Foreclosure Law Changes: Lender Beware
June 25, 2009
Both the State of Michigan and the federal government recently passed laws significantly affecting the rights of lenders to foreclose residential mortgages.
Michigan's foreclosure by advertisement statute has been changed to require mortgage holders to comply with a 90 day pre-foreclosure process before foreclosing residential mortgages by advertisement. The requirements of the new law include:
- Before foreclosing a mortgage by advertisement, the mortgage holder must send a written notice to the borrower.
- The written notice must include certain information, including a list of approved housing counselors.
- The written notice must also be published in a local newspaper.
- Within 14 days after the notice is mailed, the borrower may request a meeting with the mortgage holder's designated agent to work out a loan modification to avoid foreclosure.
- If the borrower requests a meeting, the foreclosure by advertisement may not begin until 90 days after the notice is mailed to the borrower.
- A borrower who wants to negotiate a loan modification must contact a housing counselor, who will schedule a meeting with the mortgage holder's designated agent.
- The mortgage holder must use a loan modification program, which includes a debt-to-income ratio of 38% or less.
- To reach the 38% target, the loan modification program may include one or more features, such as reducing the loan interest rate to 3%, and extending the loan term up to 40 years from the date of the loan modification.
- If the borrower is eligible for a loan modification, the mortgage holder may not foreclose by advertisement, but may foreclose by judicial action.
- If the borrower is not eligible for a loan modification, the mortgage holder may foreclose by advertisement.
- If the mortgage holder begins foreclosure by advertisement without complying with the new law, the borrower may file a court action to convert the foreclosure by advertisement to a judicial foreclosure.
- The new law applies only to property used by the borrower as a principal residence. The new law is effective July 5, 2009, and is scheduled to expire July 5, 2011.
Protecting Tenants at Foreclosure Act
In addition to the change in Michigan law, the President recently signed a new federal law protecting tenants who are leasing foreclosed homes. The Protecting Tenants at Foreclosure Act of 2009 requires purchasers of foreclosed homes to honor for the remainder of the lease term any existing legitimate leases with tenants living on the property. Purchasers do not have to honor leases for the remainder of the lease term only if they sell the property to a purchaser who will live on the property, although the tenant must still be allowed to remain on the property for at least 90 days following the receipt by the tenant of a notice to vacate from the purchaser.
If the remainder of the lease is for less than 90 days, or if the lease is terminable at will, tenants must be allowed to remain on the property for at least 90 days following the receipt of a notice to vacate from the purchaser. Month-to-month tenants are also allowed to remain on the property for a minimum of 90 days following receipt of a notice to vacate from the purchaser.
The mortgagors, and their children, spouses, or parents are not considered "tenants" and are not protected by the new law.
This law takes effect immediately and is scheduled to expire December 31, 2012.
If you have any questions about these new laws, please contact Varnum creditors' rights attorneys Randall Groendyk or Don Snide.