In the years since the housing crash and the subsequent wave of foreclosures that rocked the Bay State’s housing market, both legislators and judges have treated the state’s foreclosure laws as if they were written on an Etch A Sketch. This week, the state’s Supreme Judicial Court has laid down another decision which may finally bring some clarity both to homeowners fighting keep their homes, and to banks and lenders afraid of putting a foot wrong when it comes to completing a foreclosure.

The case, U.S. Bank National Association v. Schumacher, revolved around a homeowner who challenged the bank’s right to foreclose on his property. The bank made an error in the materials it sent him notifying him of his right to cure the foreclosure, incorrectly identifying the lender who held the mortgage at the time of the notice.

Importantly, however, the homeowner raised this argument in the course of an eviction proceeding, after the foreclosure itself had already been completed. Homeowners challenging foreclosures at the eviction stage have become more common in recent years, attorneys say, and often they’ve found a sympathetic hearing from Housing Court judges. The cases have been a thorn in the side for lenders and their attorneys, who’ve spent months completing foreclosures only to find themselves right back at the beginning when a procedural error has been uncovered at the eviction stage.

“In the past several years, there’s been an assault on years of practice in the foreclosure area … it’s been a seismic change,” said Ed Bloom, partner at Boston’s Sherin & Lodgen. “A lot of lenders aren’t going forward with foreclosure because they and their counsel aren’t quite sure how to do it anymore.”

A Slippery Slope

Attorneys for homeowners have argued that mix-ups in the banks’ notices make it difficult for homeowners to know who to contact. With many homeowners facing foreclosure unable to afford an attorney, the eviction proceedings may be the first chance they get to appear in front of a judge and address these issues.

When a foreclosure is overturned during an eviction, however, it can cause long-term problems for selling the property. The Real Estate Bar Association (REBA) and others have argued that if a homeowner is allowed to overturn a foreclosure after it’s been completed – because of an error not in the foreclosure documents themselves, but in the numerous notices and correspondence banks are required to send homeowners before and during the foreclosure – it becomes difficult to sell the properties. Title insurers will be reluctant to insure any property with a foreclosure in its history, they argue, since examiners will have no way to determine from the materials filed at the registry of deeds whether a foreclosure could be thrown out and the property revert back to the homeowner.

The Supreme Judicial Court’s decision gave lenders some relief on that score, with the court ruling that a technical error in the notices sent to the homeowner about their right to cure the default wasn’t enough to invalidate the whole foreclosure after the fact.

Applying A Little Common Sense

But that doesn’t mean that foreclosures are immune from challenge once a case reaches the eviction stage. “Rather, to defeat the eviction, the defendant must prove that the violation of [the right-to-cure law] rendered the foreclosure so fundamentally unfair that she is entitled to affirmative equitable relief, specifically the setting aside of the foreclosure sale ‘for reasons other than failure to comply strictly with the power of sale provided in the mortgage,’” Justice Ralph D. Gants wrote in a concurrence explaining the court’s reasoning.

The decision will provide a great deal of clarity for lenders, making it easier for banks to clear up some of the backlog of distressed properties, said Fran Nolan, co-chair of REBA’s legislation committee and attorney director at Newton-based Harmon Law.

“Anything is still challengeable. But I think the analysis is going to differ if the borrower does it three days before the foreclosure starts, as opposed to three months after it ends,” Nolan said.

While he’s familiar with many cases where borrowers have challenged bank’s compliance with the right-to-cure law, far fewer of them have raised issues so substantive that it would render the foreclosure “fundamentally unfair,” Nolan said.

“Practically speaking, you start to say, ‘All right, how did that [error] prevent you from avoiding the foreclosure?’” he said. For example, an error like the one in the Schumacher case – where the name of the mortgage holder on the notice was incorrect – would have little practical impact on the borrower if they were provided with correct information to contact the servicer. Servicers are generally the ones who manage the foreclosure process for banks, and have the power to issue loan modifications and inform the borrower of the status of their case. 

Email: csullivan@thewarrengroup.com