KERSEY v PHH MORTGAGE CORP.

1. HOT TOPIC LEGAL UPDATES KERSEY v. PHH MORTGAGE CORP.& COLORADO�S EXPEDITED FORECLOSURE BILL 1 WilliamWilliam

2. SPEAKERS 2 WilliamWilliam

3. PARTIES Plaintiff Entered into a $71,397.00 Federal Housing Administration (FHA) mortgage on May 3, 2002 Subsequently fell into arrears Defendant Noteholder Began foreclosure proceedings 3 Jon/JackieJon/Jackie

4. PROCEDURAL BACKGROUND October 14, 2009 � Complaint file in City of Richmond Circuit Court Seeking declaratory judgment on the basis that Defendant did not sufficiently comply with the terms of the Deed of Trust (DOT) to proceed with foreclosure November 18, 2009 � Matter to removed to U.S. District Court for the Eastern District of Virginia November 25, 2009 � Defendant filed 12(b)(6) motion to dismiss Failure to state a claim upon which relief can be granted January 21, 2010 � Entry of instant opinion 4 Jon/JackieJon/Jackie

5. CONTROVERSY Terms of DOT permit foreclosure in the event of default on payment only if the noteholder has complied with FHA regulations Specific regulation incorporated into DOT � 24 C.F.R. �203.604 Face to Face Interview Requirement 5 Jon/JackieJon/Jackie

6. 24 C.F.R. �203.604(b) �The Mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting before three full monthly installments due on the mortgage are unpaid. If default occurs in a repayment plan arranged other than during a personal interview, the mortgagee must have a face-to face meeting with the mortgagor, or make a reasonable attempt to arrange such a meeting within 30 days after such default and at least 20 days before foreclosure is commenced . . .� 6 Jon/JackieJon/Jackie

7. Defendant�s Arguments No Private Cause of Action Exemption 24 C.F.R. �203.604 and the National Housing Act (NHA) do not permit a private right of action and, therefore, the plaintiff cannot veil what is actually a forbidden federal claim for violation of federal regulations as a claim under state contract law 24 C.F.R. �203.604(c)(2) excepts Defendant from the provision in the DOT and the Defendant relied on HUD�s own interpretation of the regulation 7 Jon/JackieJon/Jackie

8. Private Cause of Action v. Contract Claim 4th Circuit acknowledges that the NHA does not expressly or implicitly create a private cause of action for violation of a federal regulation A separate theory of liability for breach of contract relating to the rights and obligations under the parties� contract Explicitly incorporated the HUD regulations into their agreement as conditions of the contract DOT manifests the �mutual assent to a bargained-for exchange of promises� 8 Jon/JackieJon/Jackie

9. Breach of Contract? Plaintiff admits defaulting on the note Is the plaintiff�s default a material breach of the contract excusing defendant�s obligation to perform (i.e. comply with 24 C.F.R �203.604) ? DEFAULT MATERIAL BREACH Contract specifically contemplates the arrears by imposing obligations on the defendant in the event of arrearage prior to foreclosing suggesting that falling into arrears is not a material breach 9 Jon/JackieJon/Jackie

10. 24 C.F.R. �203.604(c)(2) Exemption �[a] face-to-face meeting is not required if . . . the mortgaged property is not within 200 miles of the mortgagee, its servicer, or a branch office of either.� 10 Jon/JackieJon/Jackie

11. HUD�s Interpretation of Regulation Per HUD�s website, �the face-to-face meeting requirement referenced in 24 C.F.R �203.604 relates only to those mortgagors living within a 200 mile radius of a servicing office�. ISSUE: Is this agency interpretation afforded deference by the Court? 11 Jon/JackieJon/Jackie

12. Deference Analysis Interpretation of an Agency Statute Interpretation of an Agency Regulation Found in formal regulations (Chevron analysis) Found in informal materials; i.e. opinion letters, policy statements, and like materials (Christensen analysis) Any interpretation, whether formal or informal (Skidmore analysis) Is the regulation ambiguous? (Auer analysis) 12 Jon/JackieJon/Jackie

13. Meaning of �branch office�? Plaintiff Defendant A �branch office� is not limited to a servicing office per the plain language of the regulation �Branch office� should be limited to a �servicing office� because most staff at origination offices are not familiar with default servicing HUD�s interpretation of the term on its website indicates it is limited to a �servicing office� 13 Jon/JackieJon/Jackie

14. Is �branch office� ambiguous? Court holds that �branch office� is unambiguous and the plain meaning of the term should apply A place for the regular transaction of business or performance of a particular service located at a different location from the business�s main office or headquarters Mortgagee is obligated to have a face-to-face meeting with the mortgagor if the mortgaged property is within 200 miles of any branch office No deference afforded to HUD�s interpretation, plain language of the regulation controls 14 Jon/JackieJon/Jackie

