the former homeown-ers for the same shortfall it recovered in the saleto a third party. Under many state foreclosurelaws, this double recovery is perfectly lawful.

Foreclosed homeowners have good reason tofeel outraged by this turn of events. If the prop-erty was located in an area with depressed homeprices, or if the loan originator made the loanbased on an overly optimistic or deliberately in-flated appraisal, the deficiency amount is likely tobe very high, easily in the tens of thousands ofdollars. If the mortgage holder obtains a moneyjudgment for the deficiency against the formerhomeowners, the judgment will be listed on theborrowers’ credit report for seven years, jeopard-izing their financial recovery. With statutory in-terest, the unpaid judgment amount could doubleover a decade. Unless they are fully protected byexemption laws, the borrowers’ property and in-come will be exposed to collection actions and wagegarnishments until the judgment is paid in full.

Example from American General Financial Services,Inc. v. Brown, 376 S.C. 580, 658 S.E. 2d 99 (S.C.2008):Kimberly Dawn Brown bought a mobile home in1999. She signed a mortgage in the amount of$53,600. After making payments for several yearsshe fell behind. Her lender filed a judicial fore -closure action in 2005. The court entered a fore -closure judgment, ordered the property sold atsheriff ’s sale, and found the total debt due to be$61,763.90.

A third party bid $25,001 at the sale and ac-quired the property. The lender then requested adeficiency judgment against Ms. Brown personally.

The lender asked the court to enter judgment in theamount of $39,087.99, the difference between thehigh bid and the full amount of the debt.

The judge hearing the foreclosure case refused togrant the deficiency judgment. According to thejudge, the result would be inequitable and a judgehearing a foreclosure case could exercise discretionto deny a deficiency judgment on equitable grounds.The lender appealed the decision. On appeal, theSouth Carolina Supreme Court reversed the trialcourt judge. According to the Supreme Court,under existing state law, the trial judge had no dis-cretion to refuse to enter the deficiency judgment inthe full amount of $39,087,99. Thus, Ms. Brownwould not only lose her home, but she would remainpersonally liable for this $39,087.99 debt.

The only limitation on foreclosure deficiency claimsallowed under South Carolina law is the debtor’sright to submit evidence of an appraisal of theproperty in an attempt to lower the deficiency claim.The debtor must submit the request for an appraisalto the court within 30 days of the foreclosure sale.The statutes do not require any form of notice tohomeowners of the right to seek this appraisal.

One of the major inequities resulting fromthe diversity in state foreclosure laws is that theevents in this scenario would never occur if theborrower lived in a state that barred deficiencyjudgments after a home foreclosure. In the wakeof a foreclosure, depending upon the laws of thestate where it took place, homeowners can face aremarkable variety of consequences. These rangefrom complete immunity, to deficiency judgments,to full enforcement of creditor judgments.76

State statutes that limit holders’ rights to pursueformer homeowners for a deficiency judgmenthave been in effect in many parts of the countysince the 1930s. The courts upheld these statelaws against creditor claims that they were un-constitutional infringements of contract rights.77

The United States Supreme Court has ruled thata state statute which limited a lender’s recourseto a post-foreclosure deficiency claim passed con-stitutional muster even though the statute hadbeen enacted after the borrower and lender en-tered into the loan transaction.78

State legislatures have enacted anti-deficiencystatutes in response to a number of unfair practices


that have been endemic in the home lending in-dustry. First, anti-deficiency statutes discouragelenders from overvaluing property when theyoriginate a mortgage loan. This practice has con-tributed significantly to the current foreclosurecrisis. When lenders know that if they foreclosethey will never be able to recover more than theforeclosure sale price, or at most the property’sfair market value, they have less incentive to over-value the property at the beginning of the trans-action. When deficiencies are outlawed, recoveryof an inflated debt that is unrelated to any realvalue in the property is not an option. Second,anti-deficiency statutes prevent the windfall sce-nario in which the holder purchases the home ata foreclosure sale for an artificially low price, sellsit later for a much higher price, then seeks a dou-ble recovery by pursuing a deficiency claim basedon the low forced sale price.

Anti-deficiency statutes can also play a role inmitigating the regionwide effects of an economicdownturn and a depressed real estate market.79

The likely result of mortgage holders’ pursuit ofdeficiency judgments will be to drive many indi-viduals into chapter 7 bankruptcies when theywould not otherwise have sought bankruptcy re-lief. While discharging the mortgage deficiencymay be the driving force behind the bankruptcies,the borrowers’ local creditors will be draggedinto the bankruptcy discharges as well. If not forthe overwhelming deficiency debts, the borrow-ers may have gone ahead and paid the debts owedto their other creditors. Similarly, if the borrow-ers refrain from seeking bankruptcy relief andstruggle to pay the deficiency debts owed tomortgage holders, their payments toward the de-ficiency claims typically flow to distant holders ofsecuritized loan obligations rather than provid-ing needed stimulation for the distressed localeconomy.

Anti-deficiency statutes encourage mortgageholders to make greater efforts to avoid foreclo-sure in the first place, but also to maximize the bidsmade at foreclosure auctions if the sale proceeds.Under prevailing practices, whether the sales are

judicially supervised or take place under power ofsale provisions, mortgage holders often do littleto attract bidders to an auction. Relatively smallexpenditures by mortgage holders for advertisingand marketing could yield significantly higherbids. Mortgage holders have access to title andappraisal information they could use for more ef-fective marketing. They could encourage morelucrative bids by setting flexible bid or paymentterms. Mortgage holders have the ability and, onewould think, the financial incentive to encouragevigorous bidding. Yet, as is true for many of theentrenched practices of the home mortgage lendingindustry, rationality and common sense do notnecessarily prevail. Rather than make the effortsto maximize bids, mortgage holders typically gothrough the motions of complying with the bareminimum steps required under existing state fore-closure laws in order to obtain title to the propertiesas quickly as they can. They rarely engage in any ofthe marketing practices associated with home salesoutside of the foreclosure context. Because manyof the deficiencies resulting from low foreclosuresale prices are really self-imposed by lenders, statu-tory restrictions on their ability to pursue bor-rowers for deficiencies is an appropriate response.

Survey ResultsIn the following fifteen states and the Districtof Columbia, mortgage holders are free to pur-sue collection of deficiencies against foreclosedhomeowners without limitation:

Alabama MississippiDelaware MissouriDistrict of Columbia New HampshireIllinois Rhode IslandIndiana TennesseeKentucky VirginiaMaryland West VirginiaMassachusetts Wyoming

Many state legislatures have enacted statutesthat substantially restrict mortgage holders’ ability


to pursue deficiency claims. These statutes taketwo basic forms. Some prohibit pursuit of defi-ciency claims outright. Other states do not pro-hibit deficiency claims after foreclosures, butimpose significant limits upon them. The mostcommon limitation is to require that the fairmarket value of the property be substituted forthe foreclosure sale price when calculating theamount of a deficiency. The debt owed after fore-closure is then reduced by the larger of the fore-closure sale price or the fair market value of theproperty.

While the prohibitions do not apply across theboard in all foreclosures, the following ten stateshave enacted laws that completely bar deficien-cies claims after most home foreclosures:

Alaska (bars deficiency after power of sale foreclosure)Arizona (no deficiency for most home purchase mortgages)California (no deficiency after power of sale foreclosure

on home mortgage)Hawaii (no deficiency after power of sale foreclosure of

mortgages executed after 1999)Minnesota (no deficiency after power of sale foreclosure if

six-month redemption applicable)Montana (no deficiency after power of sale foreclosures)North Dakota (no deficiency for most residential

properties)Oklahoma (no deficiency after power of sale foreclosures)Oregon (no deficiency after power of sale foreclosure or

after judicial foreclosure of home)Washington (no deficiency after power of sale foreclosure

of residential properties)

Statutes creating a clear prohibition againstdeficiency actions offer the most effective protec-tion for homeowners. Two uniform foreclosurelaws, the Uniform Land Security Interest Act(ULSIA) adopted in 1985 and the Uniform Non-judicial Foreclosure Act promulgated in 2002,contain provisions that bar deficiency actions.80

The following twenty-one states have enactedlaws that require mortgage holders to use the fairmarket value as the basis for calculating a defi-ciency debt after a foreclosure sale in most homeforeclosures:

Colorado (non-judicial)Connecticut (judicial)Georgia (non-judicial)Idaho (non-judicial)Kansas (non-judicial)Louisiana (executory process)Maine (judicial)Michigan (non-judicial)Nebraska (non-judicial)Nevada (non-judicial)New Jersey (judicial)New York (judicial)North Carolina (non-judicial)Oklahoma (barred in non-judicial, limited to fair market

value in judicial)Pennsylvania (judicial)South Carolina (judicial)South Dakota (non-judicial)Texas (non-judicial)Utah (non-judicial)Vermont (judicial)Wisconsin (judicial)

Using a property’s fair market value ratherthan the sale price to calculate the deficiency canreduce the borrower’s net debt owed to the lenderby a substantial amount. Unfortunately, allstates do not apply the fair market value limita-tion on deficiencies in a uniform way. In a fewstates, the fair market value calculation may beused to reduce a deficiency only in non-judicialforeclosures. Nebraska and Utah restrict use ofthe fair market value standard in this way. Otherstates apply the limitation when the mortgageholder purchases the property at the foreclosuresale. This is the case in Arizona, Maine, Michi-gan, North Carolina, Pennsylvania, and SouthDakota.

