Mortgage modification, Part II

In addition to efforts made by the Federal Government and the Attorneys General of several states to encourage more mortgage modification plans, there have also been efforts at the local legislative level.  Since basic property rights are primarily established at the state level, local legislative efforts have had a more direct impact on the foreclosure process than recent federal efforts.

The first major legislative response to the foreclosure crisis in Massachusetts occurred n 2007.  The 2007 legislation addressed a number of issues, including more carefully regulating sub-prime mortgages in an effort to avoid the trap caused by the practice of offering sub-prime borrowers a low "teaser" rate for the first few years of a mortgage loan with a much higher rate kicking in in subsequent years.  The legislation also provided for additional funding to more closely supervise mortgage brokers and lenders. However, the two more significant changes that addressed the concerns of the typical homeowner were a lengthening of the payment default period and a subtle change in the rights of a homeowner after foreclosure.

With respect to the default period, mortgage loans traditionally had a thirty (30) day default period.  That meant that if a homeowner missed a mortgage payment, the bank could "default" the homeowner and begin the process of foreclosure thirty (30) days later.  The 2007 legislation extended the default period to ninety (90) days so that a homeowner who missed a payment had ninety (90) days to make up the missed payment or payments before the bank could start foreclosure proceedings. The other change related to the status of the homeowner after foreclosure.

Traditionally, after the foreclosure of a home, the homeowner had no further rights as a tenant and whoever purchased the home at the foreclosure sale could start eviction proceedings immediately.  The 2007 legislation made the former homeowner a "tenant at will" which means that he had all the rights of a normal tenant and could not be evicted until after his tenancy had been terminated. Terminating a tenancy typically requires a (30) day notice to quit before eviction proceedings could begin, which effectively gave the homeowner a two to three month grace period before the former homeowner could be physically evicted from the premises.

The 2007 legislation obviously did not resolve the mortgage foreclosure crisis and in 2010 the legislature made additional changes in an effort to assist struggling homeowners.  The 2010 legislation again extended the default period for missed mortgage payments and provided that a homeowner would have 150 days to make up any missed mortgage payments unless the mortgage lender went through a mediation process with the homeowner to consider alternatives to foreclosure, such as a mortgage modification plan.

The 2010 legislation also again extended the rights of homeowners who had lost their homes in foreclosure, providing that they could only be evicted for just cause unless the purchaser at the foreclosure sale had entered into a purchase and sale agreement with a good faith third party purchaser.  Of course, the former homeowner would still be required to make monthly rent payments to the new owner of the property while that former homeowner occupies the property.

Since the 2007 and 2010 changes haven’t had a significant impact on the foreclosure picture, the legislature is again considering changes to the law. The current proposal would make mediation with a view to mortgage modification mandatory before a bank or other lender could begin the foreclosure process.  Although bills to that effect have been passed by both the Massachusetts House and Senate, they have been sent to a legislative conference committee to address differences in the respective versions.  It is uncertain if a compromise version will be adopted before the current legislative session ends on July 31, 2012.