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Home Foreclosures: 12.1.4 The Borrower’s Rights in the Property After Foreclosure of a Junior Mortgage

At common law, foreclosure of a junior mortgage has a severe impact on all the borrower’s rights in the property. According to common law, upon foreclosure of a junior mortgage, the borrower loses all rights in the property.18 The purchaser at the junior mortgage foreclosure sale can proceed to evict the borrower and take possession of the property. If there is substantial equity in the property, the purchaser is incentivized to pay off the first mortgage and acquire unencumbered title to a valuable asset.

Home Foreclosures: 12.2.1 General

The statutes of limitations that apply to foreclosure of mortgages vary greatly from state to state. Section 5.3.1, supra, outlines the wide range of time frames that are in effect, depending on the jurisdiction and the event that triggers the running of a limitation period.

Home Foreclosures: 12.2.2 The Statute of Limitations for Individual Installments

When a mortgage or deed of trust has not been accelerated, a limitation period typically runs from the due date of each individual unpaid installment.26 For example, New York’s statute of limitations for mortgages is six years. An individual installment that came due and remained unpaid for six years with no acceleration of the loan can no longer be collected in a legal action.27 This principle can be particularly important in defending against a second mortgage foreclosure.

Home Foreclosures: 12.2.3 Statute of Limitations After Acceleration

As discussed in § 5.3.2, supra, acceleration of a mortgage loan cancels the borrower’s right under the contract to pay off the loan in installments. Acceleration makes the entire loan balance due immediately. An acceleration also triggers the running of the statute of limitations for the entire obligation.

Home Foreclosures: 5.3.2 When Does the Statute of Limitations Begin to Run?

Once the appropriate statute of limitations has been identified, the next step is to ascertain whether and when the limitation period began to run. Different events can trigger the running of a statute of limitations for foreclosure. The important ones are: the default in making an installment payment when contractually due; the acceleration of the entire debt; and the maturity date for completing all scheduled payments. Any of these events may start the limitation period running.

Home Foreclosures: 5.3.4 What Is the Effect of Expiration of the Statute of Limitations on the Underlying Debt?

As discussed above, expiration of the statute of limitations can be an affirmative defense to a judicial foreclosure or a basis to enjoin a non-judicial sale. Aside from these defensive uses, expiration of a limitation period may also serve as a ground to remove a mortgage as an encumbrance on the homeowner’s property. Like many aspects of the relationship between statutes of limitations and mortgages, the availability of this option is heavily dependent on the peculiarities of each state’s property laws.

Home Foreclosures: 12.2.4 Statute of Limitations After the Loan Maturity Date

When a mortgage loan reaches its contractual maturity date, the effect is much like acceleration. Any balance remaining unpaid is due immediately, and the borrower has no contractual right to pay off the debt in installments. If an unpaid balance remains at the scheduled maturity date, the lender must commence foreclosure before the applicable limitation period expires.

Home Foreclosures: 12.4.2 Notices of Change of Loan Ownership and Servicing Rights of Junior Mortgages

Investors buy and sell second mortgages that have remained inactive for extended periods. The failure to inform borrowers of these transfers of ownership contributes to borrowers’ expectations that there is no need to take action regarding an ongoing payment obligation. During long periods while a loan remains dormant, borrowers may try to contact someone for information about the loan’s status, yet find themselves in the dark.

Home Foreclosures: 12.7 Defenses and Claims Based on State UDAP Statutes

Federal and state laws impose affirmative obligations on owners of second mortgages and their servicers to disclose to borrowers important facts about their accounts, and to do so on a regular basis. These include disclosures of changes of loan ownership and servicing rights, as well as details about the current status of an account. If loan owners and servicers provided the ongoing disclosures required by TILA and RESPA, borrowers would rarely find themselves blindsided and overwhelmed by the sudden appearance of a zombie second mortgage.

Fair Debt Collection: 16.3.1 Nature and Advantages of a UDAP Claim

Every state has passed at least one law protecting consumers from deceptive sales practices.390 These statutes, most of which were passed in the late 1960s and early 1970s, are typically referred to as “Little FTC Acts,” “Consumer Protection Acts,” or “UDAP” (unfair and deceptive acts and practices) statutes. They are often interpreted to prohibit unfair or deceptive practices by debt collectors.