Another practice that allows courts in judicialforeclosures to limit deficiency liabilities is theuse of an “upset bid” as a threshold to bidding ata foreclosure sale. Under this practice, the courtrequires a fair market value appraisal before theforeclosure sale and sets an “upset bid,” or re-quired minimum bid, based on the appraisedvalue.81 Arkansas, Louisiana, and Ohio usevariations of this practice.


Additional limits on deficiencies come in theform of short statutes of limitations for filing adeficiency lawsuit. Several states, includingIdaho, Nebraska, New Jersey, Oklahoma, andUtah, set three-month limitation periods for fil-ing mortgage deficiency claims with a court. Ifthe mortgage holder does not begin legal actionwithin this time, its deficiency claim is perma-nently barred. Under the Montana, Nevada, andNew York procedures, the lender must seek thedeficiency when it forecloses or in the confirma-tion of sale proceedings. These timing restric-tions effectively prevent lenders from waitinguntil years later to bring a collection action.Under Iowa’s statute the lender must waive anydeficiency claim if it wishes to enforce the bor-rower’s waiver of the post-sale redemption right.

New Mexico enacted a unique provision thatbars deficiency claims from deeds of trust secur-ing residential loans made to low-income house-holds. The law applies to households whoseincome was lower than 80% of the state medianfor the family’s size at the time of the loan appli-cation. Florida’s statute gives the courts a gen-eral discretion to regulate deficiency claims, butdoes not mandate application of any particularguideline or rule.

California laws provide some of the broadestprotections against deficiency claims. Californiastatutes allow holders to use either a judicial ornon-judicial foreclosure procedure. Mortgageholders overwhelmingly favor the non-judicialprocedures. Deficiency actions are prohibited inboth judicial and non-judicial foreclosures inCalifornia when the loan was secured by a resi-dential property containing four or less units. Nodeficiencies are allowed in connection with powerof sale foreclosures, regardless of the type of prop-erty involved. An exception to this broad rule ap-plies only to junior mortgagees. A junior mort-gagee may bring a lawsuit to recover a moneyjudgment against the borrowers if its lien has beenvoided through foreclosure of a senior lien. Thebottom line in California is that deficiency claimsare available only with certain junior mortgages or

after judicial foreclosures, and these are limitedby the fair market value rule and cannot involveloans for purchase of residential properties.81

Recommendations for HomeownerProtections1. Bar all deficiency actions after

foreclosure on residential propertiesUpon analysis, many of the limitations on thescope of anti-deficiency statutes for consumerborrowers prove to be arbitrary. For example, ap-plying the protection against deficiencies solelyto purchase loans for residential properties failsto protect borrowers whose loans involved refi-nancings and other loans secured by a home.Similarly, the inconsistent treatment of judicialand non-judicial foreclosures does not stand upto scrutiny. Creditor conduct that results in lowbids in non-judicial foreclosures occurs just asroutinely in judicial foreclosures. Competitivebidding is largely a fiction in both contexts. Thebest protection for consumers against future de-ficiency actions is to bar them for all loans se-cured by a residence and to apply the prohibitionequally to judicial and non-judicial foreclosures.This will achieve the goals of protecting both in-dividual borrowers who are seeking better fu-tures for themselves and the communities thatare reeling from the cumulative impact of a mul-titude of foreclosures.

2. To extent deficiency actions are allowed,make them subject to fair market valueand time limitations

If deficiency actions are allowed, the calculationof the deficiency amount should be based on thegreater of the fair market value of the property orthe sale price at foreclosure. However, there areseveral drawbacks to reliance on the fair marketvalue calculation as the primary means to protectborrowers from deficiencies. In many instancesthe rules require a timely property appraisal. Pay-ing for an appraisal is often beyond the means of


a homeowner facing imminent foreclosure. Atthe time of foreclosure the borrower’s attentionis understandably focused on essential survivaland relocation options. In addition, the rule pre-sumes a degree of knowledge and sophisticationon the part of unrepresented borrowers that issimply unrealistic. As discussed above, borrowersare often surprised years after a foreclosure whenthey first learn about the concept of a deficiencyclaim. This typically happens when they areserved with the legal papers starting the defi-ciency lawsuit.

A few modifications of procedures would makeapplication of the fair market value limitation amore effective protection for homeowners. Oneoption would be to set a strict time limit on raisingdeficiency claims. Requiring the holder to raisethe claim during or immediately after the fore-closure would encourage production of a timelyappraisal. Under New York’s statute, the mort-gage holder must have the court establish a defi-ciency claim during the proceeding to confirmthe foreclosure sale, otherwise the claim is barred.This limitation is preferred, at least in judicialforeclosure states. Alternatively, a three-month timelimit after the sale should be set for bringing adeficiency claim, as required now in several states.

Another protection in judicial foreclosurestates would be to have the court order an ap-praisal after a foreclosure judgment and beforeany judicial sale. The court could use a system forselecting neutral appraisers and require themortgage holder to pay for the appraisal as partof its costs of foreclosure. The current Ohiopractice follows a version of this procedure. If thecourt does not order the appraisal, a minimallyprotective alternative would be to place the ini-tial burden of producing an appraisal showingfair market value on the mortgage holder. Thecourt could then review the appraisal in the con-text of a timely deficiency action and the bor-rower would have the opportunity to presentcontrary evidence, including an opposing ap-praisal. In power of sale states, the mortgageholder could be required to obtain an appraisal

before the foreclosure sale and attach it to anylegal papers filed against the homeowner seekinga deficiency judgment.

Finally, the fair market value limitation on de-ficiencies must apply to all home foreclosures.The limitations that many states place on therule, such as those based on the type of foreclo-sure or the identity of the purchaser, did not de-velop out of any comprehensive legislative planand are arbitrary in practice.

C. Accounting of Foreclosure SaleProceeds and Return of Surplus

Accounting of foreclosure sale proceeds In the typical foreclosure auction the mortgageholder submits the highest or often the only bidand buys the property. Because the borrower’sdebt usually exceeds the amount of the mortgageholder’s bid, the bid is simply treated as a credittoward the borrower’s deficiency debt. Occasion-ally the sale brings in a bid that is high enough topay off the mortgage debt and the costs of thesale. During periods of a robust real estate mar-ket, this is more common. When this happens,most state laws require that the remaining pro-ceeds be applied to pay off any junior mortgagesand judgment liens recorded against the prop-erty. Finally, if all these claims are paid in full anda surplus still remains, the final surplus is paidover to the borrower.

Regardless of which of these scenarios occursat the auction, the borrower has significant inter-ests at stake throughout the foreclosure saleprocess. A remaining surplus represents the bor-rower’s equity from the home, possibly the soleinvestment of a lifetime. The surplus can providea source of funds that allow a family to relocateand start on the road to financial recovery. Forthis reason, when there is any surplus from aforeclosure sale, the borrower needs to be surethat the amount is calculated accurately and thatthe funds are available promptly.

Even in the more common case, when the bor-rower does not receive any surplus, the manner in


which proceeds from a foreclosure sale are ap-plied can have a significant impact on the bor-rower’s financial future. For example, if othercreditors receive more from the sale proceedsthan is lawfully due to them, a potential surplusthat would otherwise go to the borrower can dis-appear. If the mortgage holder includes exorbi-tant foreclosure charges and other “junk” fees inthe loan balance, these bogus charges will simi-larly eat away at a potential surplus. Bad account-ing, whether the result of negligence or deliberatecalculation, can erase a surplus or leave the bor-rower with a highly inflated deficiency debt.

Despite the clear need for a system that im-poses strict oversight over the distribution offoreclosure sale proceeds, many state laws aresurprisingly lax in the supervision they provide.Homeowners are not familiar with the proce-dures and seldom know that they have any rightsto protect. Often they do not receive documentsand critical notices, such as the report of the sale.Reported court decisions give an indication ofthe nature of these problems. For example, aMassachusetts homeowner never found outthat she was entitled to a $21,000 surplus from anon-judicial foreclosure sale until one year afterthe sale, when she received a notice from the In-ternal Revenue Service (IRS) informing her thather former lender had reported the surplus to thegovernment as income to her.82 A Maine appel-late court has held that a seventeen month delayin filing an accounting and report of sale was rea-sonable given the lack of any express statutorytime frame under the state’s foreclosure laws.84

“Surplus retrieval” consultantsIt is not surprising that during the current fore-closure epidemic a cottage industry of “surplusretrieval” consultants has emerged. These scam-mers offer a “service” of assisting distressedhomeowners through the maze of proceduressurrounding a foreclosure sale. The consultantstypically end up with a lion’s share of any sur-plus, or simply take money from financiallystrapped homeowners when there is no likeli-

hood there will ever be a surplus. Some states, in-cluding Nevada and Maryland, recently enactedstatutes drafted specifically to regulate the prac-tices of “surplus purchasers.”85 Other states, in-cluding California, Colorado, and Florida,include surplus purchasers and their practiceswithin the definition of “foreclosure consult-ants” who are now subject to state regulation.86

Homeowners turn to these unscrupulous enter-prises out of sheer desperation. This desperationis a clear indication of the need for stronger judi-cial supervision and control over the entire fore-closure sale process, including the turnover ofany surplus proceeds.

Comparing judicial and non-judicialforeclosuresWhen it comes to protecting the borrowers’ in-terests in an accurate and timely distribution offoreclosure sale proceeds, judicial foreclosure sys-tems always provide more safeguards than thenon-judicial procedures. Unlike non-judicialforeclosures, which involve little or no court su-pervision, judicial foreclosures require, or at leastpermit, court intervention at the importantstages in the foreclosure process. When a courtenters a foreclosure judgment, whether by de-fault or after litigation, a judge signs an order ap-proving the claims of the various parties who willbe paid out of the proceeds from a sale. Thisorder directs an official, typically a sheriff, to con-duct a sale of the property. In most cases thejudgment order itself tells the official how to dis-tribute proceeds from the sale. If the order doesnot expressly do so, the order will likely direct theofficial to make a distribution of proceeds ac-cording to priorities set forth in a state statute.

