foreclosure

Borrower sues mortgage lender for violation of attorney preference statute

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Court of Appeals holds lender’s foreclosure action is not a compulsory counterclaim

South Carolina’s Court of Appeals ruled on a noteworthy foreclosure case* in August.

The facts are interesting. In 1998, the borrowers signed a fixed-rate note in the amount of $60,400 at a 9.99% interest rate secured by a mortgage on property in Gaston. The note contained a balloon provision requiring payment in full on July 1, 2013.

On June 27, 2013, days before the note matured, the borrowers brought an action against the lender alleging a violation of South Carolina Code §37-10-102, the Attorney Preference Statute. The complaint alleged that no attorney supervised the closing, that the loan was unconscionable, and that the borrowers were entitled to damages, attorney’s fees and penalties as provided in the Consumer Protection Code. In addition, the complaint asserted a claim under the Unfair Trade Practices Act. All the allegations were premised on the same alleged violation of the Attorney Preference Statute.

The borrowers immediately defaulted on the note, and the lender filed an answer asserting no counterclaims. At trial, the jury found for the lender. About a year later, the borrowers sent a letter by certified mail to the lender requesting that it satisfy the mortgage. The letter included a $40 check to pay the recording fee for the mortgage satisfaction. The lender refused to satisfy the mortgage and returned the check.

The lender brought the present action for foreclosure in October of 2016. The borrowers asserted defenses of res judicata, laches, unclean hands, waiver, and setoff, but admitted no payments had been made on the loan after July 1, 2013. The borrowers then sought a declaratory judgment that the lender held no mortgage on the property, or, alternatively, that the mortgage was unenforceable. They alleged that the lender was liable for failing to satisfy the mortgage and for noncompliance with the Attorney Preference Statute. The lender denied the allegations and argued that the claims under the Attorney Preference Statute were time-barred.

Both parties sought partial summary judgments before the master-in-equity. The master granter the borrower’s motion and denied the lender’s motion. He ruled that the mortgage was satisfied and instructed the lender to file a satisfaction.

On appeal, the lender argued the master erred by finding its foreclosure action was a compulsory counterclaim in the 2013 action. The Court of Appeals agreed, holding that the two claims arose out of separate transactions. The Attorney Preference claim arose from the closing, while the foreclosure arose from the borrower’s default, according to the Court. The Court reversed the master’s award of partial summary judgment to the borrower and remanded the case for further proceedings. Because of its decision on this issue, the Court determined that it did not need to address the remaining issues.

*Deutsche Bank National Trust Company v. Estate of Houck, South Carolina Court of Appeals Opinion 5844, August 11, 2021.

CFPB issues proposed rule to ban foreclosures until 2022

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The Consumer Financial Protection Bureau (CFPB) issued a notice on April 5 proposing an Amendment to Regulation X that would require a temporary COVID-19 emergency pre-foreclosure review period until December 31, 2021, for principal residences. This amendment would, in effect, stall foreclosures on principal residences until January of 2022. The press release, which can be read here, requests public comments on the proposal through May 10, 2021.

The press release states nearly three million borrowers are delinquent in mortgage payments and nearly 1.7 million will exit forbearance programs in September and the following months. The rule proposes to give these borrowers a chance to explore ways to resume making payments and to permit servicers to offer streamlined loan modification options to borrowers with COVID-related hardships.

Under current rules, borrowers must be 120 days delinquent before the foreclosure process can begin. Anticipating a wave of new foreclosures, the CFPB seeks to provide borrowers more time for the opportunity to be evaluated for loss mitigation.

Many provisions of the CARES Act apply only to federally backed mortgages, but the CFPB seeks, by this proposed rules change, to set a blanket standard across the mortgage industry.

