New laws designed to clarify and streamline parts of Indiana’s mortgage foreclosure process were enacted in 2012.
One change comes from Rep. Woody Burton, R-Whiteland, whose House Enrolled Act 1238 created a new section of Indiana code, “Determination of Abandonment for Property Subject to a Mortgage Foreclosure Action.” HEA 1238 took immediate effect. Another significant change comes from Sen. Joseph Zakas, R-Granger, whose Senate Enrolled Act 298 creates a new section of code negating the Supreme Court decision in Citizens Bank of New Castle v. Countrywide Home Loans, Inc. Some changes made by SEA 298 took immediate effect, and others become effective July 1.
SEA 298 creates a strict foreclosure statute, which applies to both residential and commercial foreclosures. John Waller, a partner with Wooden & McLaughlin, said that until now, courts relied on caselaw to solve disputes involving junior liens or second mortgages that were inadvertently omitted from the foreclosure process.
Waller said that when someone buys a house, he buys it with the expectation that it’s free and clear of liens, except for his own mortgage.
“That’s kind of what happens in this sheriff’s sale world. People come in to a sheriff’s sale and they think they’re buying it free and clear, that as a part of the foreclosure process, all these other liens are being flushed away,” Waller said. “Part of what this is about is what happens to the junior lien holder’s rights, and what happens to the buyer’s rights if, in fact, there’s this dangling lien out there that was missed in the foreclosure process,” Waller said.
In the Citizens case, Countrywide Home Loans, the original lien holder on a homeowner’s property, inadvertently omitted Citizens Bank of New Castle, the junior lien holder on the property, at foreclosure. Justice Frank Sullivan wrote that the two lien holders should have been given the practical equivalent of do-over – a second foreclosure in which Citizens Bank could redeem its subordinate interest in the property. That was the decision the trial court reached. But Sullivan wrote that the Supreme Court’s majority opinion “allows the omitted party to maintain its lien on the property (now owned by Fannie Mae) but provides that the omitted party’s lien is no longer subordinate to any senior lien. That is, the Court promotes the omitted party from a junior to the senior lien holder without having to pay anything to redeem its interest.”
Zakas, who is also a lawyer, took a cue from Sullivan’s dissent.
“I think Justice Sullivan kind of gave guidance on the thinking several of us had with regard to this situation,” Zakas said of title insurance companies and lawmakers.
Terry Farmer, managing partner at Bamberger Foreman Oswald & Hahn, said that he thinks title companies are overwhelmed with the volume of foreclosures, which results in more junior lien holders being missed at foreclosure.
“In this day and age, most title examiners are fairly error-prone on residential (foreclosures),” Farmer said. “You’re talking about a title search system that worked pretty efficiently when Vanderburgh County had 10 sheriff’s sales a month.”
At the March 29 Vanderburgh County monthly sheriff’s sale, 109 properties were up for bid.
Burton, who is a real estate broker, said that an increase in abandoned properties in recent years has put a strain on neighborhoods, where vacant homes attract crime and drive down property values for other properties.
He said the time from a lender’s initiation of foreclosure until it can access the property averages 422 days.
“Basically, as a realtor and a legislator on the banking committee, the last several years, we’ve been working very hard to try to fix this problem,” Burton said. “What we did is we passed a law that says there is a process with prima facie evidence to the court (to determine) that the property is abandoned.”
Burton said that under the new statute, if the court feels sufficient evidence exists to show that a property is abandoned, a post-complaint waiting period may be waived, shaving time off the overall foreclosure process.
Waller said he thinks that that the Legislature stopped short of fully clarifying one section of mortgage foreclosure law.
In Citimortgage v. Shannon Barabas, the Indiana Court of Appeals disagreed about the application of Indiana Code 32-29-83, which the majority found precluded Citimortgage’s claim on Shannon Barabas’ property because Citimortgage failed to intervene for more than a year after it first acquired interest in the property. But Judge Elaine Brown wrote in her dissent that the statute specifies that one-year period begins with the sale of the property, and the facts of the case show Citimortgage filed a motion to intervene and for relief from the amended default judgment within one year of sale.
The statute as amended by SEA 298 adds a clause that elaborates on that disputed one-year time frame, but Waller said the language that remains about a post-sale right of redemption is open to interpretation.
“In Indiana, before all this came down, I always relied upon the fact that the right of redemption ended upon sheriff’s sale. That was the conclusion to the foreclosure suit as well as transfer of title property,” Waller said. Without clarification, he wonders if the statute’s redemption language may be applied in a way the Legislature did not intend.
On April 13, the Indiana Supreme Court granted transfer in Citimortgage, and Waller said the high court will base its opinion on the law as it is was prior to changes made during the 2012 legislative session.
“It could use some more work, I think, and maybe the Supreme Court will clear it up for us,” he said.•