After the sale in a judicial foreclosure, themortgage holder or the officer who conductedthe sale must file a report describing how anyproceeds have been disbursed. If a surplus re-mains after paying off the mortgage debt and thecosts of the sale, the report will give notice of thissum. The report is a public document filed withthe court or county clerk. If there is a surplus to


be distributed, the officer pays the surplus fundsinto court or retains them pending a furtherorder from the court.

A judicial foreclosure typically includes a post-sale motion procedure in which the court must“confirm” the sale. In some states this court re-view and a hearing are automatic after all foreclo-sure sales. In other states the matter is set forcourt review and a hearing only if someone dis-putes the officer’s report, including its proposeddistribution of a surplus. When a judge rules in aproceeding to confirm a sale, the judge’s order ad-dresses the distribution of any remaining surplus.

In sum, most judicial foreclosures provide thehomeowner with notice and an opportunity todispute claims on two occasions. First, the home-owners can dispute the claims of interested partiesby responding to the summons and complaintthat begin the lawsuit. Second, in the post-saleconfirmation proceedings the homeowner canchallenge a proposed distribution of proceeds, aswell as any other defects in the conduct of the sale.

A non-judicial foreclosure proceeds along avery different track. When a non-judicial saletakes place there will have been no prior courtruling that established the amounts owed to themortgage holder or any other entities claimingshares in the sale proceeds. If the sale results in adeficiency rather than a surplus, a private trusteeor the mortgage holder plays a large role in deter-mining the costs of the sale and the extent of anycredit against the borrower’s debt. When statelaw allows the mortgage holder to pursue theborrower for a deficiency judgment, this assess-ment of the borrower’s debt by the mortgageholder or trustee will be the initial basis for thedeficiency claim. It will also be the amount themortgage holder reports to the IRS as taxable in-come to the borrower. The consequences of thisinitial assessment of the borrower’s debt can bedifficult to undo at a later time.

If a third party purchases the home at a non-judicial foreclosure sale, it will again be the pri-vate trustee or the mortgage holder who appliesall payments received toward the borrower’s debt

and to foreclosure charges. In some jurisdictionsthe individual mortgage holder or trustee has au-thority to complete the distribution of any avail-able proceeds to junior lienholders and tojudgment creditors. If there is any final surplusleft, the trustee or mortgage holder pays this sur-plus to the borrower. Thus, in a non-judicial pro-ceeding, the entire foreclosure, including theaccounting and distribution of all proceeds, usu-ally takes place outside the supervision or con-trol of a neutral judicial official.

Survey ResultsAccounting of sale proceeds—judicial foreclosure statesJudicial foreclosure systems work most effec-tively to protect the interests of homeownerswhen they require that a court review all aspectsof the sale. The foreclosure procedures shouldmandate close scrutiny over disbursements forany charges that were not included in the court’searlier foreclosure judgment. For example, pay-ments for new post-judgment foreclosure costs andfees should not be paid from the proceeds unlessthe court has explicitly approved them. The follow-ing thirteen states require this type of formalcourt review after all judicial foreclosure sales:

Connecticut New YorkDelaware North DakotaIllinois OhioIndiana OklahomaKansas South DakotaNew Jersey Vermont

Wisconsin

In addition to these states, both Puerto Ricoand the Virgin Islands use judicial foreclosuresystems that require court approval of sales anddistribution of surplus proceeds. Of the states inwhich judicial supervision of foreclosures occurs,only Colorado and Iowa do not routinely providefor court review of distribution of proceeds fol-lowing foreclosure sales.


In the states that require a court to conduct aformal post-sale review, either the official whoconducted the sale or the mortgage holder mustfile a formal request with the court to ratify thesale and approve the proposed distribution ofany surplus. In some states, such as Connecti-cut, Illinois, New York, Ohio, and Vermont,requests to confirm a foreclosure sale are treatedas distinct legal proceedings, following specificcourt rules. The procedures include the opportu-nity for a hearing and a decision in writing froma judge. In Connecticut the ruling is designatedas a “supplemental judgment” and is a separate,appealable court order distinct from the court’searlier foreclosure judgment.

New York follows this type of formal proce-dure for surplus money proceedings. In one pub-lished decision, a New York trial court reviewinga foreclosure sale discovered that the mortgageholder had made a claim for $88,000 in attorney’sfees connected with the foreclosure, a charge notincluded in the court’s earlier foreclosure judg-ment.87 The court determined the reasonable at-torney fee charge to be only $5,000. When a state’slaws provide for court procedures to confirm a sale,abuses such as these can be remedied effectively.

An alternative but slightly less protective sys-tem for review of judicial foreclosure sales exists inseveral other states. In Florida, Kentucky, Maine,and Pennsylvania, the officer who conductedthe sale files a report of the sale. The report is amatter of public record. The homeowner or anyother interested party may then request a courtreview. Under this practice, a court does not rou-tinely review the conduct of the sale or the distri-bution of proceeds unless a party has formallyobjected to the officer’s report of the sale. Absentobjection, the official will distribute proceedsfrom the sale as described in the report of the sale.

Accounting of sale proceeds—non-judicial foreclosure statesIn non-judicial foreclosures, there is typically nocourt involvement in the period leading up to thesale. A neutral public official will not have reviewed

the extent or validity of the mortgage holder’sclaim or the claims of any junior lienholders.Therefore, after a non-judicial foreclosure sale, itis critical that there be judicial scrutiny of thedisbursement of proceeds. Unfortunately, undermost non-judicial procedures, the opposite istrue. Despite the need, the majority of non-judi-cial foreclosure states do not have any explicitprocedures or protections for homeowners thatapply routinely to accounting of sale proceeds.

Non-Judicial Foreclosure States Lacking Routine Sale Accounting

Homeowner Protections

Alabama, Alaska, Arizona, Arkansas, District of Columbia, Idaho, Minnesota, Mississippi,Missouri, Montana, Nebraska, Nevada, New Mexico,

Oregon, Rhode Island, Tennessee, Utah, West Virginia, and Wyoming

Under most non-judicial foreclosure systems,borrowers’ access to court procedures that canhold a trustee accountable often proves to becostly and time consuming. To the extent thatavenues for court review after a non-judicial fore-closure exist at all, the procedures appear de-signed primarily for the benefit of the trustee ormortgage holder. The procedures authorizetrustees or mortgage holders to wash their handsover troublesome cases involving conflictingclaims of junior lienholders and refer those dis-putes to the courts to settle.

In the realm of non-judicial foreclosures, thereare a few general schemes that allow for limitedjudicial review of the conduct of sales. Those thatdo the best job of protecting homeowners re-quire that in all cases in which there is a surplusleft after payment of the foreclosing mortgageholder’s claim and the costs of sale, the surplusmust be transmitted to the local court for furtheraction. Under the non-judicial foreclosurestatutes of New Hampshire, South Dakota andWashington, all cases involving a surplus are directed to court review. Maryland’s court rules


apply the same judicial review procedure to bothjudicial and non-judicial foreclosure sales.

Several other states provide some limited judi-cial review of non-judicial foreclosure sales. InVirginia, the trustee reports to a county com-missioner of accounts who reviews the reportand sends it on for court review. A judge can con-firm or reject the account over a 15-day period.North Carolina’s law requires the trustee to filea report of the sale with the court within five daysof the sale and pay a surplus into court underspecific circumstances defined by statute, such aswhen claims are disputed. Similarly, Californiaand Massachusetts require the trustee to make areport and, under conditions set forth in thestatutes, refer certain questions of proposed dis-tribution of proceeds to a court. Michigan re-quires that the trustee refer the disbursement ofthe surplus to the court if a junior lienholdermakes a claim. Georgia’s non-judicial foreclo-sure statute mandates court confirmation of asale, but only if the mortgage holder intends toseek a deficiency judgment.

Most other states give a private trustee or thelender substantial discretion in determining whento refer a question over distribution of proceedsto a court. The trustee makes the initial distribu-tion from sale proceeds to cover the foreclosingmortgage holder’s claim and the costs of the sale.Then, to the extent proceeds remain, the trusteehas the discretion to complete the distribution,including payments to junior lienholders and tothe borrower.

The statutes in Arizona, Montana, Nevada,New Mexico, and Utah expressly give the trusteethe authority to file an “interpleader” type oflegal action in a court. In an interpleader case,the trustee pays the sale proceeds into court sothat a judge can decide how the funds should bedisbursed. Under most non-judicial foreclosuresystems, starting such a proceeding is left to thetrustee’s discretion. Although a state’s foreclo-sure statutes may not expressly provide for atrustee’s authority to start an interpleader ac-tion, trustees have the option of resorting to this

general type of court proceeding in any jurisdic-tion when they face disputed or complex claimsrelated to a specific sum of money.

Ostensibly, a homeowner who has the requi-site sophistication and financial resources couldinitiate a lawsuit to stop an inappropriate distribu-tion of a surplus in any non-judicial foreclosure.However, this remedy is almost always illusory. Asa practical matter, homeowners find themselves inmuch the same position after a non-judicial fore-closure sale as they do at the commencement ofthe proceeding—they must file a lawsuit with acourt in order to stop proceedings that will oth-erwise forge ahead without any court oversight.In both situations time constraints and the un-availability of affordable legal help effectively barhomeowners from access to the courts.

