Given the current state of the economy, Maine real estate foreclosure has been on the rise. In 2010. the Maine legislature revised the residential mortgage foreclosure laws in Maine to address the foreclosure crisis facing our state and the rest of the country. Part I of this Article summarizes the largest change – the foreclosure diversion mediation program – and the ways in which the program may reduce mortgage foreclosure sales. Part II discusses investment opportunities that may arise when real estate foreclosures do result in public auctions of the property, and provides tips for interested bidders.
I. FORECLOSURE MEDIATION SYSTEM IN MAINE COURTS
Part of the 2010 law revisions is a court-facilitated real estate foreclosure mediation program in which homeowners are given the opportunity to meet with trained mediators and their bank to discuss the possibility of a loan modification or other alternative to foreclosure. As an attorney with a foreclosure practice and a former foreclosure mediator, Attorney Buck has seen the benefits of Maine’s real estate foreclosure mediation process play out over the last year.
When homeowners are served with a complaint for foreclosure of their personal residence, they are also provided standard “mediation request” forms and financial paperwork to complete and provide to the mortgage holder to consider prior to mediation. Homeowners requesting mediation attend an informational session at the courthouse. At the informational session, representatives from Pine Tree Legal Assistance and other community resources are available to assist homeowners in completing the financial paperwork and preparing for mediation. Then, individual mediation sessions are held at the courthouse. The homeowners (defendants) and the foreclosing bank’s attorney must appear in person at the mediation. Because the majority of Maine mortgage foreclosures involve out-of-state mortgage companies (plaintiffs), the plaintiffs typically participate by telephone, which is authorized by the new court rules and procedures for mediation as long as the representative on the telephone has the authority to enter into agreements with the homeowners, including loan modifications.
On February 18, 2009, President Barack Obama announced the Making Home Affordable program (“HAMP”), a comprehensive plan to stabilize the United States housing market. Certain residential mortgage lenders received federal funding through HAMP for their use in providing loan modifications that may include: a principal forbearance or reduction, a waiver of late fees/penalties, interest rate reduction or switch to a fixed rate, or an extension of the amortization term. There are also private or traditional loan modifications that may be available to homeowners who do not qualify for HAMP modifications because their lender is not HAMP eligible, or their income level or home value does not meet the HAMP guidelines.
The mediation does not force a bank to enter into a loan modification, but it does require that the lender engage in good faith mediation to see whether or not it is feasible to modify the loan to allow the homeowner to remain in their home. At the very least, the mediation process addresses a common frustration among homeowners who fall behind in mortgage payments: poor communication with their lender. Mediation provides many homeowners with a forum to explain and explore their situation, to discuss how they came to default on payments, and how they might cure their default and remain current under an established, agreed-upon plan. Or, mediation may provide the impetus for a fresh start, even in cases where a loan modification is not the best option. For instance, occasionally, homeowners decide they simply cannot afford the expense of the home and need to “downsize” or move to another city. In these cases, a deed in lieu of foreclosure might be a possibility – that is where the defendants sign the property over to the plaintiff in exchange for an agreed-upon move out date. Deed in lieu deals can also include a deficiency waiver or even some relocation money in exchange for leaving the property in broom-swept condition. In addition, “short sales” might be discussed and approved through the mediation process. Under a short sale deal, the mortgage holder agrees to accept some amount less than the full payoff of the mortgage so that the property can be transferred to a new buyer. Short sales often occur when a borrower is unable to make the monthly mortgage payments and the lender makes the practical determination that selling the property at a moderate loss is more advantageous than selling after the delay and costs of a foreclosure. Some banks and mortgage companies may even allow the homeowners to stay in the home while short sales are pending, perhaps for a reduced monthly payment.
Through discussion at the mediation session, and financial paperwork completed beforehand, the exchange of information often does result in a homeowner’s being able to remain in their home and cure arrearages over time. In other cases, the process gives homeowners some control over moving out of the home and the timeframe for making a fresh start. Either way, the mediation requirement makes the foreclosure process better for Maine homeowners, by requiring meaningful conversations about creative alternatives to foreclosure.
