Connecticut has passed a new law, An Act Concerning an Optional Method of Foreclosure ( the ”Act”), effective as of January 1, 2015, providing another option in foreclosure cases, in addition to the traditional standard remedies of strict foreclosure and foreclosure by sale. The new remedy is Foreclosure By Market Sale. There are important points for both lenders and homeowners to be aware of about the Act.
The Act applies only to first mortgages on residential (one to four family dwellings) properties (“Property”) where the amount due on the mortgage, including interest, late changes and any other fees secured by the mortgage, exceeds the appraised value of the Property. In such cases, the Act requires, prior to institution of any foreclosure action, that the lender give notice to the homeowner by registered or certified mail advising the homeowner of its rights under the Act to seek a foreclosure by market sale. The Act gives the homeowner 60 days to respond to the notice and to start a negotiating process with the lender to see if an agreement can be reached as to a foreclosure by market sale. If the homeowner does not respond to the notice within the 60 day period, the lender is free to proceed with normal foreclosure proceedings, after filing an affidavit of compliance with the notice provisions.
If the homeowner does give notice to the lender of electing to proceed with negotiations with the lender as to the possibility of foreclosure by market sale, the homeowner and lender discuss the mortgage situation to see if agreement can be reached between the parties as to how to proceed. If, at any point, the lender finds anything unacceptable in the pre-foreclosure process, it may file an affidavit with the court to that effect, and the lender may then proceed with a regular foreclosure.
If the parties agree to proceed with pursuing a mutually acceptable foreclosure by market sale, the Act provides a process to go through, which starts with the lender having a written appraisal of the fair market value of the Property performed, and then both parties agreeing to a listing agreement. If, after listing, the homeowner receives an offer to purchase the Property that is mutually acceptable to both parties, the homeowner executes a contract for sale with the purchaser which is contingent upon completion of the foreclosure by market sale process in the Act. This additional process involves the lender commencing a foreclosure action, and then filing a Motion For Judgment of Foreclosure By Market Sale. The court appoints a person to make the sale. As part of the judgment, the court sets “right of first refusal” law days for subordinate lien holders. This gives a subordinate lien holder a right to purchase the property at the price in the purchase and sale contract, in inverse order of priority. The person appointed by the court makes the sale of the Property. The proceeds of the sale are brought into court and, if not sufficient to pay the full amount of any mortgage or lien foreclosed, the court may render a deficiency judgment against any party liable.
From a lenders point of view, it is difficult to see what advantage this new option would have as compared with the existing remedies of strict foreclosure or foreclosure by sale. There is the question of how long the listing period would extend. There is no guaranty of receiving any acceptable offer, especially because buyers will be aware that this is a foreclosure market sale, and so will not have an incentive to bid a high price. This process can potentially turn out to be time wasted for the lender. The lender may well have to start the regular foreclosure process from the beginning after all the time spent on the foreclosure by market sale procedure.
From a homeowners’ point of view, the new Act provides an opportunity to use the foreclosure law to obtain some possibly significant extra time before the entry of a judgment of foreclosure without paying the mortgage, and then requiring the lender start a standard foreclosure. This means extra time for a defaulting homeowner at no cost. However, the homeowner must also be aware that the lender can opt out of the process at any point 60 days after giving the notice required by the Act.