Don’t Let Your Foreclosure Property Investment Crumble

Seasoned real estate investors know the tricks of the trade when buying a foreclosed property – which starts with finding an ideal location at a good price and working with an experienced real estate attorney to navigate the process.  But after a recent decision by the First Circuit Court of Appeals, the federal appellate court with jurisdiction over Massachusetts, some investors will find themselves on the wrong side of the foreclosure process. Any foreclosure deal finalized after the 2019 decision in Massachusetts could be in jeopardy due to this new ruling, and investors state-wide may end up with a unmarketable title – meaning you won’t be able to sell your property.

“This poses a real problem for investors who were led to believe that the foreclosure was valid when many paid a cash investment and began new construction,” said Michelle Bessette Oliveira, Associate at PK Boston Law.  “Now, when the investor finishes construction and gets ready to sell the property, the process is stopped in its tracks when the closing attorney tells everyone that a new foreclosure is needed before the sale. That means that the seller could lose the buyer and will be left holding the property while the whole process starts over.” 

The problem started because the bank’s default notice to the mortgagor neglected to provide enough specifics about the time within which the mortgagor could reinstate the mortgage. The court found therefore that the borrower was not properly informed of the bank’s terms and conditions.  

The United States Court of Appeals for the First Circuit, Thompson v. JPMorgan Chase Bank, N.A., 2019 U.S. App. LEXIS 3989, determined that  mortgagees must comply with the requirements of both paragraphs 19 and 22 of the mortgage in order to invoke the statutory power of sale.

“Now, when the investor finishes construction and gets ready to sell the property, the process is stopped in its tracks when the closing attorney tells everyone that a new foreclosure is needed before the sale.

Any foreclosure deal closed on (or 3 years prior to) November 2018 in Mass could be in jeopardy due to this new regulation.

The defendant , JP Morgan Chase Bank, N.A., had sent out a notice to the borrower that informed them of their rights under “Paragraph 22” of the mortgage.  However, the mortgage in question also contained a “Paragraph 19”, which set time limits and conditions on the borrower’s right to reinstate, which in this case required that the reinstatement be made five days prior to sale.  The court held that since the bank did not inform the borrower that there were limits and conditions on their right to reinstate the mortgage, the notice was potentially deceptive, and thus, invalid.

Going forward, all notice of default letters will need to be closely scrutinized by the buyer’s attorney to ensure that they strictly comply with the mortgage terms.  If a default letter does not strictly comply with all of the mortgage terms, then it will be impossible to obtain title insurance, and thus, impossible to close on the loan as lenders will not want to assume the risk.  While there is a statute to assist with “faulty” foreclosures, MA Gen. Laws Ch. 244, sec. 15, it only applies to foreclosures in which the affidavit of sale was recorded three or more years ago. Therefore, if you are interested in purchasing a property that was foreclosed on within the last three years, it is important that you have an attorney review the foreclosure documents to ensure that the foreclosure notices were proper.

Since this case is so recent and the impacts only recently have been realized, foreclosure buyers who purchased within the past year, may have a problem.  However, there is a solution:

  1. Ask an attorney to review your title and more specifically the foreclosure documents;
  2. If the notices are not available, your best bet is to make sure the foreclosure is done again… especially if you do not plan to hold the property for a long period; or
  3. Hold the property for at least three years– until the statute of limitations expires and the issue self-corrects.

To answer any questions you have on foreclosure properties, email us at info@pkboston.com or call Michelle Oliveira at (508) 807-1131.  Check out more articles by Michelle here.