II. PUBLIC FORECLOSURE SALES – TIPS FOR BIDDING ON PROPERTIES
Of course, not all mortgage foreclosure cases are settled through the mediation process. Some result in public auctions that may present investment opportunities for those interested in buying and selling real estate, or for people simply looking for a deal on a starter home, second home, etc. Here are some tips for those interested in bidding at foreclosure auctions.
Tracking Public Auctions: Before selling foreclosed property at a public auction, foreclosing banks/lending institutions are required to publish a notice of the sale for three consecutive weeks, starting at least three weeks prior to the sale. The sale notice is published in a newspaper that is in general circulation in the city or town where the property is located. So, if you are interested in property in the Augusta area, you may wish to view the legal advertisements in the Kennebec Journal. Notices of Lewiston/Auburn foreclosure sales are generally published in the Sun Journal. It is common, however, for sale notices to appear in smaller local publications, which often reduces the overall costs of the auction.
In addition, some attorneys handling a large volume of foreclosure cases list the subject properties on their websites. Some real estate brokers, auction companies, and other property-related trades collect and list foreclosure sale notices on their website. Often they are sorted according to locale or cost. You can even sign up for on-line foreclosure tracking services (Realtytrac.com, for example). If you are interested in bidding on foreclosed property, utilize the Internet and local print publications to develop a system to keep track of properties in a given region or price range.
Investigating the Property: Once you find a particular piece of property that interests you, find out as much as you can about the property prior to the auction. You may not have the opportunity to view the inside of the property, but at least conduct a drive-by inspection. This will give you a better idea of the property’s condition, the type of neighborhood it is in, whether or not it is occupied, whether or not the yard has been cared for recently, etc. You may also get a sense of how much money you will need for repairs and renovations. Call the City or Town tax assessor to obtain the property’s assessed value, its acreage, the annual tax bill, and the status of property tax payments. Call the attorney or auction company who published the notice of sale; their contact information is typically contained in the notice. The attorney or auctioneer may have additional information about the property, for instance, whether it is still owner-occupied, or, if it is a multi-unit, whether tenants occupy some or all of those units. Ask for a copy of the foreclosure judgment. The judgment will tell you when the mortgage was given and the dollar amount owed to the bank. It will also contain the legal description of the property. You may also inquire as to whether there will be a showing of the property before the auction, if that information is not contained in the notice of sale. Check real estate listings to determine the asking prices for comparable, neighboring properties. The more information you have about the property, the better able you will be to set your maximum bidding amount.
Bidding and Buying: Sometimes the foreclosing bank’s attorney conducts the auction, and other times an auction company handles the sale. Contact the bank’s attorney, or the auction company, to be sure the auction is still going forward (auctions can cancelled and postponed for a variety of reasons). Confirm the auction date, time, and location of the auction and the bidding procedure. The auction may be at the property location, or it may simply be held in a conference room at the bank’s attorney’s office. Be sure to arrive on time, as the auction may start promptly and end quickly. Interested bidders must register to bid at the auction, and must bring certified funds or cash in for the deposit amount, which is set forth in the notice of sale. The required deposit can be $5,000 or more, depending on the value of the property.
A purchase and sale agreement will be presented at the auction, which the high bidder and the foreclosing lender sign. Under the purchase and sale agreement, the property is sold “as is,” with no representations or warranties about the condition of the property or anything else. The buyer is responsible for all closing costs, including real estate transfer taxes and property taxes owed to the municipality. The foreclosing bank generally requires closing within 30 days of the auction; therefore, if financing will be required, it is a good idea to seek pre-approval before bidding. If you are the high-bidder, but you are ultimately unable to buy the property, you will likely forfeit the deposit amount.
Like any investment, buying properties at foreclosure auctions comes with a certain amount of risk. It is important to identify the risk level you are willing to take, and take steps to minimize those risks.
This article is not legal advice but should be considered as general guidance in the area of the Maine real estate foreclosure process, particularly mediations and the bidding process.