Presentation on theme: "1 Judicial Foreclosures and Deficiency Judgments in Tennessee: Recent Developments Anthony J. McFarland Cynthia N. Sellers."— Presentation transcript:
1 Judicial Foreclosures and Deficiency Judgments in Tennessee: Recent Developments Anthony J. McFarland Cynthia N. Sellers
2 Residential Foreclosure Statistics - U.S. Sources: U.S. Foreclosure Trends and Foreclosure Market Statistics, RealtyTrac; Mortgage Bankers Association www.ForeclosureHelpandHope.org;www.ForeclosureHelpandHope.org 1 in every 411 housing units nationwide received a foreclosure filing in June 2010 Every three months, 250,000 families enter into foreclosure One child in every classroom in America is at risk of losing his/her home because their parents are unable to pay their mortgage
3 Residential Foreclosure Statistics - U.S. Source: www.ForeclosureHelpandHope.org 43% of American households spend more than they earn each year 52% of employees live paycheck to paycheck Nearly 42% of all American households do not have enough in liquid financial assets to support themselves for at least three months 46% of American households have less than $5,000 in liquid assets, including IRAs
4 Residential Foreclosure Statistics - TN Sources: U.S. Foreclosure Trends and Foreclosure Market Statistics, RealtyTrac 1 in every 693 Tennessee housing units received a foreclosure filing in June 2010 Tennessee was #11 nationwide in foreclosure activity counts in June 2010 (3,981) Average Tennessee foreclosure sale price: $100,069 Top Tennessee counties for foreclosure activity: #1 – Shelby#2 - Davidson 7 of top 10 Tennessee counties for foreclosure activity located in Middle Tennessee
5 Residential Foreclosure Statistics Source: Craig Focardi, CMB, Research Director, TowerGroup’s consumer lending division, cited by Dona Dezube, “Heroic Homerownership”, Mortgage Banking, (June 2006) Most lenders and investors do not make money on foreclosures Losses generally range from 20¢ to 60¢ on the dollar Lenders typically lose $50,000 or more on one foreclosure
6 Commercial Foreclosure Observations Federal Reserve Bank’s July 2010 “Beige Book”: Commercial real estate markets “remain weak”, and “continue to struggle in all twelve Districts”. “The outlook for commercial and industrial real estate across the Districts ranged from further declines in activity to slow growth.” Atlanta District: “Vacancy rates were high across the District and contacts witnessed downward pressure on rents. The outlook for the rest of the year remained negative.” “I have always felt that when the commercial levee breaks, there will be a cascade of properties that drive prices to levels that we have not seen in a very long time, if ever.” -- Chris Toci, executive director, Capital Markets Group, Cushman & Wakefield of Arizona, Inc.
7 Public Chapter 834: Changes to Notice Requirements Adds new section to Title 35: § 35-5-117* Applies only to foreclosure of “owner-occupied residence” Must send notice of right to foreclose 60 days prior to first publication of notice of a foreclosure sale
8 Public Chapter 834: Changes to Notice Requirements Notice can be sent via regular mail and is effective upon deposit with the Postal Service Must be sent to both the principal debtor and any co-debtor or guarantor (if address is different) Must be sent in a separate mailing Notice must contain certain language, set out in the statute (Tenn. Code Ann. § 35-5-117 (f)(4)) The fact that the notice has been given must be set out in the Notice of Foreclosure and recited in the deed conveying title after foreclosure.
9 Public Chapter 1001: Post Foreclosure Deficiency Judgments Adds new section to Title 35: § 35-5-117* Applies to commercial and owner-occupied foreclosures alike Reaffirms creditor’s right to a full deficiency judgment However, judgment equals total indebtedness prior to sale plus costs of the foreclosure and sale, LESS the “fair market value” of the property “at the time of the sale”
10 Post Foreclosure Deficiency Judgments: Prior Law Absent fraud, irregularities or illegal conduct, most courts accepted the foreclosure sales price as the amount of credit to apply towards the debt Some courts applied a “grossly inadequate” test Practically, very difficult for a debtor to undermine the foreclosure sales price
11 Public Chapter 1001: Post Foreclosure Deficiency Judgments Rebuttable presumption that the sales price = FMV at time of sale Debtor can overcome presumption by proving by a “preponderance of the evidence” that the property sold for “materially less” than the FMV
12 Public Chapter 1001: Post Foreclosure Deficiency Judgments If the debtor prevails in challenging the adequacy of the foreclosure sales price, the deficiency judgment shall be the total debt prior to the sale plus costs of foreclosure and sale less the FMV at the time of sale as determined by the court Generally, an action to enforce the deficiency judgment must be brought within two (2) years of the date of sale (excluding any bankruptcy petition period)
13 Open Issues Under the New Act Is it even worth seeking a deficiency judgment? How do you determine “Fair Market Value”? Will a contemporary appraisal become a prerequisite to every foreclosure? Can you include the appraisal cost as a “cost of the foreclosure and sale”?
14 Open Issues Under the New Act (cont’d) What value should your appraiser provide you – “fair value”, “liquidation value” or “investment value”? Is “fair value” the same as “Fair Market Value”? Can you provide your appraiser with assumptions for purposes of arriving at a “fair value”? What assumptions should you provide? Is your appraisal discoverable in litigation?
15 Open Issues Under the New Act (cont’d) How does “materially less” than FMV compare to “grossly inadequate”? How much is “materially less” than the fair market value? Based on comparison of size of debt, or value (or sales price?) of property Based on a percentage of value, or actual dollars? “Material” to whom – lender or debtor? Can inclusion of the appraisal cost result in a sales price “materially less” than FMV?
16 Real World Example Commercial property purchased in 2007 for $3,000,000, with an associated mortgage of $2,850,000 after a $150,000 down payment. Loan goes in default with a principal balance of $2,500,000. Foreclosure, appraisal and sale expenses total $10,000. Property sells at foreclosure for $1,757,000 (70% of principal loan balance plus expenses). Few, if any, sales of comparable properties have occurred in the past year. $1,757,000 / $3,000,000 = 58.5% of original purchase price.
17 Real World Example Did the property sell for “materially less” than FMV or not? Would your answer change if the debtor was independently wealthy? Would your answer change if the lender were a relatively small community bank rather than a large national bank?
19 Possible Compliance Options - Loan Documents Have borrower waive the procedure created by the statute (such waiver may not be enforceable) Address “Fair Market Value” in loan documents Provide that the FMV of the property will be the sales price at any foreclosure Provide that a percentage of the debt will be FMV
20 Possible Compliance Options - Loan Documents Address “materially less” in the loan documents Provide that any difference between FMV and the foreclosure sales price that is less than “X”% is considered immaterial Require borrower to deliver documents regarding net worth, value of all property (including appraisals), sale/marketing of collateral upon demand (including those generated on his/her behalf)
21 Other Possible Compliance Options Premium put on workouts Proceed against guarantors first Reduce your debt to judgment before foreclosure Have debtor undertake sale obligations first Conduct an auction foreclosure
22 Conclusion Ultimately, the new notice provisions are a trap for the unwary and careless, not for the knowledgeable and attentive. The new post-foreclosure deficiency judgment provisions, however, are a potential nightmare for loan underwriters, an opportunity for workout specialists, and a source of new business for the plaintiff’s bar.