SC Supreme Court may have eradicated HOA foreclosures

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Third party bid was held grossly inadequate

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On December 18, the South Carolina Supreme Court decided a case that will force homeowners’ association attorneys to carefully consider whether they will initiate foreclosure actions in the future*. This blog discussed the Court of Appeals case last April. You can read that blog here but the very short version is that the Court of Appeals did not upset any apple carts and left the foreclosure process status quo.

The facts are simple. Mr. and Mrs. Hale bought their home in Richland County in 1998 for $104,250. In the next 20+ years, they built up $60,000 in equity, and the property now has a fair market value of $128,000.

In 2011, the Hales fell behind on their homeowners’ association payments. The HOA initiated a foreclosure complaint seeking a sale of the property in exchange for $566.41 in principal and interest. The Hales defaulted.

Interestingly, after the affidavit of default was filed, the HOA sent the Hales a bill for $250, which they paid. Also interestingly, the law firm representing the HOA sent the Hales a notice that the lien had been satisfied.

Three months after the HOA filed the affidavit of default, the Master entered a default judgment, calculating the amount due to the HOA as $2,898.67, comprised of $250 in principal, $80.87 in interest, $542.80 in litigation costs and $2,025 in attorneys’ fees. The property was sold at auction two weeks later to a third party, Regime Solutions, LLC.

This is the Hale’s explanation of the facts in their motion to vacate the sale:

“When we were served with the lawsuit to take away our home, I put the papers in a drawer and forgot about them. Some time after that, we received a bill from the HOA asking for the $250.00. I paid that without a problem. In November, we received a letter from the law firm of (the HOA) telling us that the Lien had been Satisfied…I thought that everything was OK after that. The next thing I know, someone is knocking on my door telling me that they bought my home and that me and my family were being evicted.”

The Master denied the Hales’ motion and adopted the position that the “effective sales price” was $69,040, consisting of the successful bid plus the balance of the mortgage. In his order, Richland County’s Master-in-Equity, Joseph Strickland, stated that “the practice of homeowners’ association foreclosures would effectively be eradicated if (the Hale’s) position came to bear.”

The appeal was handled by the law office of my friend, Brian Boger, a Columbia lawyer and well-known champion of consumers’ rights. The appeal argued that the $3,036 bid “shocked the conscience” and violated equitable principles.

The Court of Appeals affirmed.  Chief Justice Lockemy dissented, saying:

“A buyer at a judicial sale in which a senior lienholder is not a party takes the property subject to that lien, but the buyer is not responsible for its payment. The evidence in this cases shows (the Hales) have continued to pay the mortgage for a home for which they have no title because they will suffer the severe consequences of default if they do not. The buyer (Regime) has paid nothing. I do not believe it proper to give a judicial sale buyer credit for assuming a debt which is not legally required to pay.”

The Supreme Court seemed truly troubled by Regime’s business model. In a footnote, the Court stated that Regime either allows the senior mortgagee to (re)foreclose on the property or quitclaims the property to the original homeowners for a hefty fee. The Court seemed to be disturbed by Regime’s failure to assume mortgages in the ordinary course of its business.

The Court discussed two methods to calculate whether a bid price is so grossly inadequate as to shock the conscience. The debt method is a ratio comparing the total debt on the property to the fair market value. Under the debt method, Regime would have paid 53.9% of the value of the property. The equity method is a ratio comparing the winning bid price to the equity in the property. Under the equity method, Regime would have paid 4.9% of the value of the property.

The Court stated that our courts have not established a bright-line rule for what percentage “shocks the conscience”, but that a search of our jurisprudence reveals our courts have consistently held a price below ten percent definitely does.

The Court stated that when the foreclosure purchaser assumes the mortgage, the debt method should be used. But the court rejected the blind application of the debt method because of the facts in this case. Under these facts, the Court stated, applying the equity method is the only logical option.

