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Home Foreclosures: 16.3.4.2 General Notice Requirements

Because tax foreclosures in many states involve a multi-step process, the question arises as to the extent notice is required at the various stages. Many of the court decisions discussed here focus on the notice required at the initial tax sale, before the homeowner has lost all interest in the property.

Home Foreclosures: 16.3.4.3 Adequate Notice

In 1982, the Supreme Court invalidated the state of Indiana’s tax sale procedure on due process grounds because the statute did not provide for actual notice to a mortgage holder of a tax lien foreclosure, but instead permitted notice by publication.237 The Court ruled that when the mortgage holder’s name and address were identified in a publicly recorded mortgage, constructive notice by publication must be supplemented by notice mailed to the mortgage holder’s last known address or by personal service.23

Home Foreclosures: 16.3.4.5 Full and Adequate Opportunity to Protest

Due process also requires that the taxpayer be given a full and adequate opportunity to contest an assessment or the grounds for a tax sale before property can be taken by foreclosure.273 In states that permit the owner to enter into a payment plan to avoid a tax sale, this due process right involves an adequate opportunity to cure the unpaid taxes before the taxing authority proceeds with a tax sale.274

Home Foreclosures: 16.3.4.6 Asserting a Due Process Challenge

Invalidity of a sale for failure to comport with due process should be raised, if possible, before the end of any statutory period to object to the sale. However, expiration of the period to object generally should not preclude late constitutional challenges.277 An exception to this general rule would apply if the challenge involves an affirmative claim for violation of constitutional rights under 42 U.S.C.

Home Foreclosures: 16.3.4.8 Excessive Fines Clause

The Supreme Court has held that the Eighth Amendment Excessive Fines Clause is an incorporated protection applicable to the states under the Fourteenth Amendment Due Process Clause.313 In order to be subject to the limitations of the Excessive Fines Clause, a monetary sanction can arise in a civil proceeding, but its purpose must be at least partially punitive.314 Thus, it can be asserted that the loss of a homeowner’s equity in a tax sale proceeding is a monetary sanction that violates the Exce

Home Foreclosures: 16.4.1 Introduction

As discussed earlier in this chapter, the tax lien sale process in most states allows a homeowner to redeem the property for a specified period of time after a tax lien sale is completed.321 Generally, the homeowner must pay the entire amount of the lien including all unpaid taxes, penalties and interest, plus any costs or expenses incurred by the purchaser in order to effectuate redemption.322 Some states provide an extended time period to redeem for property owners if certain conditions apply.

Home Foreclosures: 16.4.2 The Redemption Amount

The amount of the redemption obligation may be at issue. The taxpayer may dispute interest, fees, costs and other add-ons to the base amount of the unpaid taxes.330 Advocates should carefully review requests by the tax sale purchaser for attorney fees, which are often sought if the state procedure requires a court action to foreclose the right of redemption.

Home Foreclosures: 16.4.3 Borrowing to Effectuate Redemption

One way to effectuate redemption is to borrow to pay necessary amounts. Typically, this would involve obtaining a mortgage and using the proceeds to pay off the tax sale purchaser or taxing authority. The new mortgage holder would obtain first lien position if there are no other (non-tax) liens or mortgages on the property. For older homeowners, options include the possibility of a reverse mortgage.336

Home Foreclosures: 16.4.4 Redemption in Bankruptcy

The amount necessary to redeem after a tax sale can also be paid as a secured claim in the chapter 13 bankruptcy process.343 The chapter 13 case must be brought before the debtor’s interest in the property has been terminated under state law.344 Several courts have held that because a tax lien is not consensual, the claim associated with the lien can be modified.345 Thus, for example, a debtor can pay the redemption amount with interest over the du

Home Foreclosures: 16.5 Fraud by Tax Sale Speculators

In many communities, there is a group of predatory speculators that seek to profit by manipulating the tax sale process. Some of these speculators buy many properties at tax sale. They then seek to lure unsophisticated homeowners to transfer their redemption rights in exchange for expensive or fraudulent sale-leaseback schemes or high-rate loans.360

Home Foreclosures: 16.6 Private Collection and Enforcement of Tax Liens

Sometimes taxing authorities contract out collection work to independent companies. The question arises whether these companies are governed by state and federal fair debt collection laws.363 Several courts have held that taxes are not “debts” within the meaning of the federal Fair Debt Collection Practices Act,364 but state debt collection statutes may have broader coverage.

