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The Process
In Massachusetts, there are two methods by which a
mortgage may be foreclosed:
- the lender may enter and take possession of the
property by several alternative means, in which case the lender's ownership can
become final after three years, and
- the lender may complete a non-judicial sale under a
power of sale clause.
The first method, entry and possession, is seldom used
as the primary means of foreclosure. Instead it is used as a backup in case of
technical error in non-judicial sale procedures. The first method is
essentially a variation on the strict foreclosure theme. The second method, a
foreclosure sale under a power of sale clause, is the usual procedure. The
power of sale foreclosure takes place out of court. In spite of the fact that
the power of sale foreclosure is conducted out of court, it is nevertheless
customary to file a lawsuit before attempting such a sale in order to make sure
that the federal Soldier and Sailor's Relief Act does not apply to the
borrower's situation.
Entry and Possession Procedures
A lender can foreclose in Massachusetts by lawfully
taking possession of the premises and then waiting three years for title to
become final in the name of the lender. Lawful recovery of possession can be
done by several alternative means:
- file a lawsuit and obtain a court order giving the
lender possession,
- enter peaceably and take possession or
- obtain the borrower's proper consent to entry.
The first method consists of filing a lawsuit to recover
possession. The lender's lawsuit must allege that there was a breach of a
condition in the mortgage, such as failing to pay the loan. If so, the court
may render a conditional judgment giving the lender possession. The court will
also grant a writ of entry which will permit eviction of the borrower. However,
the borrower may recover possession within two months by paying the amount due
under the mortgage or correcting any other breach of the mortgage. Unless the
borrower can come up with enough money to pay off the mortgage within three
years, however, the lender's ownership becomes final and the borrower's right
to redeem the property is cut off.
The second method the lender can use to recover
possession lawfully is for the lender to openly and peaceably enter the
mortgaged premises. Two witnesses must swear that the entry was proper. Once in
possession, the lender has to wait three years for full title.
The third method the lender can use to recover
possession is to obtain the borrower's consent. The borrower must sign and
record a written memorandum to the mortgage deed. The recording must be done
within 30 days from the signing. Once again, the lender must wait three years
for full title under this method.
During the time the lender obtains possession pending
foreclosure, the lender must account for rents and profits. The lender may
deduct the costs of reasonable repairs and improvements.
Power of Sale Clause Foreclosure
In Massachusetts the usual method of foreclosure is
through sale under a power of sale clause in the mortgage. The sale must be
conducted in accordance with the requirements specified in the power of sale
clause. Notice of the foreclosure must be published once a week for three weeks
in a newspaper of general circulation in the town where the land is located.
The first publication must be at least 21 days before sale. Notice must also be
sent by registered mail to any owner whose interest was recorded as of 30 days
prior to the sale. The actual date of mailing must be at least 14 days prior to
the foreclosure sale.
In Massachusetts there is an exhaustive list of
potential addresses to which the lender must mail the foreclosure notice, the
purpose of which is to make sure the borrower gets a copy of the notice, if it
is at all possible. Initially the lender should mail the notice to the address
found in the registered land records, or if none is found, then to the last
known address appearing in the lender's records, or if none is found, then to
the address on the deed or probate petition. If the address is still not found,
then it should be mailed to the last address to which a tax bill was sent any
time within the previous three years. If that address can not be found, then to
any address shown in the deed or documentation for any other land owned by the
same owner. Nevertheless, there is no requirement for the borrower to actually
receive the notice, merely for the lender to make a diligent effort to locate
the borrower. Notice should also be sent to any junior lien holders.
The actual sale must be conducted at the date, time and
place specified in the notice. The sale will be made to the highest bidder.
Within 30 days after sale, the person selling the property at foreclosure must
record a copy of the notice of sale and an affidavit that the foreclosure sale
was properly conducted. Any lien or encumbrance on the property that was not
part of the mortgage that was foreclosed on and not included in the
auctioneer's bargain remains intact and can affect the title to the property
after the foreclosure sale. If there is any money left from the foreclosure
sale after paying off the lender, the surplus goes to the borrower. A
proper sale prevents the borrower from exercising any right to reclaim the
property through redemption.
If a suit in equity is filed to clear up problems that
could result from the Soldier and Sailor's Relief Act of 1940, service is
considered sufficient if the above described notices were published 21 days
before the return day and mailed 14 days before the return day for the lawsuit.
The return day is the day by which the lawsuit must be answered.
Deficiency
If the foreclosure sale proceeds are not enough to pay
off the lender, then the borrower is liable for any deficiency. However, the
statutory notice of intention to foreclose must have been sent at least 21 days
before the sale. Furthermore, the affidavit that the sale was complete must be
on record 30 days after the sale. Otherwise, no deficiency can be obtained. The
statute of limitations on deficiency judgments is two years after the date of
foreclosure or two years after the loan payments were accelerated and the
loan's unpaid balance was made due entirely. If there was no foreclosure sale
under a power of sale clause, and the lender attempts to sue the borrower on
the theory that the value of the real estate the lender obtained at foreclosure
was less than the balance due on the loan, then the borrower has a right to
bring a suit for redemption within one year after recovery under such a
judgment.
Redemption
The basic rule in Massachusetts is that the foreclosure
under a properly conducted power of sale clause cuts off the borrower's right
to redeem. The sale must be conducted in good faith and the lender must use due
diligence to comply with the statutory requirements for a power of sale
foreclosure, as previously outlined.
Interestingly, however, the borrower may use the right
of redemption as a vehicle for slowing down a foreclosure sale, even though the
lender is attempting to foreclose under a power of sale clause, which normally
cuts off the right of redemption. A borrower may bring a suit to redeem the
property before the first notice of sale is published. Such a suit will delay
the foreclosure sale. The court must determine the amount due under the
mortgage on which conditions remain unperformed such that if the amount is
paid
or the conditions are performed, the borrower will have
a right to redeem. The court can specify a time period and manner for payment
or performance, and if the borrower complies with the court's specified
conditions, the borrower will have a right to discharge the mortgage and
receive a decree regaining possession- If the borrower fails to perform by the
time and in the manner specified by the court, the lender can proceed to mail
and publish the foreclosure notices (14 days and 21 days, respectively) and
then hold the foreclosure sale.
The Massachusetts Uniform Fraudulent Conveyance Act
and Bankruptcy
The Massachusetts bankruptcy courts have shown a
particular willingness to invalidate foreclosure sales. Because of this
propensity, numerous additional steps should be taken if a lender forecloses in
Massachusetts. The U.S. bankruptcy courts for Massachusetts have ruled that all
the statutory procedures outlined above may be insufficient to guard against
invalidation of the foreclosure sale if the borrower files bankruptcy after the
foreclosure. If the sale took place for less than market value, it may be ruled
to be a fraudulent conveyance, under section 548 of the Bankruptcy Code, which
commands that reasonably equivalent value must be obtained before the
foreclosure sale will be left undisturbed by the bankruptcy court. Reasonably
equivalent value is market value.
The invalidation of a foreclosure at less than market
value can also be accomplished through the application of the Massachusetts
Uniform Fraudulent Conveyance Act. Therefore the lender should take further
precautions by appraising the property at the time of foreclosure, by
advertising it in the real estate section of the newspapers, by mailing a
notice of the sale to anyone who expressed an interest in buying the property,
and by notifying real estate brokers in the immediate vicinity that the
property is for sale. All of these steps should be taken if the lender wants to
be sure to avoid future trouble from the borrower's bankruptcy petition after
the sale, or a suit to set the sale aside under the Massachusetts Uniform
Fraudulent Conveyance Act. |
