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Friday, June 6, 2014

Connecticut Adopts Optional Method of Foreclosure Known as Foreclosure by Market Sale

         Effective October 1, 2014 Connecticut General Statutes Section 49-24 was amended to allow mortgage lenders holding first mortgages on residential properties by agreement with mortgagors aka borrower occupants to enter into a foreclosure by private market sale. Presumably the main impetus for this optional method of foreclosure is the recognition that foreclosure auctions do not attract the highest and best sales prices for foreclosed properties. I applaud the Connecticut legislature's attempt to solve this problem, but in reading how the process will work under the statute I find it convoluted and unattractive to mortgagors, prospective purchasers and their real estate agents. Foreclosures by sale via auction are usually ordered in cases where there is equity in the property for the mortgagor and/or subsequent lienholders on the property. It appears to me that this foreclosure by market sale is supposed to be attractive to mortgagors in this position, but not underwater mortgagors since unlike a short sale it does not provide for any debt forgiveness. If this amendment was pushed through by lenders as an alternative to short sales it clearly is not and hopefully mortgagors who could benefit from a short sale will not choose this option instead.
     My first comment in looking at the process established by this amendment is that a distressed mortgagor with equity in his property seeking to sell his property would be better served selling it himself with the help of a real estate agent. If a foreclosure is started and additional time to sell is needed the mortgagor should first file for foreclosure mediation. If more time is needed beyond mediation than he can file an answer and special defenses to the foreclosure with the assistance of an experienced foreclosure defense attorney. The process starts out with a preforeclosure notice to mortgagors of the availability of a private market sale foreclosure. The process requires the mortgagor to contact a real estate agent to assess the feasibility of listing the property for sale, but the listing cannot take place until lender does an interior appraisal and agrees to listing of property for private mortgage sale. The mortgagor will be required to sign as part of the private market sale agreement that they forgo their right to participate in foreclosure mediation which to me is a red flag that this is a lender friendly drafted amendment to the statute with the ulterior motive of keeping files out of mediation which the legislators who approved it were probably not even aware of. The foreclosure action will be commenced after receipt of a mutually acceptable contract and the statute attempts to fast track the foreclosure judgment which includes the approval of the contract as well as the fees and expenses of the sale including buyers anticipated expenses. Based on my experience with short sales the required participation of lenders in this process will delay the closing considerably beyond what the drafters of this amendment planned. The court requirements for buyers will require them to incur more attorney fees than a normal sale. I see the reality of this process adding more time than the average buyer will want to wait for the closing to take place with additional fees that they will not want to incur. I also forsee major problems with any buyer trying to finance their purchase under this process. Which of course means the pool of buyers will be reduced to mostly cash buyers looking for bargains which defeats the purpose of a private sale over an auction in the first place. In fact I do not see this new option bringing any new pool of buyers offering higher prices for foreclosed properties. The amendment also gives subordinate lienholders with right of refusal law days in inverse right of priority. This adds an additional uncertainty to process for buyers that they may lose property to subsequent lienholder so all their time and effort will be wasted despite mechanism for eventually getting back their approved anticipated costs, but possibly not actual costs. The problems outlined above will also make this option not attractive for agents who will likely advise both sellers and buyers against it. This is magnified by the fact that once sale is approved by court a "person" presumably not the borrower is appointed to make the sale and transfer title. Consequently, the seller the client of the agent is out of the picture and the agent will be dealing with possibly a court appointed attorney similar to a Committee for a foreclosure auction. Something most real estate agents would prefer to avoid and adds additional complexity for a purchaser's lender in the unlikely event there is one if they have to process and review for underwriting. I have only highlighted some of the drawbacks of this new foreclosure option and my overall opinion is that it is not a good option for a distressed mortgagor trying to sell their home due to many practical problems with process established in the statute and lack of true benefits to the mortgagor. As stated in bold above there is a much better and simpler way for  a mortgagor to buy the time necessary to sell their property them self which will attract a larger pool of interested buyers and consequently a higher purchase price.