Home Foreclosures: 16.7 Property Assessed Clean Energy (PACE) Tax Assessments

Property Assessed Clean Energy (PACE) programs provide financing for energy efficiency improvements to residential and commercial properties as an alternative to traditional loan products. These programs are authorized by local government entities under state legislation. PACE allows a property owner to finance specific home improvements by voluntarily contracting for the addition of an assessment to the property’s tax bill secured by a lien against the property. The local government entity funds the program by issuing bonds linked to homeowner tax payments.

Mortgage Servicing and Loan Modifications: 9.2.1 Overview

The Department of Veterans Affairs (VA) Home Loan Guaranty Program2 allows eligible servicemembers and veterans to purchase homes without any down payment at relatively low interest rates. The VA guarantees the loans made by private lenders.

Mortgage Servicing and Loan Modifications: 9.2.2.1 Generally

The VA requires servicers to consider all possible loss mitigation or alternative options before pursuing foreclosure.5 Generally, loss mitigation is pursued for loans that are sixty-one or more days delinquent, though borrowers facing imminent default may qualify for some options.

Mortgage Servicing and Loan Modifications: 9.2.2.2 Repayment Plan

A repayment plan is a written agreement between the borrower and the lender to reinstate a loan that is at least sixty-one days delinquent, by paying the regular monthly payment plus a partial payment toward the delinquency each month.34 The repayment plan must last at least three months in order for servicers to receive an incentive. The period of repayment is not limited. Plans may be renegotiated at any time.

Mortgage Servicing and Loan Modifications: 9.2.2.3 Special Forbearance

With a special forbearance, the mortgage holder agrees to suspend payments or accept reduced payments for one or more months.35 Loans that are at least sixty-one days delinquent are eligible. The period of forbearance is followed by repayment of the arrears in a lump-sum repayment or through a payment plan.

Mortgage Servicing and Loan Modifications: 9.2.2.4 Modification

Servicers of VA-guaranteed loans may offer borrowers several types of loan modification options. These options include a streamline modification, with reduced documentation requirements; a traditional modification; and the VA Affordable Modification.38 A lender may modify a VA-guaranteed loan by changing one or more of the terms of the loan, including the interest rate or term, and reamortizing the balance due.

Mortgage Servicing and Loan Modifications: 9.2.2.5 Compromise Sale

A compromise sale is a sale of the property to a third party for an amount that is insufficient to pay off the loan.57 The servicer must agree to release the lien in exchange for the proceeds of the sale. The servicer may file a claim with the VA to recoup the debt owed by the borrower. Borrowers are not required to submit a loss mitigation application or other financial information to qualify for this option if the loan is sixty days or more delinquent.

Mortgage Servicing and Loan Modifications: 9.2.2.6 Deed in Lieu of Foreclosure

A deed in lieu of foreclosure is a voluntary transfer of the property to the holder of the VA-guaranteed loan.59 Servicers are required to consider other workout options, including a compromise sale, before accepting a deed in lieu of foreclosure. Borrowers are not required to submit a loss mitigation application or other financial information to qualify for this option if the loan is sixty days or more delinquent. The deed in lieu of foreclosure will usually not be accepted if there are any junior liens on the property.

Mortgage Servicing and Loan Modifications: 9.2.2.7 Assumption

If a workout is unsuccessful, a lender may grant a borrower forbearance for a reasonable period of time to permit the sale or transfer of the property. For loans made on or after March 1, 1988, VA approval is needed for an assumption of the loan.61 Approval of the assumption releases the borrower from any future liability to the VA, including liability for any loss resulting from the default of the purchaser or subsequent owner of the home.

Mortgage Servicing and Loan Modifications: 9.2.2.9 Refinancing

A borrower may refinance a high-interest-rate loan at a current, lower rate with the VA’s interest rate reduction refinancing loan.74 The new loan could also be used to obtain a shorter term or a fixed interest rate or to fund energy efficiency improvements. However, the term of the refinance loan may not exceed the term of the original loan plus ten years, or thirty years altogether, whichever is shorter. If the current loan is delinquent or if foreclosure is imminent, VA approval is necessary to refinance.

Mortgage Servicing and Loan Modifications: 9.3.1 RHS Mortgages

Two different mortgage loan programs are administered by the Rural Housing Service (RHS), an agency of the United States Department of Agriculture (USDA).75 The Rural Housing Service was briefly named the Rural Housing and Community Development Service (RHCDS) and is the successor agency to the Farmers Home Administration (FmHA), which was eliminated in 1994 when the USDA was reorganized.