Home Foreclosures: 12.4.4a FDCPA Claims Related to Second Mortgages

The Fair Debt Collection Practices Act (“FDCPA”) prohibits a wide range of unfair and deceptive practices by debt collectors.112 NCLC’s manual Fair Debt Collection provides a comprehensive analysis of practices prohibited and remedies available under the FDCPA.113 The Fair Debt Collection manual also analyzes related state

Home Foreclosures: 12.5.1 RESPA

The important set of Regulation X rules132 applicable to a wide range of mortgage servicer activities that went into effect in January 2014 apply to junior mortgages as long as they secure loans for closed-end credit.133 These include the rules requiring mortgage servicers to adhere to general standards in their operations.134 The standards require, inter alia, that servicers adopt policies and procedures to ensure that borrowers receive t

Home Foreclosures: 12.5.2 Government Sponsored Enterprise (GSE) Loans

Fannie Mae and Freddie Mac have created extensive loss mitigation guidelines that servicers of GSE loans must follow.142 If a mortgage loan is owned or guaranteed by a GSE, the servicer must review the borrower for the GSE loss mitigation options when the loan is in default. However, some of the major GSE options do not apply to junior mortgages. Advocates need to check the applicable GSE servicing guide to determine the extent to which each option is limited to first lien mortgages.

Home Foreclosures: 12.5.3 FHA, VA, and RHS Loans

Three federal agencies insure home loans, FHA, VA, and RHS.160 These agencies insure junior mortgages in limited circumstances.161 Typically they insure certain home improvements loans and loans originated by nonprofits that can take a second lien position.162 The agencies’ major modification programs typically require that the modified loan retain a first-lien position.163 This is true, for example,

Home Foreclosures: 12.6 Contract-Based Claims and Defenses

Efforts to resurrect long-dormant second mortgages can be opposed with contract-based defenses and claims. One approach is to focus on the requirement of most mortgages that the foreclosing party comply with applicable law as a condition to enforcement of the obligation. As discussed in NCLC’s Mortgage Servicing and Loan Modifications treatise,172 the GSE standard security instrument contains such a requirement. TILA and RESPA are applicable laws.

Home Foreclosures: 12.8.1 Introduction

Equitable defenses to foreclosure may be available when a second mortgage has lain dormant with no communication to the borrower for years. The borrower may be able to raise equitable claims against a servicer who emerges as housing values increase to try to collect on the mortgage after failing to provide periodic statements or any notifications regarding the debt for several years.

Home Foreclosures: 12.8.2 General Principles of Laches

The laches doctrine recognizes that foreclosure is an equitable remedy.187 The defense applies when protracted inaction in enforcing the equitable remedy of foreclosure has worked to the disadvantage of the borrower who acted in reliance on that inaction.188 Laches focuses on the inequity of enforcement of the mortgage in view of the particular circumstances of the borrower and the property.189 Two elements must coalesce for laches to apply.

Home Foreclosures: 12.8.3 Unreasonable Delay in Exercise of a Legal Remedy

In the case of a foreclosure of a zombie second mortgage, it is often not difficult to establish the delay element. The doctrine of laches does not assume that there is a fixed time that is appropriate for bringing a claim. Rather, it looks at whether the claimant took all reasonable steps under the circumstances to assert its rights.192

Home Foreclosures: 12.8.4 Prejudice or Harm to the Borrower

The prejudice or harm aspect of laches is likely to present more challenges to the advocate, and a creative approach can be helpful. The determination of prejudice is fact-specific, and no fixed standards define the term. As a general rule, the prejudice element looks at whether the party asserting the harm changed position in a way that would not have occurred if the claimant had acted promptly to enforce its claim.193 In the foreclosure context, borrowers must show that the loan owners’ delay placed them in a less favorable position.

Home Foreclosures: 12.8.5 Laches and Non-Judicial Foreclosures

Courts have authority to enforce equitable principles to bar exercise of a contractual power of sale in a mortgage or deed of trust.205 Although applied most often as a defense to a stale judicial proceeding, laches can also be the basis for declaratory relief, for example, to obtain a declaration that a mortgage lien is discharged.206 Finally, laches can be applied to reduce the amount of a monetary claim.

Home Foreclosures: 12.9 State Law Foreclosure Requirements

A second mortgage holder should be held to the same standards of compliance with applicable state foreclosure laws as a first mortgagee. A second mortgagee must have a valid mortgage with the borrower and be able to prove that the borrower defaulted, prove the amounts alleged owed by the borrower, and follow the applicable foreclosure procedures.