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Residential Mortgage Foreclosures: Procedures & Practicalities

In stark contrast to the recent drop in interest rates is the rise in Pennsylvania mortgage foreclosures, especially in Philadelphia. While attributable to Pennsylvania having one of the largest populations of homeowners, the amount of foreclosures is also likely related to the growing availability of non-conventional mortgage loans (i.e., 3-7 year Adjustable Rate, Interest Only, Reverse, and 103%) to consumers who ordinarily would not able to afford their current residence. Predicated on a belief that one's income will rise and rates will stay at record lows, these new loan products may give rise to foreclosure when that optimism clashes with unanticipated reality. 

With the passing of The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("Bankruptcy Reform Act"), Congress limited consumer's access to traditional bankruptcy protections. When faced with a client's mortgage delinquency, effective counsel can no longer safely make a referral to local bankruptcy counsel.

To be effective in an era where real estate investment opportunities, mortgages and Sheriff's Sales make the local paper as often as the rise in tech stocks did in the mid-90's, counsel must have more then a cursory understanding of the foreclosure procedures and practicalities:

Acceleration/Demand Notice(s)-Acts 6 & 91: Prior to filing a complaint, where the original principal balance is $50,000 or less on a residential, occupied dwelling, the foreclosing lender must send formal ("Act 6") notice to the mortgagor of its intent to foreclose. If the mortgagor is less than $60,000 and 24 months delinquent on the mortgaged, primary residence and the loan is not insured by the Federal Housing Administration ("FHA"), ("Act 91") notice must also be sent advising the debtor of the ability to cure the arrearage through the Pennsylvania Homeowner's Emergency Mortgage Assistance Program ("HEMAP").

Act 6/91 (combined) Notice must be sent (proof is not needed of receipt) to the mortgagor at the property and mailing address, if different. The foreclosing lender must wait 30 days from the date of notice prior to proceeding. Act 6/91 Notice conveys jurisdiction and likewise, defects in its strict statutory form or service arguably renders the subsequent Action void ab initio (even if raised for the first time on appeal).

As a matter of ease, counsel prosecuting volume foreclosures should consider always serving Act notice(s) prior to any filing, but in doing so should be aware that unnecessary notice may render the lender estopped from contesting its defects or requirements.

Complaint in Mortgage Foreclosure-Pa.R.C.P. 1141: The complaint must include: (1) the parties to, place of recording and date of the mortgage and any assignments; (2) a description of the subject land; (3) the names, addresses and interests of the defendants in the action, and, if the real owner is not named as a defendant (required if available), a statement that the real owner is unknown; (4) an averment of default; (5) an itemization of and a demand for judgment on the delinquency; and (6) if a federal lien exists, the United States of America must be named as a defendant.

Prior to commencing, counsel should review the Act 6/91 Notice and contemplate including an averment in the complaint that Notice has been complied with or is not necessary for the reasons above mentioned. An effective response to a jurisdictional defense alleging defective Act 6/91 Notice should be this averment having been admitted or deemed admitted.

Service of Process-Pa.R.C.P. 400: All counsel should always be careful in effectuating service of original process, reinstating every 30 days after each unsuccessful attempt. Given the nature of a foreclosure, one should be conscious that service requires repeated, aggressive attempts preceded by significant investigation as to the current whereabouts of often evasive defendants.

Motions for Alternative Service (service by posting on the premises) will often be required but proof of multiple attempts at personal service and ongoing investigation is necessary to support it being granted. In the case of a foreclosure on vacant, estate property, the court will often require alternative service via posting and publication upon the "Known and Unknown Heirs".

In anticipating these problems, proactive counsel not only begins process after receipt of a (updated) title search, but also immediately orders a "Skip Trace" after the first unsuccessful attempt at service.

Default Judgment-Pa.R.C.P. 237: Similar to other actions, the foreclosure default judgment can be entered after service followed by proper (in English and Spanish in many counties) Notice of Praecipe to Enter Default Judgment ("10 Day Notice"). However, foreclosures have a very high rate of these default judgments and counter-intuitively, counsel should not be over-eager in entering default until service upon all defendants has been perfected to avoid the complexity of interest running at different rates.

Litigation: Generally, an uncontested foreclosure will take between 5-8 months prior to Sheriff's Sale. Starting from Act 6/91 Notice, 99% of delinquencies either result in default judgment, pay-off or reinstatement, Forbearance or Mortgage Modification Agreement, Deed-In-Lieu of foreclosure, or bankruptcy. Of those remaining, the majority of those 1% are litigated solely for purposes of delaying Sheriff's Sale and do not survive summary judgment. To lenders and even their counsel, litigation is both unprofitable and an unusual burden.