15. CONCLUSION Plaintiff does not have a private federal cause of action under the NHA Plaintiff may bring a declaratory judgment action related to rights and obligations under the contract Defendant obligated to have, or reasonably attempt to have, a face-to-face meeting with plaintiff prior to commencing foreclosure based on plain language of the unambiguous regulation Defendants motion to dismiss is denied 15 Jon/JackieJon/Jackie

16. Overview of Colorado�s Expedited Foreclosure Bill On April 29, 2010, Colorado�s Governor signed the Expedited Foreclosure Bill (aka HB 10-1249) into law. It is effective for foreclosures filed after August 1, 2010 until August 1, 2014. The Bill allows for an expedited foreclosure on vacant and abandoned properties or when a grantor consents to an expedited process. 16 DeanneDeanne

17. Overview of Colorado�s Expedited Foreclosure Bill Holders of an eligible evidence of debt (�Holders�) can opt to use the expedited process and must do so at the initiation of the foreclosure. The expedited process will cut the time for processing a foreclosure in half. The expedited process is not applicable to judicial foreclosures. 17 DeanneDeanne

18. Colorado�s Foreclosure ProcessBackground Colorado is the only state to utilize a public trustee system. Colorado has 64 counties and 64 public trustees. Some are elected and some are appointed. Colorado�s foreclosure system is dictated by statute and fairly consistent state-wide. 18 DeanneDeanne

19. Colorado�s Foreclosure ProcessNon-Expedited A foreclosure in Colorado is initiated by the filing of a Notice of Election and Demand (�NED�) along with other required documents with the public trustee (�PT�) in the county where the property is located. The PT has 10 business days to open the package and record the NED. The foreclosure sale is set between 110-125 days from the date of recording of the NED for residential properties. 19 DeanneDeanne

20. Colorado�s Foreclosure ProcessNon-Expedited The foreclosure sale is set between 215-230 days from the recording of the NED for agricultural properties. The PT must mail two sets of notices and run four publications prior to the sale date. Sales can be continued for up to 12 months from the originally scheduled sale date. 20 DeanneDeanne

21. Colorado�s Foreclosure ProcessNon-Expedited � Rule 120 Because Colorado has public trustees conducting the foreclosures, in order to NOT violate borrowers� due process rights, Colorado has a �Rule 120� proceeding. The Rule 120 process requires a Holder of an indebtedness who seeks to foreclose a deed of trust to file a motion seeking an order authorizing the public trustee to hold a foreclosure sale. 21 DeanneDeanne

22. Colorado�s Foreclosure ProcessNon-Expedited � Rule 120 In order to obtain an order authorizing the sale (�OAS�), a Holder must file a motion with the district court in the county where the property is located. The �Rule 120 Motion� must declare the alleged default. Prior to May 5, 2010, the Notice of the Rule 120 Motion Hearing would be mailed to appropriate parties. After May 5, 2010, (due to another legislative change) Notice of the Rule 120 Motion Hearing must be mailed to appropriate parties AND posted on the property at least 15 days prior to the return hearing date. 22 DeanneDeanne

23. Colorado�s Foreclosure ProcessNon-Expedited � Rule 120 If no response to the Rule 120 Motion is filed, the Court will enter the OAS. If a response is filed, the Court will schedule a hearing. The only issues to be determined in a Rule 120 hearing are: 1) whether there is a reasonable probability that a default has occurred; and 2) if the borrower is protected by SCRA. The Rule 120 is an expedited proceeding. There is no discovery. 23 DeanneDeanne

24. Colorado�s Expedited Foreclosure Process A Holder must notify the PT by submitting an additional notice to the PT when filing the foreclosure that it is electing to use the expedited process. The expedited process can only be utilized for foreclosures on residential properties. A Holder cannot switch from non-expedited to expedited or vice-versa during the foreclosure. The foreclosure would have to be withdrawn and re-filed if a Holder wanted to proceed the other way. 24 DeanneDeanne

25. Colorado�s Expedited Foreclosure Process If the expedited document is received, the PT will set the sale date between 45-65 days from the recording of the NED. The Holder must provide the PT with an order for expedited sale no later than 30 days after the recording of the NED. To obtain the order for expedited sale, the Holder will file a motion for expedited sale pursuant to Rule 120 or other rule of civil procedure. 25 DeanneDeanne

