On May 20, 2009 Michigan enacted a series of laws having the intention of curbing the number of foreclosures and thus, gives owners an opportunity to modify their loans and keep their homes.
Public Acts 29, 30 and 31 of 2009 (House Bills 4453, 4454 and 4455), which became effective July 5, 2009, overhauls the foreclosure process regarding principal residences (i.e., homestead properties) and in particular, imposes new notice requirements and loan modification guidelines upon mortgage lenders desiring to foreclose. The law expires July 4, 2011 and has no effect on foreclosures commenced July 4, 2009 or earlier.
Lenders or servicers cannot begin a foreclosure by advertisement without first satisfying several new notice requirements within the purview of a 90-day pre-foreclosure/foreclosure avoidance process. Initially, the lender or servicer must serve a written notice on the borrower (by certified mail, return receipt requested and restricted delivery) and which must contain all of the following information:
- The reason why the loan is in default and the current amount due;
- Information regarding the mortgage holder, servicer or their designated agent, including the name, address and telephone number, and also the name and contact information for a designated contact person having the authority to modify the loan;
- A list of housing counselors approved by MSHDA or HUD;
- That the borrower has the right, within 14 days after the written notice is mailed, to request a meeting with the designated contact person and, if the borrower further requests, to have a housing counselor participate in the meeting. Alternatively, the borrower may contact a housing counselor, who would then, within 10 days thereafter set up the meeting with the designated contact person;
- If the borrower requests such a meeting, that foreclosure proceedings cannot begin until 90 days after the written notice is mailed to the borrower;
- If the parties agree to modify the loan and the borrower complies with the modified terms, there will be no foreclosure;
- If the lender or servicer decline to modify the loan where a borrower is otherwise eligible, the lender or servicer must foreclose by judicial action, rather than by advertisement; and,
- Notice of the borrower’s right to legal counsel and contact information regarding State Bar of Michigan’s Lawyer Referral Service and of similar services provided by local bar associations.
Within 7 days after mailing the written notice, the lender or servicer must also publish this same information once in a local newspaper (i.e., a newspaper published in the county where the residence is located). If no such paper exists, then the lender or servicer must publish the notice in a newspaper published in a neighboring county. And rather than including a potentially long list of approved housing counselors, the publication must provide MSHDA’s website address and telephone number.
It is also worth noting that the law does not require in-person meetings to discuss loan modifications with a designated lender representative unless, apparently, the borrower requests it. Some lenders have already announced programs to conduct these meetings by telephone.
Loan modifications reached under the new law must follow and are mirrored after FHA workout guidelines, which bases eligibility on the borrower’s housing related debt (principal, interest, taxes, insurance and association fees) being equal to or less than 38% of gross income. To accomplish this, interest rates can be adjusted to a floor of 3 percent for at least 5 years, up to 20 percent of loan principal can be deferred, late fees can be reduced or eliminated, and the repayment period cannot exceed 40 years from the date of modification. If the borrower cannot meet these criteria, declines an offer of modifications that comply with the above, or defaults on any modified loan agreement within a year, the lender or servicer may then proceed with a foreclosure by advertisement under the previous law.
Borrowers may seek injunctions in court to stop a foreclosure by advertisement if their lender or servicer has violated the notice requirements and/or modification provisions of the new law. From a practical standpoint, however, buyers often lack the financial resources necessary to hire counsel and pursue an injunction. Local legal aid services offer a viable option under those circumstances.
For lenders and real estate professionals, it is too soon to tell what impact the new laws will have on lender criteria in the troubled real estate market. There is optimism that the delays created by these laws will produce more loan modifications than foreclosures, perhaps even before a homeowner default. But skeptics argue that these requirements stand only to put off inevitable foreclosures, increase the number of judicial foreclosures and lender costs, and further burden the housing market because lenders would be more likely to impose greater restrictions upon the already limited number of available buyers.
If you need help evaluating your obligations as a lender under the new Michigan foreclosure law, or if you have questions regarding your overall real estate investment strategy, please contact Randy Barker, a member of Berry Moorman’s Real Estate Practice Group.