The Court expressed concern about the foreclosure proceeding itself, stating that it morphed in to “a proxy to capitalize on a small debt”. The Court said it was especially troubled by Regime’s participation in a foreclosure proceeding to accommodate its business model of leveraging a nominal debt to secure an exorbitant return from homeowners who fear the prospect of an eviction. The Court said, “We do not countenance the improper use of foreclosure proceedings by the HOA, its attorney or Regime.”

The decision should not be read as a shift toward providing relief to homeowners despite their own poor choices, according to the Court. The Court said the case would have turned out very differently if the HOA and Regime had pursued “foreclosure in the normal course and made affirmative efforts to assume the Hales’ mortgage”. And that under the “unique facts of this case”, the Hales have demonstrated Regime’s bid was grossly inadequate.

I am quite sure my foreclosure lawyer friends are deciding how to change their practices in light of this case. I’m not sure the Court is correct about the normal course of foreclosures. I also doubt that the facts in this case are unique.

Justice Beatty concurred in a separate opinion, stating that he would adopt the equity method generally. That approach would certainly provide more clarity. Justice Beatty also said, “homeownership is the quintessential American dream. Purchasing a home is the largest investment that most South Carolinians will make. To allow the hard-earned equity to be confiscated by a bidder’s minimal investment is unconscionable. This is especially troubling when the foreclosure sale is the result of an HOA lien.”

For many reasons, I am glad today that I am not a foreclosure lawyer!

*Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Supreme Court Opinion 27934 (December 18, , 2019).

HOA foreclosures are being challenged on multiple levels in SC

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The HOA won in a recent Court of Appeals case

In January, I blogged about a Federal class action lawsuit filed in Charleston seeking to invalidate non-condo foreclosures by owners’ associations. You can read that blog here but the short version is that the suit challenges foreclosures on the grounds that these non-profit corporations don’t have the power to create liens for unpaid assessments prior to obtaining judicial judgments. Condominium associations established through the Horizontal Property Regime Act have statutory authority to create liens, but the power of non-condo projects is created by restrictive covenants. We’ll have to wait and see how that suit turns out, but if the plaintiffs there are successful, foreclosure practice will change drastically in South Carolina.

gavel house

Our Court of Appeals decided a case* on April 4th that could have made drastic changes in another way. In fact, Richland County’s Master-in-Equity, Joseph Strickland, stated in his order that “the practice of homeowners’ association foreclosures would effectively be eradicated if (the Plaintiffs’) position came to bear.”

This appeal was handled by the law office of my friend, Brian Boger, a Columbia lawyer and well-known champion of consumers’ rights. The appeal argued that the $3,036 successful bid “shocked the conscience” and violated equitable principles. The parties agreed that the home was valued at $128,000. There was a mortgage balance of $66,004, leaving equity of $61,996. The Hales did not argue that there were irregularities in foreclosure process, but instead argued that the low bid should have encouraged the Master to use his gavel to “do equity”.

Comparing the successful bid to their equity using the “Equity Method”, the Hales argued that the bid amounted to 4.8% of the fair market value of the property. The HOA argued, using the “Debt Method”, that the bid must be added to the senior mortgage balance to judge its sufficiency because the successful bidder would have to pay the senior mortgage to have good title. In this case, using the Debt Method, the bid amounted to 54.94% of the fair market value. The Court of Appeals agreed that the Debt Method was the proper method for considering a senior encumbrance in a foreclosure.

The Court found no South Carolina cases that expressly weighed the two methods of judging a bid, but pointed to prior cases that considered the amount of a senior mortgage in the determination and found a 3.15% bid sufficient. One reason the Court of Appeals prefers the Debt Method is that it will result in “fewer set asides”.  In other words, the Court of Appeals is not interested in upsetting the foreclosure practice applecart at this point.

Justice Lockemy dissented, stating that he thought it improper to give a judicial sale buyer credit for assuming a debt it is not legally required to pay. He said the Court’s decision could create a perverse circumstance where a judicial sale bidder purchases property for a de minimis amount simply to capitalize on rental revenue until the senior lienholder forecloses. The majority called this argument a solution in search of a problem because there was no evidence that the successful bidder in this case was engaged in such a scheme and because the successful bidder must satisfy the mortgage to obtain clear title.