26. Colorado�s Expedited ForeclosureProcess If the PT sets an expedited sale, the PT will mail one notice to all parties on the mailing list provided by the Holder no more than 25 calendar days after the recording of the NED. The Holder can provide an amended mailing list no later than 30 calendar days after the recording of the NED. If an amended mailing list is provided, the PT shall mail notices to all parties on the amended mailing list no later than five business days from the receipt of the amended mailing list. 26 DeanneDeanne

27. Colorado�s Expedited ForeclosureProcess If the notice is sent less than 21 calendar days prior to the sale date, the PT shall continue the sale for one week. The PT shall run 4 publications of the notice of sale. The sale may not be continued for more than four weeks. 27 DeanneDeanne

28. Colorado�s Expedited ForeclosureProcess The foreclosure shall be deemed withdrawn if the Holder: Fails to timely file a copy of the order for expedited sale; Fails to timely file a mailing list; Delivers an amended mailing list after the deadline 28 DeanneDeanne

29. Colorado�s Expedited Foreclosure Process The motion for expedited sale must state that: The Deed of Trust secures an eligible evidence of debt; The property has been abandoned or, In the alternative, the grantor of the Deed of Trust (borrower) REQUESTS the order for expedited sale; 29 DeanneDeanne

30. Colorado�s Expedited ForeclosureProcess The clerk of the court shall set a time for a hearing not less than twenty nor more than 30 days from the date of the filing of the motion. At least 15 calendar days prior to the hearing, notice of the hearing IN ENGLISH AND IN SPANISH shall be personally served on the grantor of the Deed of Trust or shall be posted in a �conspicuous place on the property.� Notice shall also be mailed as required by law. 30 DeanneDeanne

31. Colorado�s Expedited ForeclosureProcess The Court shall enter an order for expedited sale if: �Clear and convincing evidence� is presented proving the allegations in the motion and No appearance is made to oppose the motion. 31 DeanneDeanne

32. Colorado�s Expedited ForeclosureProcess An affidavit meeting the following requirements shall be prima facie proof of abandonment: Affidavit must be signed by and based upon the personal knowledge of either: The eligible Holder An agent of the eligible Holder The Sheriff of the county where the property is located A building inspector or other municipal or county official having jurisdiction over the property 32 DeanneDeanne

33. Colorado�s Expedited ForeclosureProcess The affidavit must state that the property is not actually occupied and that the signer has inspected the property on more than one occasion and on each occasion has determined that the property is abandoned. 33 DeanneDeanne

34. Colorado�s Expedited ForeclosureProcess The affidavit shall set forth AT LEAST TWO of the following supportive facts: Windows or entrances to the property are boarded up or closed off, or multiple panes are broken and unrepaired; Doors to the property are smashed through, broken off, unhinged, or continuously unlocked; Gas, electric, AND water service to the property have been terminated for a period of at least 30 days; 34 DeanneDeanne

35. Colorado�s Expedited ForeclosureProcess The affidavit shall set forth AT LEAST TWO of the following supportive facts (continued): The Police or Sheriff�s office has received at least two reports of trespassers on the property, or of vandalism or other illegal acts being committed on the property; or The property is deteriorating and is either below or is in imminent danger of falling below minimum local government standards for public safety and sanitation. 35 DeanneDeanne

36. Colorado�s Expedited ForeclosureProcess Photographic or other documentary evidence that demonstrates the supporting facts set forth in the affidavit shall be attached to the affidavit. A signed affidavit by the grantor of the Deed of Trust (borrower) requesting an order for expedited sale is prima facie evidence of the same. 36 DeanneDeanne

37. Colorado�s Expedited ForeclosureProcess - Drawbacks The requirement that two forms of proof of abandonment be provided is a difficult standard to meet. Further, the requirement that the election to proceed on the expedited track must be made at the initiation of the foreclosure will make it difficult for lenders and servicers to take advantage as they will need a reliable inspection (at a minimum) prior to sending foreclosure referral. The inability to switch from expedited to non-expedited foreclosure status is a significant detractor from using the expedited process. 37 DeanneDeanne

38. Colorado�s Expedited ForeclosureProcess - Benefits Benefits lenders, servicers and investors by reducing the foreclosure time. Benefits HOAs by reducing the number of unpaid HOA dues and reducing the time a vacant property sits as an �eyesore� to the community. Benefits code enforcement or other local government officials by reducing the blight, reducing the time in which illegal activities may occur in the property, reducing the time that the local government has to monitor and/or maintain the property. Benefits neighborhoods by decreasing vacancy time. 38 DeanneDeanne

39. Colorado�s Expedited ForeclosureProcess � Closing Remarks The process is not perfect, but is one of the first of many steps in the right direction in addressing a nationwide problem of vacant and abandoned properties. This Bill is the result of many groups and individuals on opposite sides of the fence working together to create workable solutions. 39 DeanneDeanne

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