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New foreclosure option soon to be available to homeowners

Legislation that will go into effect January 1, 2015, will create a third method of foreclosure to in the State of Connecticut not previously available to homeowners. Specifically, Public Act No. 14­ 84 titled an Act Concerning an Optional Method of Foreclosure will create an alternative method for foreclosure to the current methods of Strict Foreclosure and Foreclosure by Sale. The new method will be a Foreclosure by Market Sale which will allow property owners who are in the beginning of the foreclosure process to work directly with a broker and the mortgage holder to attempt to sell the subject property and avoid the time­consuming judicial foreclosure process.

Currently, when a homeowner (“Mortgagor”) falls behind on his/her mortgage payments there are two (2) methods of foreclosure that the lender (“Mortgagee”) can resort to in Connecticut: (1) Strict Foreclosure (usually when there is no, or little, equity in the property ­when the debt being foreclosed is greater than value of property); and (2) Foreclosure by Sale (when there is enough equity to justify an auction, taking into account the anticipated costs of the sale).

Strict Foreclosure:
A strict foreclosure is a summary proceeding that usually involves a property with little or no equity. Basically all parties in interest to the mortgage are given a set timetable to make full payment (redeem) at the conclusion of which title to the property will pass directly to the lender without a sale if the conditions for redemption are not met.

Foreclosure by Sale:
When there is a Foreclosure by Sale the subject property is sold as part of a publicly noticed auction. A sale is ordered if the value of the property is significantly greater than the amount of the Mortgagor’s debt. If a sale is ordered, the Court will assign sale date at which time the property will be auctioned to the highest bidder. At that time the Court will make findings as to the fair market value of the property, the amount of the Mortgagee’s debt and will award costs and fees.

Additionally, at the time judgment is entered an attorney is appointed as the Committee of Sale. The Committee’s job is to post a sign on the property advertising the sale, arrange for a legal notice to be published online and in a local newspaper and conduct the actual auction of the property on the date of the sale. On the date of the sale any interested person can bid on the property so long as they provide the Committee a deposit of 10% of the fair market value of the property as found by the Court. Once the Court approves the winning bid, the successful bidder finalizes the purchase of the Property and takes title subject to those liens ahead of its debt, such as property taxes, water/sewer liens or prior mortgages. It should be noted that the Mortgagor (owner of the equity of redemption) may redeem the property up until the time the Court approves the sale.

Foreclosure by Market Sale:
Beginning January 1, 2015 there will be a third option available to homeowners who are facing foreclosure. Public Act No. 14­84 titled An Act Concerning an Optional Method of Foreclosure creates a process wherein a Foreclosure by Market Sale can be achieved. This will allow Mortgagors who are in the beginning of the foreclosure process to work directly with a broker and the Mortgagee to sell the property at a price that reflects its fair market value, while at the same time avoiding the time­ consuming judicial foreclosure process.
The process allows for the sale of the property under non-distressed circumstances such that it would be expected that the best price can be obtained for the Mortgagor and Mortgagee. This option, however, is only available if the mortgage being foreclosed is a first mortgage on a one ­to ­four family residential property that is the Mortgagor’s principal residence. Additionally, both the Mortgagor and Mortgagee must agree to proceed pursuant to the Foreclosure by Market Sale criteria.

The new legislation requires that prior to initiation of a foreclosure, notification must be sent to the Mortgagor advising that this option is available and that they have an option to discuss whether the property may be marketed for sale, by mutual consent of both parties. The Mortgagor has 60 days to respond should he/she wish to avail themselves of the new process. The Mortgagor, however, must first contact a licensed real estate agent to discuss the feasibility of listing the property for sale pursuant to the foreclosure by market sale process.

If both parties agree discuss the discuss Market Sale option, the first step is for the Mortgagee to obtain an appraisal of the property. The Mortgagor is obligated to allow an interior and exterior inspection of the property for purposes of the appraisal. If the appraisal indicates that Foreclosure by Market Sale is an option, the Mortgagor and Mortgagee must then must reach an agreement concerning acceptable terms for a real estate listing agreement, including an acceptable duration and acceptable listing price. When an offer to purchase on the agreed upon terms is received, and deemed acceptable to both th Mortgagor and Mortgagee, the Mortgagor must then execute a contract of sale reflecting the agreed upon terms and must provide written documentation evidencing the mortgagor’s consent to the filing of a Motion for Judgment of Foreclosure by Market Sale.

After receipt of the sale contract and Mortgagor’s consent, the Mortgagee may then commence the foreclosure action and file a timely motion for judgment. Subordinate lien holders are then given “first right of refusal law days”, in inverse order of priority, by which time they can preserve their interest in the property by tendering full payment called for under the purchase and sale contract. If the lien holder does not tender full payment by its first right of refusal law day then its lien rights are extinguished upon the sale. It is clear that the new legislation was drafted in recognition of the fact that foreclosure auctions do not attract the highest and best sales prices for foreclosed properties. Whether the new process will succeed in correcting that problem only time will tell. Needless to say, being faced with possible foreclosure is stressful under the best of circumstances. While the new foreclosure law will provide homeowners with another option when faced with foreclosure, it also may serve to confuse and complicate the process. If you have any questions about foreclosure, the programs available to you (including mediation) or the possible protection of your property through bankruptcy, feel free to call Harlow, Adams & Friedman and speak with a knowledgeable experienced Attorney who can help guide you through the process.