Foreclosure practice in South Carolina remains the same…for now.

* Winrose Homeowners’ Association, Inc. v. Hale, South Carolina Court of Appeals Opinion 5549 (April 4, 2018)

SC Supreme Court Crafts New Foreclosure Law

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foreclosureFailure to file bond does not render appeal moot

In a case decided on November 4*, the Supreme Court of South Carolina interpreted S.C. Code §18-9-170** in a way that may come as a surprise to dirt lawyers.

The case arose from the foreclosure of an HOA lien. The absentee owner defaulted in the foreclosure and did not appeal. Instead, he moved to vacate the resulting sale. When his motion to vacate was denied, the master issued a deed to the successful bidder, and the defaulting owner appealed without filing an appeal bond.

The Court of Appeals dismissed the appeal, holding that the property owner failed to comply with the statute that would have stayed the sale, and, therefore the master-in-equity’s deed rendered the appeal moot.

The Supreme Court reversed and remanded the case to the Court of Appeals for a decision on the merits.

Real estate practitioners have likely read §18-9-170 to mean that failure to file a bond in this situation renders the appeal moot. This case indicates that the failure to file a bond may not be an issue. If no bond is filed, the master may issue the deed to the successful bidder, but the appeal can proceed. By implication, if the appeal is successful, then the purchaser’s deed may be set aside. The Court specifically stated that the master’s deed does not moot the appeal, and the appellate court may reach the merits.

For title examiners and the lawyers who rely on title examinations, this case means that whether or not an appeal bond has been filed, we must pay attention to a case on appeal.

* Wachesaw Plantation East Community Services Association, Inc., v. Alexander, Appellate Case No. 2012-21340, Opinion 27585

** S.C. Code §18-9-170 reads in relevant portion: “If the judgment appealed from directs the sale or delivery of possession of real property, the execution of the judgment shall not be stayed unless a written undertaking be executed….”

Mobile Home Claims Continue

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What do a hurricane, a tornado and a redneck divorce have in common?
Somebody’s fixin’ to lose a mobile home!

Trailer Park Treehouse

That joke may be attributable to Jeff Foxworthy, Lewis Grizzard or some other Southern comedian.  Regardless, a large number of South Carolinians lost mobile homes during the economic downturn, most often as a result of foreclosures rather than the disasters in the joke. Foreclosures uncover title issues that lead to title insurance policy claims. Because our office continues to see mobile home claims on almost a weekly basis, this reminder might be in order for residential real estate practitioners.

When sales and mortgages of real estate including mobile homes are closed, titles to the mobile homes should be retired, and ALTA 7 series endorsements should be issued.

If a title examination reveals a recorded Manufactured Home Affidavit for Retirement of Title Certificate, it is advisable to request from the Department of Motor Vehicles a letter confirming that the title has been placed on the DMV’s list of retired vehicles.

If no Manufactured Home Affidavit has been filed locally, then follow our statutory process to retire the title. The Affidavit requires the owner to:

  • install the home on the real property;
  • remove the wheels, axles and towing hitch;
  • attach proof of ownership (the deed);
  • attach a copy of the certificate of occupancy; and
  • pay the recording fee.

Surrendering the certificate of title to the DMV requires:

  • a filed copy of the Manufactured Home Affidavit from the ROD;trailer duck
  • the original certificate of title with either releases of liens or consents of secured parties;
  • a copy of the most recent tax receipt for the manufactured home; and
  • payment of the DMV fee.

When the title is retired, it is safe to issue an ALTA 7 series endorsement. Your title company will appreciate compliance with these guidelines.

And here’s a practice tip. Our former boss, Nancy Booco, always said, “If it looks like a mobile home, it probably is one.”