Finally a number of state statutes simply directthe trustee to follow the state’s general ranking ofpriorities in distributing proceeds from a non-judicial foreclosure sale. The distribution takesplace entirely outside of court supervision. Thepriorities are set by statute, or otherwise are partof the state’s common law. The statutes in Arkan -sas, Idaho, Minnesota, Oregon, West Virginia,and Wyoming operate in this manner. Absent a con-trolling statute defining priorities for distribution,trustees in some states, such as Texas, followcommon law rules for distribution of proceeds.

Timely access to surplus sale proceeds Thirty-two states and the District of Columbiado not require a surplus to be released by a certaindate to the homeowner after a foreclosure sale.

States Which Do Not Require PromptRelease of Surplus Funds

Alabama, Alaska, Arkansas, Colorado, District of Columbia, Delaware, Florida, Georgia,Idaho, Indiana, Iowa, Kansas, Kentucky, Maine,

Michigan, Minnesota, Mississippi, Missouri,Montana, Nebraska, Nevada, New Jersey,

New Mexico, North Dakota, Oklahoma, Oregon,Rhode Island, South Carolina, Tennessee, Texas, Utah, Washington, and Wisconsin


Many states allow a certain period of time forthe official who conducted the foreclosure sale tofile a report and accounting of the sale. Becausethe filing of this report is often a prerequisite torelease of a surplus to the homeowner, statesshould require that the report be filed promptly.However, the states’ responses to this need forprompt release of the report vary significantly.The Illinois statute simply requires that the re-port be filed “promptly.” The Maine statute doesnot set any time limit at all, and this caused aMaine court to find that a 17-month delay wasnot unreasonable.

Many states, however, do set a time limit forthe filing of the report of sale after a foreclosure.North Carolina requires that the report be filedwithin five days of the sale.88 New York requiresthat the surplus be paid to court within five daysof the sale and the report must be filed within 30days.89 Vermont and Wyoming require reportsof surplus and an accounting to be served within10 days of the sale.90 In New Hampshire, the ac-counting must be filed within 10 days of the sale.Arizona requires notification to the borrower ofany available surplus within 15 days of the sale.91

There are no sound reasons to justify periodslonger than 15 days for filing a report of a sale, asthese statutes allow. However, many states per-mit significantly longer times. These range from30 days in California, Pennsylvania, and Mary-land, to 45 days in Hawaii, 60 days in West Vir-ginia, and six months in Virginia.92 Under theCalifornia procedure, the trustee has 30 daysfrom the execution of the trustee’s deed to notifyparties of a surplus remaining after the initialpayment to the lender. Parties then have 30 daysto file claims. At the end of 30 days, assuming nodisputes require court intervention, the surplusis released.

Once homeowners receive a report of the sale,they can decide whether to challenge the reportor accept it. Again, local statutes vary in the timelimit they set for filing objections. Once an objec-tion is filed, court calendars may have more to dowith the time frame in resolving the objection

than do the statutory provisions. The most effi-cient procedures will again be those in jurisdic-tions such as Connecticut and New York whichfollow standard motion rules for reviewing theconduct of foreclosure sales and issuing ordersfor disbursement of proceeds. When the account-ing for a surplus is not disputed, these motionsproceed with little delay.

Recommendations for Homeowner Protections.1. Require effective means to notify the

borrower of the proposed distributionand an explanation of basic rights underthe sale procedures

Homeowners often move away abruptly in reac-tion to a looming foreclosure. Default judgmentsare common in judicial foreclosures, and de-faulted parties typically do not receive notices ofongoing events in a lawsuit. Therefore, foreclo-sure sale procedures must provide extra protec-tions to ensure that borrowers receive notices ofkey events related to the sale. As discussed in Sec-tion 5, supra, a requirement that the notice of salebe served personally on homeowners is a muchneeded reform. In addition, the notice shouldcontain a description of the state’s procedures re-lated to disbursement of proceeds from the sale.The notice should include language urging theborrowers to submit an updated mailing addressso they will be kept informed of further proceed-ings related to any surplus.

Another protection, as is provided in Ohio, isto require additional steps to give notice aftermail sent to the homeowners has been returnedas unclaimed. There are many inexpensive and ef-fective methods for locating individuals whohave moved. Trustees and mortgage holdersshould be required to pursue these measures.

After the foreclosure sale is completed, thetrustee or mortgage holder should be required toprepare and serve on the borrower a final reportand accounting which lists all of the proposeddistributions of the sale proceeds, including an


itemization of all amounts to be paid to themortgage holder for principal, interest, escrowcharges, late fees, foreclosure costs, and otherfees. The report would also specify the amount ofany surplus. State law should require that this re-port be prepared and served within 15 businessdays of the foreclosure sale.

2. Require review and approval by a neutral public official of alldistributions of proceeds before they take place

This protection is essential for non-judicial fore-closures, whether or not there is a surplus. Pri-vate, interested individuals should not play thiscritical role in using the borrower’s property topay their own debts as well as debts the borrowerowes to others. In judicial foreclosures, the lawsmust require that a court approve payment ofany claims not already fixed by an earlier foreclo-sure judgment. In both types of foreclosure, thereview must occur through an independent judi-cial proceeding with a record and right to review.

3. Require that surplus funds be disbursedpromptly to the borrower

State law should set a deadline for distribution ofsurplus funds. This deadline should be soonafter a final report and accounting is approved bythe court, generally no more than 10 businessdays after any time to appeal the approval to ahigher court has passed.

4. Provide that surplus funds are exemptfrom creditor collection actions and thathomeowners get notice of exemption rights

Many state laws allow borrowers to claim ahomestead exemption in surplus proceeds froma foreclosure sale. The surplus represents the bor-rower’s exempt equity in the home and can be aresource to use for replacement housing in thefuture. Since creditor claims, even those whichare judgment liens, typically cannot be enforcedagainst exempt homestead property, a borrowershould be able to protect surplus funds in thesame way by claiming them as exempt. Statesshould amend their laws to allow for the exemp-tion of surplus funds.

Whenever government officials assist privatecreditors in seizing property from debtors thereis a great risk that the debtors will lose exemptproperty without knowledge of their right toclaim an exemption and keep all or part of theproperty. Many courts have recognized this risk.They have ruled that basic due process law man-dates that government officials give notice of ex-emption rights to debtors before they loseproperty involuntarily and permanently to acreditor. Notices of exemption rights should berequired prior to any judicial foreclosure sale and in any non-judicial proceeding in which govern-ment officials play a significant role. Notices ofexemption rights must include informationabout the procedures available under state lawthat the debtor may use to claim the homesteadexemption in proceeds from a foreclosure. Statelaw should ensure that surplus proceeds held bya trustee or mortgage holder’s attorney, or heldin the court registry, should not be released toother creditors until there is a determinationmade that the proceeds are not exempt.

Appendix A provides a detailed analysis of each state’s law based on a set ofquestions designed to determine whether certain basic protections are pro-vided for residential homeowners. Because of its length, it is found as an ap-pendix to this report only at www.nclc.org.

APPENDIX A

SURVEY OF STATE FORECLOSURE LAWS

http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/survey-foreclosure-card.pdf

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APPENDIX B

Court Mediation Programs

Philadelphia’s Residential MortgageForeclosure Diversion Pilot Program

This program is mandatory and applies to all mortgageforeclosure cases where the property is residential,owner-occupied and located in Philadelphia County.

How Does a Homeowner Participate in the Philadelphia Mediation Program?When a foreclosure Complaint is filed, the courtschedules a mandatory Conciliation Conference. Boththe homeowner and the mortgage holder’s servicer arerequired to attend. However, the servicer may appearby telephone.

Are There Any Special Requirements?The court will require the homeowner to immediatelycall the Save Your Home Philly Hotline. The Hotlinewill then direct the homeowner to a housing counsel-ing agency. The court further requires the homeownerto cooperate with the housing counselor and providefinancial information necessary to complete loan resolution proposals. The court also requires thehomeowner and the mortgage holder to exchange information.

What Is the Role of the Housing Counselor?The housing counselor will meet with the homeownerto explore the homeowner’s options. They include:bringing the mortgage current; paying off the mort-gage; a repayment plan; agreeing to vacate the prem-ises in exchange for the mortgage holder notcontesting the matter and a monetary payment; offer-ing the holder a deed in lieu of foreclosure; filingbankruptcy; paying the mortgage default over 60months; requesting a loan modification; opposing theforeclosure.

With the homeowner’s permission, the housingcounselor will prepare and submit a written proposaladdressing the mortgage delinquency to the holder’sattorney as soon as possible; or at least 10 days beforethe Conciliation Conference. The holder must evalu-ate and respond to the homeowner’s proposal beforethe Conciliation Conference.

What Happens If the Homeowner and the Mortgage Holder Do Not Reach anAgreement Before the Conference?Unless an agreement has been reached before the Con-ference, a representative of the holder who has author-ity to modify the mortgage, to enter into an alternatepayment agreement or to otherwise resolve the actionmust attend the Conference or be available by tele-phone. If the holder does not attend the Conference,the Conference is rescheduled and the sheriff sale ispostponed. If the homeowner does not attend theConference, the court will issue an order allowing thesale of the property.

What Happens at the Conciliation Conference?The Conciliation Conference is conducted by a persondesignated by the court who possesses experience inthe area or by a trial judge. The parties address the fol-lowing issues: whether the homeowner is represented,and if unrepresented whether volunteer counsel isavailable to represent the homeowner; whether thehomeowner met with a housing counselor; whetherthe housing counselor prepared a loan work-out re-port; homeowner’s income and expense information;homeowner’s employment status; homeowner’s quali-fications for any of the available work-out programs;assistance with preparation of the work-out plans; theneed for another Conciliation Conference; whetherthe case should proceed to sheriff sale since there is noprospect for an agreement.


