Maryland SB 1033 was just passed May 25, 2017, to provide a fast-track foreclosure process which will become effective October 1, 2017. This note attempts to provide some perspective on the legislation and suggestions as to how it may be handled to maximize the chance of success without undue risk. As with all unique real property, each case should be reviewed on its’ own particulars and when in doubt you should consult with licensed counsel before proceeding.
Legislation, which provides a “fast track” option for the foreclosure of vacant and abandoned properties, is nothing particularly new or revolutionary in the default world. Very populous states such as New York and New Jersey have had such laws in place for a while and there are similar processes in Maine, Ohio, Illinois, Nevada, and South Carolina. All of these share similar characteristics. They recite certain allegedly objective criteria, which must be established to show abandonment, and most require the process revert to a more standard proceeding if there are answers or substantive objections filed in the fast-track proceeding.
After going through some of the hurdles for the fast-track processes, we'll consider the particulars of Maryland's new law. First, many statutes require the property appear vacant, have visible damage, broken doors or windows, or other indicia of abandonment, which, from a creditor’s perspective, would expose the collateral to severe damage from the elements. Securing the property and repairing such damage might be allowed by the security interest, preserve the value of the collateral, and work to the benefit of all parties but actually remove the very evidence needed to support the fast-track. At a minimum, extensive documentation would be required prior to repairs, however what is to stop a borrower from re-entering the newly repaired property or later objecting to the fast-track proceeding so they could effectively enjoy free repairs? Title does not transfer until the end of the process, so there is a risk zone. Second, hearings on evidence of abandonment tend to be evidentiary and specific findings are required under the new law. This means creditors must send a witness to that particular proceeding armed with all necessary documentation to prove the abandonment at some cost. There are no well-established mechanisms for pure defaults as to abandoned property. Third, the fast-track statutes generally do not have any limitation or deadline for raising objections as to the abandonment or fast-track process so borrowers can wait until very late in the process before filing their objection, which may actually reset the process and cause additional delay. These tactics will certainly incur carry costs for the duration. Fourth, delaying tactics, whether deliberate gaming of the system or for less nefarious reasons risk running afoul of the statute of limitations.
In the Maryland “fast track” legislation, the first thing that leaps out is the exemption to MD Real Prop. §7-105.1, which is the entire current Notice of Intent (NOI) and mediation process including all service of process and notices associated with housing counseling and similar items. The NOI itself has a 45-day wait period—demands are generally 30 plus days and mediation can take months, so this would initially appear to be a good benefit. There is, of course, a caveat: the court cannot make a finding of vacancy if any answer or objection has been filed by a mortgagor or grantor setting forth a defense or objection that, if proven, would preclude entry of a final judgment and decree of foreclosure. Presumably all the borrower must do to defeat the initial petition is indicate that the property is not vacant and they haven’t received their NOI therefore judgment can’t be entered and they win. If this proves to be true, then the vacant property fast-track would be easy to defeat and word will spread quickly about how to defeat it rendering it largely ineffective.
The second, and perhaps even more significant, wrinkle in the Maryland law, is when a final determination of vacancy would be made. The language of the legislation strongly suggests that an initial petition to determine vacancy must be filed, and then if it is granted, an Order to Docket or Complaint to Foreclose must still be filed with additional service of process. Creditors are thus filing not one, but two court proceedings (even if the second one is only quasi-judicial) with commensurate costs and potential court delays. Even if they file the first one with proper evidence, send a witness to support it, make all of the necessary showings, and convince the judge to grant the petition—when they file an Order to Docket, if a “timely challenge is filed” within 20 days after service of the notices of the actual foreclosure proceeding, then the exemption does not apply and the creditor has to go back and comply with §7-105.1. The Order to Docket would need to be dismissed and an NOI would need to be sent, potentially after many months of delay.
Whenever there is a lengthy delay, prudent creditors keep a wary eye on the statute of limitations. In Maryland, this issue is relatively unsettled because in 2014 the Maryland legislature expressed a strong intent to curtail foreclosure actions after three years—see Courts and Judicial Proceedings Sec. 5-102 (removing residential Deeds of Trusts and Mortgages from the 12-year “specialty” category thereby subjecting them to the 3-year requirement of Sec.5-101; see also legislative history associated therewith). The statute was set to protect defaults, which occurred prior to July 2014, but those after July 1, 2014, could be affected. This is not entirely settled law, as the Maryland UCC still gives six years on a note see MD Code, Commercial Law §3-118, however nobody particularly wants their note or portfolio to be the test case for that approach. The safer course is to be sure to bring actions within three years as the legislature wanted. Extensive loss mitigation or unproven “fast track” approaches that could cause a late-process reset may become problematic given a much shorter statute of limitations and nobody wants to lose their right to recover the collateral.
Despite the foregoing concerns, there are some ways in which the process might still be tested or used if reasonable protective measures are taken. Consider if an NOI is sent as a protective measure at the same time as a hypothetical Petition to Determine Vacancy is filed, then the creditor still has the ability to proceed with the vacant process if the petition is granted or could still file a normal Order to Docket if the petition is denied. Borrower would have received their NOI and could not object on that basis and post-filing mediation would still be available. Maryland Rule 2-303 and Federal Civil Rule 8 allow pleading in the alternative, so this would appear to be feasible. Counsel could also explore other approaches that are permitted by the rules and procedures currently in existence to permit their own late-stage election of remedies, depending on what the borrower says or does. Either of these options could be done with little additional cost to creditors beyond what already is incurred in such proceedings and the upside of saving several months’ time would appear worthwhile.
Finally, as with any new process, efforts should be made to consult with existing title providers to see whether they will insure titles emerging from the vacant property process and, if so, under what conditions, prior to commencing such a proceeding. There is ample time to check with your preferred provider before October and that process should begin as soon as possible so that it is well established before loans are referred for the “fast track.”