To combat client frustration surrounding debtor capably delaying foreclosure in the face of an evident delinquency, counsel should engage litigation similarly to the previously discussed traditional foreclosure process: with a dichotomous sense of urgency and routine. Instead of further delaying the process by being combative, counsel should look to resolve the matter amicably at the earliest opportunity. If unavailable, devices that reduce delay should be employed: Requests for Admissions instead of traditional discovery requests, amended complaints instead of responses to Preliminary Objections, Motions for Summary Judgment predicated on stipulations and (non-Nanty-Glo prohibited) affidavits instead of depositions, waivers of attorneys fees or reduction of contested delinquency amounts, and even requests for an early settlement conference.

Deflect, move forward and pacify instead of engaging: the goal of the foreclosing lender should first be obtaining money or only then if unavailable, judgment and Sheriff's Sale. Protracted litigation is a loss to everyone (the foreclosure representative who has monthly quotas, counsel who is literally rated and sometimes fined by the client based on timeliness, and the debtor who has limited funds for legal fees which would best be applied elsewhere). Be creative: if Summary Judgment is denied, take the deposition of debtor and then Petition for Reconsideration if appropriate.

If trial is inevitable or protracted litigation is the only avenue, continue to press for the possibility of resolution while continually advising the client of upcoming events, the possible need for settlement authority, and the requirement of a knowledgeable trial witness (not a local Branch Manager contacted the night before to "pose" as a Custodian of Records). In the end, narrow the issue(s) for the client and the court-avoid allowing the client to harp on arguably irrelevant, emotional issues (i.e., how many bankruptcies have been files; the amount of time in default, or the demeanor of the mortgagor).

Sheriff's Sale: Pa.R.C.P. 3129: Strict compliance with varied and often technical county requirements must be met to conduct a timely and proper Sheriff's Sale. Prothonotarys (Office of Judicial Support in Delaware County) will not yield; counsel must adapt.

An accurate, post-judgment Writ of Execution and proper ("3129") notice of Sheriff's Sale is required to schedule and avoid potential challenges to Sale. A bring-down should be received in advance of the Sale to exhaustively serve required 3129 notice(s) 30 days prior to Sale to divest all parties and junior lien holders via the Sale. Only the attorney "on the Writ" can continue or stay the Sale, which can occur once for up to 100 hundred days without leave of court.

Important: A Sheriff's Sale can be mooted only by lender's counsel receiving funds to reinstate/pay-off the subject mortgage 1 hour prior to the Sale. There is no right to redeem a property sold at a Sheriff's Sale upon a Mortgage Foreclosure.

Generally, post-Sale challenges are only effective if raised prior to the Sheriff's Deed Poll being recorded. Thereafter, the Sale will only be Set Aside for fraud. However, a Petition to Set Aside filed prior to that recording should be granted if petitioner proves inequity would result if not granted. Inequity cannot be proven merely by alleging the loss of debtor's residence, but rather through compelling evidence of impropriety (i.e., defective service of original process, failure of 3129 notice, gross inadequacy of purchase price, "bid chilling"-concerted effort to reduce competitive bidding).

Ejectment: Pa.R.C.P. 1051: Sheriff's Sale merely effects a divestiture of junior liens and a transfer of title from debtor through the Sheriff to purchaser. It does not require the premises be vacated. Only through Ejectment can occupants of the new purchaser's premises be forced to leave ("Lockout"), which generally takes an additional 3-5 months if uncontested.

The Bankruptcy Reform Act: Practically, debtor's bankruptcy should stay all foreclosure or Ejectment proceedings until relief is granted to proceed. While the Act may render debtor's serial filing void, the Automatic Stay will likely be argued regardless (delaying matters further and creating a possibility of sanctions if a violation is proven). In fact, if bankruptcy is filed prior to Sale or Lockout, the relief Order itself must physically be presented to the Sheriff of some counties (including Philadelphia) regardless of whether that Order is reflected on the docket or of the impropriety of the bankruptcy filing.

In the 21st Century, a fundamental understanding of the Mortgage Foreclosure process and practicalities surrounding same will be as necessary as that same understanding of the Tort Action was in the last century and Maritime Law was in the century before. Unlike Maritime or Torts, strict compliance with procedure is as necessary (if not more) then the facts giving rise to the foreclosure. Consumers' and lenders'/creditors' counsel should focus their energies and clients' funds on a prompt resolution towards their clients goals (mostly revolving around time), which resolution should be understood as likely not considered by either side as a win or loss (merely the conclusion of a necessary but long process) as has been traditionally seen in those other areas of law.

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