What Happens After the Conference?Unless an agreement is reached at the Conference, thesale of the property will proceed. If an agreement isreached, the court will issue an order memorializingthe agreement.

Ohio’s Foreclosure MediationProgram Model

The Supreme Court of Ohio designed a model media-tion program for courts throughout Ohio to modifyand use for their own needs. It is unknown how manycounties in Ohio have adopted the foreclosure media-tion program. Under the Ohio model program, medi-ation is not mandatory.

How Does It Work?The mortgage holder sends to the homeowner alongwith the Summons and foreclosure Complaint filedwith the court a Request for Foreclosure Mediationform and mediation and foreclosure brochures. Thehomeowner has 28 days after service of the Summonsto answer the Complaint and send in the Request forForeclosure Mediation form to the court’s MediationDepartment. If the homeowner sends in the Requestfor Foreclosure Mediation, the Mediation Depart-ment sends a letter to the holder along with theholder’s Mediation Questionnaire for ForeclosureCases. The holder has 14 days to complete the ques-tionnaire and return it to the Mediation Department.

The Mediation Department then reviews thehomeowner’s Request form and the holder’s Media-tion Questionnaire to determine if mediation is ap-propriate. The program does not set any specificcriteria for determining when a case is appropriate formediation.

If the case is not appropriate for mediation, theMediation Department notifies the parties and thecase continues on the trial docket. If the case is sent tomediation and an agreement is reached, the partiesmemorialize the agreement by: having a written agree-ment signed by all the parties, having the agreementread into the record by a court reporter, or taperecording the agreement with all parties stating theirconsent to the agreement. If no agreement is reached,the case continues on the trial docket.

Is the Model Program in All Counties?The Ohio model program is designed for use in itscurrent form or with modifications where appropri-ate. Counties may implement changes that include:making the program mandatory, creating a role forhousing counselors and attorneys, and establishing aset of criteria for the Mediation Department. Also, be-fore implementing a mediation program, the modelprogram recommends that counties have a meetingwith the stakeholders to discuss foreclosure media-tion. Franklin County (Columbus), Clark County(Springfield) and Ashtabula County have or are cur-rently implementing programs. Cuyahoga County hasimplemented a program and a description appears atwww.cp.cuyahogacounty.us/internet/CourtDocs/ForeclosureMediation.pdf.

Connecticut’s Foreclosure Mediation Program

Does the Foreclosure Mediation ProgramApply to All Cases?Connecticut’s Foreclosure Mediation Program appliesto mortgage foreclosure actions that have Summonsreturn dates on or after July 1, 2008. The homeownermust also occupy the home as his or her primary resi-dence.

How Does It Work?The mortgage holder is required to attach to the frontof the foreclosure Complaint a notice about the avail-ability of foreclosure mediation and a Foreclosure Me-diation Request form. Upon receiving the notice, thehomeowner may request mediation by filing the formwith the court within 15 days after the return date onthe Summons. A homeowner’s participation in themediation program does not suspend his or her obli-gation to respond to the foreclosure and answer theComplaint. No judgment of foreclosure will be en-tered until the mediation period has expired.

How Long Is the Mediation Period?The mediation period begins when the court notifiesthe parties that the homeowner submitted a Media-tion Request form. It ends no more than 60 days afterthe return date for the foreclosure action. The courtmay extend the mediation period for 10 days.


Who Should Attend?The mortgage holder and the homeowner must at-tend in person and have authority to agree to a pro-posed settlement. If a holder is represented by anattorney, the attorney may appear without the holder,but the attorney must have authority to agree to theproposed settlement. The holder must be available bytelephone. If the homeowner is represented by an at-torney, both the attorney and homeowner must bepresent.

What Happens at the Conference?During mediation, the parties are expected to addressissues such as: reinstatement of the mortgage, restruc-turing of the mortgage debt, assignment of sale date,and foreclosure. The mediators are judicial employeeswho are trained in mediation and foreclosure law.

Have There Been Any Reports Issued?In a report issued by the Superior Court Judicial Oper-ations Branch reviewing cases filed from July 1, 2008through October 31, 2008, 7,063 foreclosure caseswere filed statewide during the period. Of the 5,513 el-igible for mediation, 1,553 defendants (28% of thoseeligible) sought mediation, and 680 mediations werecompleted. Of the 680 cases mediated, 40% (or 270cases) were reported as resulting in loan modifica-tions; 53% as “staying in home”; 17% as “moving fromhome; and 30% as “not settled.” The report does notgive information on nature of loan modifications.

Other Programs:

New York’s Residential Foreclosure Program The Chief Judge of the New York State Unified Courtsissued report in June 2008 establishing a StatewideProgram for Residential Owner Occupied Foreclo-sures. The plan anticipates amending local court rulesto include mediation procedures for foreclosures. Theinitial pilot program was to operate in Queens, thenexpand statewide. Under general guidelines, notice ofavailability of mediation is to be served with the com-plaint. A second notice is to be sent by the court, noti-fying the homeowner that a conference can be heldwithin 60 days. In order to schedule a conference, thehomeowner is required to confirm by sending in a re-

quest for conference and indicating that he/she sched-uled an appointment for legal assistance or housingcounseling, or explain why this has not been done.The request for a conference does not relieve thehomeowner of the obligation to file an answer. Fur-ther case management scheduling will be made at theinitial court conference. The homeowner can requestan extension of time to complete mediation. Informa-tion is available at www.courts.state.ny.us (under“What’s New).

New York Civil Practice Rule 3408, effective Sep-tember 1, 2008, requires mandatory settlement con-ferences for residential foreclosure actions involvinghigh cost home loans originated from January 1, 2003through September 1, 2008, as well as certain sub-prime non-traditional loans (including payment op-tion, adjustable rate mortgages) and loans defined bythe Real Property Actions and Procedures Law(RPAPL) § 1304. Mortgagees are required to give 90days notice to homeowners before filing a foreclosureaction involving these types of loans. The conferencemust be scheduled within 60 days of service of thecomplaint or as continued by the court. At the confer-ence, the parties will review payment revisions andother options to avoid foreclosure. The court may ap-point counsel for unrepresented homeowners. Theforeclosing party must appear for the conference withan attorney authorized to settle and the mortgageemust be available by phone or video conference.

Florida Circuit Court Mandatory Mediation ProgramsDuring late 2008, the chief judges of several circuits,including the 12th judicial circuit (DeSoto, Manatee,Sarasota counties) and the 18th judicial circuit (Semi-nole County) of Florida, authorized mediation forforeclosure cases in their courts. The chief administra-tive judge of a circuit may issue administrative ordersrelated to court procedures under Florida Rule of Ju-dicial Administration No. 2.215(b)(2).

The 12th Judicial Circuit order requires mortgageholders to attempt to set up a single phone conferencewithout a mediator. The conference is to occur nolater than 45 days after service of process. The partiescan agree to a longer time frame for completion of thediscussion. Homeowners are notified of the availabilityof mediation with service of the summons and com-plaint. The court proceeding is stayed pending themortgage holder’s certification that the mediation iscompleted. The conference may take place by phone.See www. 12circuit.state.fl.us.


The 18th Circuit requires a referral through thecourt’s formal mediation process, using certifiedcourt mediators. All foreclosure cases involving resi-dential properties are referred to mediation. The fore-closing party pays in advance the costs of $200 for a1.5 hour session. Fees can be taxed as costs in a finaljudgment. The court proceeding is stayed until themediation is completed. The foreclosing party mayenter defaults and waive mediation only upon filing a motion certifying there has been communicationwith the homeowners and the foreclosure is truly un contested. The mortgage holder may appear byphone, with attorney present. See www.flcourts18.org/foreclosures.php.

New Jersey Court Mediation ProgramOn October 16, 2008, the Chief Justice of New JerseySupreme Court announced a program to require me-diation in foreclosure cases. The program was to beginin selected counties with the intention to expandstatewide. A request for mediation does not stay orotherwise delay a foreclosure action. The homeownercan request mediation up to the time of sale, but the

homeowner must file a motion with the court to staythe sale if time is inadequate to complete mediation.The homeowner can request mediation if he/she didnot file an answer. Information and instructional ma-terial on mediation must be served on the homeownerwith the summons and complaint. This informationincludes the notice of mediation availability, media-tion financial worksheet, and a HUD-certified housingcounselor information form and recommendationsheet. These documents must also be served on thehomeowner when a foreclosing party requests judg-ment. A further notice of availability of mediationmust be given 60 days after the filing of the com-plaint. Mediation is not scheduled until a complete financial packet, including tax returns, pay stubs, and bank statements, is returned along with a housingcounselor recommendation. The homeowner is re-quired to formulate a proposal with a housing coun-selor when counseling services are available. Theserequirements apply to one to four unit owner-occupiedproperties. Mediation is to be “free.” In January 2009,the legislature appropriated $12 million to pay formediations. Information, notices, and forms are avail-able at www.judiciary.state.nj.us.

