• DYE CULIK PC | Consumer Protection Division

Massachusetts Passes Foreclosure Law, Requires All Mortgages be Evaluated for Loan Mods

Evaluation for Loan Modifications.

Most importantly, the new foreclosure law requires banks in Massachusetts to consider loans for modifications. These loan modifications must consider what is called the “net present value” of the house, a calculation that measures whether it is more profitable to do a loan modification (which it is in most cases) or foreclose (which is rare, and usually occurs where a homeowner has significant equity).

The loan modifications may reduce the interest rate, extend the term of the loan, and reduce principal, although principal reductions are not necessarily required.

In the event of a denial, homeowners are required to be provided with a summary of their financial applications so that they can dispute inaccurate information, and even make a counter-offer to their banks.

For homeowners with riskier loans, such as adjustable rates, high loan-to-value ratios, or interest-only terms, banks must actively solicit homeowners for loan modifications before sending the legally required notice that they have 150 days to cure the mortgage. If a homeowner does not respond within 30 days, the borrower’s right to cure the mortgage is reduced to 90 days. The lesson here is that it is always best to contact your bank early if you are having trouble paying your mortgage.

Loan Modification Terms.

There are no specific terms that the banks have to use to modify loans. But the new foreclosure law specifically uses the Home Affordable Modification Program (HAMP) as the standard by which loan modifications should be offered. The HAMP program allows for loan modifications with interest rates as low as 2%, extension of the mortgage as far as 40 years, and principal forbearances. These have become the industry standard for loan modifications.

What Happens if the Bank Violates the New Foreclosure Law?

The law appears to apply to everyone involved in foreclosing—banks, mortgage services, and even their foreclosure attorneys. It prohibits all of these from violating the law. Because the law is a consumer-protection law, a violation of it is expected to violate Mass. Gen. Laws Chapter 93A, the Consumer Protection Act. Failure to comply with the law should allow a homeowner to file a lawsuit challenging the bank’s compliance and asking for an injunction to prevent foreclosure.

Additional Regulations.

The new foreclosure law also gives the Massachusetts Division of Banks authority to create regulations governing how loan modifications must be provided and regulated. These regulations may help fill in the details about what sorts of terms the loan modifications should have.

All Mortgage Assignments Must be Recorded.

The bill requires banks to have all the assignments of a homeowner’s mortgage recorded in the county registry of deeds before sending a notice of foreclosure sale. This changes the previous rule which, to some people’s surprise, did not require that all assignments be recorded.

Second Mortgagees Don’t Have to Consent to Loan Modifications.

The new law also eliminates the need for second lienholders, such as banks with a second mortgage or equity line, to agree to the modification. Banks have sometimes used the existence of a second mortgage as a reason to prevent modification. Even though Massachusetts law was already clear on this point through case law, this additional clarification will help address banks’ failures to modify on this basis.

Creation of a Mediation Task Force.

The banks’ lobbyists managed to remove the requirement of foreclosure mediation, which makes banks and homeowners come to the table with a neutral party before foreclosure. Instead, the new Massachusetts foreclosure law sets up a task force to consider mediation.

What’s the Catch?

Is there a catch? Perhaps. First, as mentioned above, if a homeowner has significant equity in their home, it may be difficult to pass the net present value test. And second, the law is unclear as to whether so-called “investor restrictions” prohibiting foreclosure will still be able to prevent a homeowner from modifying their mortgage. It is important to note, however, that very few loans actually have investor restrictions prohibiting foreclosure.

This new foreclosure law provides first-in-the nation protections to homeowners, but, as with most new laws, it also leaves open some important questions. The law is certain to be controversial, and is expected to be extensively litigated. After the law becomes effective in November 2012, it is certain to cause even more controversy, but it is also expected to help many homeowners save their homes from foreclosure.

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