State Program Loan Terms Eligibility Requirements

Connecticut Emergency Mortgage Continuing loan: � EMAP is not available to borrowers Assistance Program � Initial disbursement paid to who have FHA-insured loans.(EMAP), administered homeowner’s mortgage holder � Homeowner must have had a by Conn. Housing to bring mortgage current. significant loss of income beyond Finance Authority Homeowner pays portion of his or her control and be able to (CHFA) regular monthly mortgage resume full mortgage payments in

payment to CHFA while the future. receiving EMAP assistance, � Homeowner not eligible if behind in based on his/her income. payments at least twice for more CHFA then pays the total than 30 days during prior two years, required monthly mortgage though CHFA may waive this payment to the homeowner’s provision if owner can show this mortgage holder for up to was due to circumstances beyond five years. his or her control.

� Total amount of EMAP assistance paid by CHFA to the current mortgage holder is repaid by homeowner as a 30-year, fixed-rate, fully amortizing mortgage loan.

Delaware Delaware Emergency � Short term loan up to $15,000 � Homeowner must be 90 days or Mortgage Assistance with a fixed 3% interest rate. more delinquent in his or her Program (DEMAP) Two Types of Loans: monthly mortgage payments.

Continuing loan: � Homeowner must have a good � Pays the delinquent balance credit history prior to the

and assists the homeowner delinquency.with his or her monthly � Homeowner must be experiencing payments for a period of financial hardship beyond his or 12 months. her control.

Non-continuing loan: � Homeowner must have a � Makes a one-time payment of reasonable prospect of being able

the delinquent balance. to make monthly mortgage � Homeowner must be able to payments in the near future.

resume monthly mortgage � Homeowner must have no more payments after delinquent than two mortgages on the balance is paid. property.

APPENDIX C

State Rescue Funds Programs

State Program Loan Term Eligibility Requirements

Maryland Bridge to Hope � Short term loan up to $15,000. � Homeowner must be in delinquency Loan Program Terms: or imminent risk of delinquency

� Pays homeowner’s delinquent because a subprime or exotic payments and subsidizes homemortgage or an adjustable rate owner’s monthly mortgage mortgage has or is about to reset.payment up to 24 months. � Homeowner must have stable

� Loan is repayable at the time employment. home is resold, transferred or � Homeowner must have a good upon refinancing of the existing mortgage/credit history prior to mortgage. the reset.

Michigan HELP Loan � Short term loan up to $3,000 � Homeowner must already have a and is non-interest bearing. Michigan’s Save the Dream

Terms: Mortgage Refinance Programs � Pays delinquent amount or cost (MSHDA) mortgage and be

of non-recurring event that experiencing temporary non-created the temporary financial recurring difficulty paying the difficulties. monthly MSHDA mortgage

� Loan is repayable when property payments. is sold, transferred or otherwise conveyed or when homeowner defaults on the MSHDA mortgage.

Minnesota Foreclosure Prevention � Short term loan up to $5,500. � Homeowner must be facing Assistance Program Terms: foreclosure because of temporary

� Provides one-time financial financial crisis.assistance towards mortgage payment or other financial assistance.

New Jersey Homelessness Terms: � Homeowner must have low orPrevention Program � Provides limited financial moderate income.

assistance. � Homeowner must be in imminent � Payments are made either as danger of foreclosure because of a

loans or grants to the mortgage temporary financial setback beyond companies on behalf of the his or her control.homeowner.


State Program Loan Term Eligibility Requirements

North Carolina Home Protection � Short term zero interest loan � Homeowner must be a worker who Pilot Program that is: lesser of $20,000 or has lost his or her job in a

18 months of monthly mortgage designated county even if he or she payments; or the minimum does not live in that county.amount required to bring the � Homeowner must have had a stable mortgage current. employment and credit history

Terms: before losing his or her job.� Loan is deferred for 15 years, � Homeowner must be able to

unless the home is sold, resume mortgage payments after refinanced or is no longer the the assistance ends.principal residence.

� Once homeowner’s application is approved, foreclosure is stayed for 120 days.

Pennsylvania Homeowners’ � Loan amount limited to the � Homeowner must be at least 60 Emergency Mortgage maximum of 24 months of days delinquent on mortgage.Assistance Program mortgage payments from the � Homeowner must have a favorable (HEMAP) date of the mortgage delin- mortgage credit history prior to the

quency or a maximum of delinquency during the past five $60,000 whichever comes first. years.

Two types of loans: � Homeowner must be experiencing Continuing loan: financial difficulty due to loss of � Pays delinquent mortgage job, illness, divorce, or other

balance and subsidizes monthly circumstances beyond his or her mortgage payments to control. mortgage holder. � Homeowner must have a

Non-continuing loan: reasonable prospect of resuming � Pays delinquent mortgage full mortgage payments within

balance; homeowner is required 24 months.to make all monthly payments to mortgage holder along with monthly payments to HEMAP.



Local Programs

� Beyond Housing, St. Louis, Missouri—To receivethese funds, homeowners must face short-termproblems beyond their control.

� Home Headquarters, Syracuse, New York—Homeowners can receive up to $2,000 towards theamount owed on their mortgages. However, home-owners must have a good credit history, must be financially stable, and the reason for the delin-quency must be as a result of extenuating circum-stances such as medical problems, divorce, death,or loss of employment. Homeowners are requiredto contribute 25% of the total loan amount fromtheir own funds. The loans are forgiven if home-owners attend quarterly budget and credit counseling sessions for a year.

� Foreclosure Emergency Assistance Program(FEAP), Waco, Texas—FEAP funds are availableto homeowners who have received a foreclosurenotice. Homeowners are eligible if their delin-quency was a result of illness, divorce, job loss orunforeseen circumstances that caused a temporarydisruption in the ability to pay. Homeowners canreceive funds up to $3,000. Counseling is required.

� Neighborhood Housing Services, New YorkCity, New York—Offers small loans to assisthomeowners who have predatory loans or who aredelinquent because of financial hardship.

� Michigan’s Department of Human Services—Homeowners facing foreclosures can receive up to$2,000.

Notes

1 RealtyTrac, Inc., Foreclosure Activity Increases 81 Percentin 2008 (Jan. 15, 2009), available at http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5681&accnt=64847.2 RealtyTrac, Inc., Foreclosure Activity Up 14 Percent in Sec-ond Quarter (July 25, 2008), available at http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=4891&accnt=64847 (reporting 222,391 REOproperties for the quarter); HOPE NOW, Loss MitigationNational Data July 2007 to November 2008, available athttp://www.hopenow.com/upload/data/files/HOPE%20NOW%20Loss%20Mitigation%20National%20Data%20July%2007%20to%20November%2008.pdf.3 RealtyTrac, Inc. has reported more than three quarters of amillion properties are in its active REO database. See Realty-Trac, Inc., Foreclosure Activity Increases 8 Percent in July(Aug. 14, 2008), available at http://www.realtytrac.com/ContentManagement/pressrelease.aspx?ChannelID=9&ItemID=5041&accnt=64847; see also National Association ofRealtors, July Existing-Home Sales Show Gain (Aug. 25,2008), available at http://www.realtor.org/press_room/news_releases/2008/july_ehs_show_gain (reporting total hous-ing inventory at the end of July at 4.67 million existinghomes for sale).4 Kelly Bennett, Local Prices Down 30 Percent from Peak(Aug. 27, 2008), available at http://www.voiceofsandiego.org/articles/2008/08/27/housing/869dataparty082708.txt (re-porting 135 of 337 properties listed for sale in San Diegoarea on Aug. 21 and 22, 2008, were bank repossessions).5 Seriously delinquent loans include loans that are at leastninety days delinquent, plus the loans-in-foreclosure inventory.6 The seriously delinquent rate for subprime loans in thefirst quarter of 2006, both fixed and adjustable, was 6.22%.By the third quarter of 2008 that number had grown to19.56%. Similarly, in the prime market the number of seri-ously delinquent loans has climbed from .77% in the firstquarter of 2006 to 2.87% in the third quarter of 2008. Mort-gage Bankers Association, National Delinquency Survey,2006–2008.7 Mortgage Bankers Association, National Delinquency Sur-vey, 2006-2008.8 Id.9 Press Release, Federal Deposit Insurance Corp. , FDIC An-nounces Availability of IndyMac Loan Modification Model(November 20, 2008).10 Id.

11Credit Suisse, Credit Suisse Fixed Income Research, Fore-closure Update: Over 8 Million Foreclosures Expected (Dec.4, 2008).12 Ellen Schlomer, et al., Center for Responsible Lending,Losing Ground, Foreclosures in the Subprime Market andTheir Cost to Homeowners at 3 (Dec. 2006) (estimating thatforeclosures will cost homeowners as much as $164 billion,primarily in lost home equity). 13 See Erlenbusch, et al., National Coalition for the Home-less, Foreclosure to Homelessness: The Forgotten Victims ofthe Subprime Crisis (Apr. 15, 2008); Connie Paige, Foreclo-sures Bring Rising Tide Of Homelessness, Boston Globe, Jan. 4,2009, at S1. 14 It is estimated that 18% of the foreclosures started in thethird quarter of 2007 were not occupied by the owners. SeeJay Brinkmann, An Examination of Mortgage Foreclosures,Modifications, Repayment Plans and other Loss MitigationActivities in the Third Quarter of 2007, Mortgage BankersAssociation, at 10 (Jan. 2008), available at http://www.mortgagebankers.org/files/News/InternalResource/59454_LoanModificationsSurvey.pdf.see also Hearings Before the H.Comm. on Financial Services, 110th Cong. (Apr. 10, 2008)(statement of Sheila Crowley, discussing the affects of theforeclosure crisis on renters), available at http://www.house.gov/apps/list/hearing/financialsvcs_dem/crowley041008.pdf; John Leland, As Owners Feel Mortgage Pain, So DoRenters, New York Times, Nov. 18, 2007. 15 Bankruptcy filings for 2008 were just under 1.1 million, ascompared to 827,000 in 2007. The 2008 figure representsthe highest number of filings since the 2005 amendments tothe Bankruptcy Code. See Posting of Robert Lawless, Bank-ruptcy Filings Rise 32% in 2008, to http://www.creditslips.org/creditslips/2009/01/bankruptcy-filings-rise-32-in-2008.html#more (Jan. 5, 2009).16 See Letter, Senator Chris Dodd to Senator Harry Reid (Jan.22, 2008), available at http://dodd.senate.gov/multimedia/2008/012308_ReidLetter.pdf (describing cycle of disinvest-ment, crime, falling property values and property tax collec-tions resulting from foreclosures); Brad Heath & CharisseJones, Mortgage Defaults Force Denver Exodus, USA Today, Apr.1, 2008 (in some Denver neighborhoods as many as one-third of residents have lost their homes).17 See, e.g., J.W. Elphinstone, After Foreclosure, Crime Moves In,Boston Globe, Nov. 18, 2007 (describing Atlanta neighbor-hood now plagued by house fires, prostitution, vandalism,and burglaries).


18 See Daphne Sashin & Vicki Mcclure, Foreclosure LeavePainful Ripple Effect, Orlando Sentinel, Oct. 15, 2007 (describ-ing a once safe neighborhood now dotted with emptyhomes and overgrown lawns).19 The Asset-Back Securities Market: The Effects of Weak-ened Consumer Loan Quality, FDIC Regional Outlook (Sec-ond Quarter, 1997).20 By the end of 1997, the volume of subprime mortgage-backed securities had leaped to about $90 billion, and by2002, more than $134 billion were issued. Inside MortgageFinance Publications, The 2003 Mortgage Market StatisticalAnnual (2003); Glenn B. Canner, Thomas A. Durkin &Charles A. Luckett, Recent Developments in Home EquityLending, 84 Fed. Res. Bull. 241, 250 (Apr. 1998).21 Servicers are responsible for handling a variety of mort-gage account activities. They send monthly statements, handleinterest rate changes on adjustable rate mortgages, acceptpayments, keep track of account balances, process escrowaccounts, engage in loss mitigation, and prosecute foreclo-sures. They also collect and report information to nationalcredit bureaus, and issue reports and remit monies to theowners of the loans. In effect, servicers provide the link be-tween mortgage borrowers and mortgage owners.22 See Kurt Eggert, Limiting Abuse and Opportunism byMortgage Servicers, 15 Housing Policy Debate 753, 756–58(2004).23 For a more detailed discussion of mortgage servicingabuses, see National Consumer Law Center, ForeclosuresCh. 6 (2d ed. 2007 and Supp.); see also Islam v. Option OneMortgage Corp., 432 F. Supp. 2d 181 (D. Mass. 2006) (ser-vicer continued to report borrower delinquent even after re-ceiving the full payoff amount for the loan); Hukic v. AuroraLoan Servicing, 2006 WL 1457787 (N.D. Ill. May 22, 2006)(servicer’s clerical error in recording amount of payment lefthomeowner battling with subsequent servicers and fendingoff foreclosure for nearly five years); Vician v. Wells FargoHome Mortgage, 2006 WL 694740 (N.D. Ind. Mar. 16, 2006)(servicers have forced-placed insurance in cases where theborrowers already had it and provided evidence of it); Dowl-ing v. Select Portfolio Servicing, Inc., 2006 WL 571895 (S.D.Ohio Mar. 7, 2006) (servicers have forced-placed insurancein cases where the borrowers already had it and provided ev-idence of it); Barbera v. WMC Mortgage Corp., 2006 WL167632 (N.D. Cal. Jan. 19, 2006); Rawlings v. DovenmuehleMortgage, Inc., 64 F. Supp. 2d 1156 (M.D. Ala. 1999) (ser-vicer failed for over seven months to correct account errordespite borrowers’ twice sending copies of canceled checksevidencing payments); Choi v. Chase Manhattan Mortg. Co.,63 F. Supp. 2d 874 (N.D. Ill. 1999) (home lost to tax foreclo-sure after servicer failed to make tax payment from borrow-ers escrow account and then failed to take corrective actionto redeem the property); Norwest Mortgage, Inc. v. Super.Ct., 85 Cal. Rptr. 2d 18 (Ct. App. 1999) (kickbacks availablein force-placed insurance encourage placement); Monahanv. GMAC Mortgage Co., 893 A.2d 298 (Vt. 2005) (affirming$43,380 jury award based on servicer’s failure to renew floodinsurance policy and subsequent uninsured property damage).

24 Tomasz Piskorski, Amit Seru, and Vikrant Vig, Securitiza-tion and Distressed Loan Renegotiation: Evidence From theSubprime Mortgage Crisis, Dec. 2008.25 Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306(1950).26 Maxwell v. Fairbanks Capital Corp., 281 B.R. 101 (Bankr.D. Mass. 2002).27 New Mexico will soon become the thirtieth state in whichnon-judicial power of sale will be the most common form ofresidential home foreclosures. In 2006, New Mexico re-moved a statutory ban on power of sale clauses in residentialdeeds of trust. Since then, power of sale clauses have becomestandard in residential deeds of trust and will soon outnum-ber those without such clauses. 28 In some states, a completed sale of the home to a goodfaith purchaser will cut off the homeowner’s ability to chal-lenge the sale even if there has been some irregularity in howthe sale was conducted. 29 Okla. Stat. tit. 46, § 43.30 Id. 31 Okla. Stat. tit. 46, § 45.32 S.D. Codified Laws § 21-48-9.33 N.C. Gen. Stat. § 45-21.16.34 N.C. Gen. Stat. § 45-21.16(d). Recent legislation enactedin North Carolina, which will expire on October 31, 2010,requires that a mortgage holder foreclosing a “subprime”loan as defined in the law must include in the initial fore -closure notice either a statement of compliance with thesubprime pre-foreclosure notification requirement or astatement that the loan is not “subprime.” If the court clerkdetermines that the certification is “materially inaccurate” itmay be grounds for dismissal of the foreclosure action with-out prejudice and for payment of borrower costs defendingthe action.35 Turner v. Blackburn, 389 F. Supp. 1250 (W.D.N.C. 1975).Many power of sale statutes are probably constitutionalunder federal law due to the lack of state action. FlaggBrothers, Inc. v. Brooks, 436 U.S. 149 (1978). 36 See 11 U.S.C. § 362.37 See 11 U.S.C. § 362(c)(3).38 The FHA is one of the federal agencies that ensures mort-gage lenders against loss when a loan is made in accordancewith FHA regulations.39 On September 7, 2008, the Federal Housing FinanceAgency (FHFA) announced that the two GSEs, Fannie Mae(Federal National Mortgage Association) and Freddie Mac(Federal Home Loan Mortgage Corporation) had beenplaced into a conservatorship run by the FHFA.40 See American Securitization Forum, Streamlined Foreclo-sure and Loss Avoidance Framework for Securitized Mort-gage Loans (Dec. 6, 2007) (revised July 8, 2008).41 See, e.g., Sheila C. Bair, Chairwoman, Federal Deposit In-surance Corp. (FDIC), Remarks to the American Securitiza-tion Form (ASF) Annual Meeting (June 6, 2007) (“Theimmediate task is to sustain homeownership by ensuringthe servicers have the flexibility they need to make prudentloan modifications.”).


42 Id. (stating that loan modifications that provide sustain-able mortgages for borrowers are generally the best optionfor investors and borrowers).43 Some mortgage programs, such as the FDIC program in-stituted for mortgages owned and serviced by IndyMac SavingsBank, have requirements that the new loan be sustainable,by requiring that the payments be no greater than—for ex-ample—38% of the homeowner’s gross income.44 Extending a mortgage term to forty years is only a benefitwhen the interest rate on the mortgage is very low (for exam-ple, 4% or less); otherwise, the benefits derived from extend-ing the payback period over a longer term are outweighed bythe extraordinarily large excess interest that is due.45 Statement on Loss Mitigation Strategies for Servicers ofResidential Mortgages (Sept. 2007), available at http://www.occ.treas.gov/ftp/bulletin/2007-38a.pdf.46 Associated Press, Paulson to Mortgage Industry: HelpCurb Defaults (Oct. 31, 2007), available at http://money.cnn.com/2007/10/31/real_estate/paulson_housing.ap/.47 Press Release, Statement of Treasury Secretary Henry M.Paulson, Jr. at Press Conference to Announce Framework toHelp Preserve Communities by Preventing Foreclosure (Dec.6, 2007), available at http://www.treas.gov/press/releases/hp716.htm.48 See HOPE NOW: Results in Helping Homeowners (Feb.2008) (data covers eighteen servicers representing two-thirds of the industry), available at http://www.fsround.org/hope_now/pdfs/JanuaryDataFS.pdf; see also HOPE NOW,Alliance Servicers, Prime and Subprime Residential Mort-gages: 2007 Loss Mitigation Activities (Feb. 2008), available athttp://www.fsround.org/media/pdfs/NationaldataFeb.pdf. 49 Of the 384,000 foreclosures, the MBA reports that235,000 of the foreclosure filings fell in one of three cate-gories: property was investor-owned, the subject of a previ-ous broken payment plan, or the homeowner could not bereached by the servicer. Jay Brinkmann, Mortgage BankersAssociation, An Examination of Mortgage Foreclosures, Modi-fications, Repayment Plans and other Loss Mitigation Activ-ities in the Third Quarter of 2007 (Jan. 2008), available athttp://www.mortgagebankers.org/files/News/InternalResource/59454_LoanModificationsSurvey.pdf.50 See Alan M. White, Rewriting Contracts, Wholesale: Dataon Voluntary Mortgage Modifications from 2007 and 2008Remittance Reports (Aug. 27, 2008). Fordham Urban LawJournal, Forthcoming.51 Rod Dubitsky, et al. , Credit Suisse Fixed Income Research,Subprime Loan Modifications Update at 1-2 (Oct. 1, 2008).52 Id..53 Id. (while 80% of principal modifications were delinquentprior to modification, only 23% were delinquent eightmonths after modification).54 See, e.g., Miller v. Mccalla, Raymer, Padrick, Cobb, Nichols,& Clark, L.L.C., 214 F.3d 872, 875 (7th Cir. 2000) (describ-ing the process of trying to get through to an 800 number asa “vexing and protracted undertaking”); Gretchen Mor-gensen, Can These Mortgages Be Saved?, New York Times, Sept.30, 2007 (describing one homeowner who identified 670

calls relating to her home foreclosure in the previous threemonths and who received nine different answers about howbest to proceed from fourteen different people at the com-pany).55 Neighborhood Housing Services of Chicago, Inc., Lessonsfrom the Front Lines: Counselor Perspectives on Default In-tervention, at 6 (Oct. 29, 2007).56 See Kate Berry, The Trouble with Loan Repayment Agreements,Am. Banker (Jan. 9, 2008) (noting that servicers push repay-ment plans instead of modifications because they “needtwice the staff, and in part they can’t manage the volume”).57 California Reinvestment Corp., The Growing Chasm Be-tween Words and Deeds (Dec. 2007).58 Information about these bills can be found on NCLC’swebsite, www.nclc.org.59 Cal. Civ. Code § 2923.5 (West).60 See Appendix C, infra.61 This is exactly what the Maryland Supreme Court heldwas the effect in that state when a mortgage servicer failedto provide loss mitigation as required by the FHA guide-lines. See Wells Fargo Home Mortgage Inc. v. Neal, 398 Md.705, 922 A.2d 538 (Md. 2007).62 12 U.S.C. § 2605(e). 63 Texas Department of Housing & Community Affairs, Di-vision of Policy & Public Affairs, An Examination of Resi-dential Foreclosures in Texas, at 32 (Sept. 29, 2006).64 Freddie Mac, Foreclosure Avoidance Research, 2005, availableat http://www.freddiemac.com/service/msp/pdf/foreclosure_avoidance_dec2005.pdf; Freddie Mac, Foreclosure Avoid-ance Research II, 2007, available at http://www.freddiemac.com/service/msp/pdf/foreclosure_avoidance_dec2007.pdf.65 Fla. Stat. § 494.00794 (forty-five-day notice of right to cure);815 Ill. Comp. Stat. § 137/105 (thirty-day notice of right to cure);N.M. Stat. § 58-21A-6 (thirty-day notice prior to accelera-tion or commencement of any type of foreclosure proceeding).66 See, e.g., Bisno v. Sax, 175 Cal. App. 2d 714, 346 P.2d 814(1959);Reynolds v. Ramos, 188 Conn. 316, 449 A.2d 182(1982); Savarese v. Schoner, 464 So.2d 695 (Fla. Dist. Ct.App. 1985); Fed. Home Loan Mortgage Corp. v. Taylor, 318So.2d 203 (Fla. Dist. Ct. App. 1975); Crane v. Bielski, 15 N.J.342, 104 A.2d 651 (1954); Associated East Mortgage Co. v.Young, 163 N.J. Super. 315, 384 A.2d 899 (N.J. Super. Ct.,Ch. Div. 1978); Graf. v. Hope Bldg Corp., 254 N.Y.1, 171 N.E.884 (N.Y. 1930) (Cardozo, C.J., dissenting); Germania Life Ins.Co. v. Potter, 109 N.Y.S. 435 (App. Div. 1908); Casper v. An-derson Apartments, 196 Misc. 555, 94 N.Y.S. 2d 521 (Sup.Ct. 1949); Murphy v. Fox, 278 P.2d 820 (Okla. 1955); UnitedStates v. Loosley, 551 P.2d 506 (Utah 1976). 67 24 C.F.R. § 203.608.68 Federal National Mortgage Ass’n/Federal Home LoanMortgage Corp. (FNMA-FHLMC), Clause 22, Mortgage Doc-uments Security Instruments, available at www.efanniemae.com/singlefamily/forms_guidelines/mortgage-documents/sec- instr.jhthl?role,ou); Federal National Mortgage Ass’n/Federal Home Loan Mortgage Corp. (FNMA-FHLMC), Clause18, Uniform Mortgage–Deed of Trust Covenant-SingleFamily.

69 Id.70 11 U.S.C. § 1322( c )(1).71 See e.g., In re Foreclosure Cases, 521 F. Supp. 2d 650 (S.D.Ohio 2007); In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex.2008); In re Maisel, 378 B.R. 19 (Bankr. D. Mass. 2007); Ever-home Mortgage Co. v. Rowland, 2008 WL 747698 (Ohio Ct.App. Mar. 20, 2008); DJL Mortgage Capital, Inc. v. Parsons,2008 WL 697400 (Ohio Ct. App. Mar. 13, 2008).72 Federal Home Loan Mortgage Corp., Foreclosure Avoid-ance Research II, 2007, available athttp://www.freddiemac.com/service/msp/pdf/foreclosure_avoidance_dec2007.pdf. 73 Iowa Code § 628.3, provides: “The debtor may redeem realproperty at any time within one year from the day of sale,and will, in the meantime, be entitled to possession thereof;and for the first six months thereafter such right of redemp-tion is exclusive. Any real property redeemed by the debtorshall thereafter be free and clear from any liability for anyunpaid portion of the judgment under which said real prop-erty was sold.”74 Cal. Civ. Proc. Code § 729.080 (West).75 S.D. Codified Laws § 21-49-31. 76 Conflict of law issues governing which state’s laws applyin a situation when the former homeowner has moved to adifferent state after foreclosure add a further layer of uncer-tainty and unfairness to the operation of deficiency laws. Seegenerally Robert A. Brazener, Conflict of Laws: Application ofstatutes Proscribing or Limiting Availability of Action for DeficiencyAfter Sale of Collateral Real Estate, 44 A.L.R. 3d 922 (1972).77 Gelfert v. Nat’l City Bank of N.Y., 313 U.S. 221 (1941);Honeyman v. Jacobs, 306 U.S. 539 (1939); see also Lester v.First Am. Bank, Bryan, Tex., 866 S.W. 2d 361 (Tex. App.1993) (upholding Texas deficiency limitation against stateconstitutional challenge).78 Gelfert v. Nat’l City Bank of N.Y., 313 U.S. 221 (1941).79 See generally Joseph E. Gotch, Jr., Creditors’ vs. Debtors’ RightsUnder Alaska’s Foreclosure Law: Which Way Does the BalanceSwing?, 14 Alaska L. Rev. 77, 105-106 (1997); Georgina W.Kwan, Mortgagor Protection Laws: A Proposal for Mortgage Fore-

closure Reform in Hawaii, 24 U. Haw. L. Rev. 245, 265-66(2001); John Mixon & Ira B. Shepard, Antideficiency Relief forForeclosed Homeowners: ULSIA Section 511(b), 27 Wake ForestL. Rev. 455, 474-75 (1992).80 See John Mixon & Ira B. Shepard, Antideficiency Relief forForeclosed Homeowners: ULSIA Section 511(b), 27 Wake ForestL. Rev. 455 (1992); Grant S. Nelson & Dale A. Whitman, Re-forming Foreclosure: The Uniform Nonjudicial Foreclosure Act, 53Duke L.J. 1399 (2002).81 See, e.g., Ohio Rev. Code Ann. § 5721.19 (West).82 Cal. Civ. Proc. Code § 580(b),(d) (West); Georgina W.Kwan, Mortgagor Protection Laws: A Proposal for Mortgage Fore-closure Reform in Hawaii, 24 U. Haw. L. Rev. 245, 259-62(2001). 83 Duclersaint v. Fed. Nat’l Mortgage Ass’n, 427 Mass. 809,696 N.E. 2d 536 (1998).84 Brickyard Ass’n v. Auburn Venture P’ship, 626 A.2d 930(Me. 1993)85 Md. Code Ann., Real Prop. §§ 7-301(h), 7-314 (West); NevRev. Stat. § 40.463.86 Cal. Civ. Code § 2945.1(e)(8) (West) (defining surplus re-covery as a regulated “service” subject to restrictions understatute applicable to foreclosure consultants); Colo. Rev.Stat. § 6-1103(4)(a)(IX) (including surplus retrieval consult-ants in scope of regulated foreclosure consultant activities);Fla. Stat. §§ 45.032, 45.034 (regulating contracts to assignsale surpluses).87 NYCTL 1998-1 Trust v. Oneg Shabos, Inc., 800 N.Y.S.2d808 (Sup. Court. 2005).88 N.C. Gen. Stat. § 45-21.26.89 N.Y. Real Prop. Law §§ 1354, 1355 (McKinney).90 Wyo. Stat. Ann. § 34-4-104(b); Vt. R. Civ. P. 80.1.91 Ariz. Rev. Stat. Ann. § 33-812(B).92 Cal. Civ. Code § 2924j (West) (report due within thirtydays of issuance of trustee’s deed); Haw. Rev. Stat. § 667-33;Va. Code Ann. § 26-15; W. Va. Code § 38-1-8; Md. Civ. R. 14-305; Pa. R. Civ. P. 3136; .


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