Uniform Laws Update provides information on uniform and model state laws in development as they apply to property, trust, and estate matters. The editors of Probate & Property welcome information and suggestions from readers.
The Model Negotiated Alternative to Foreclosure Act—A Safe Harbor for Working Out Home Mortgage Loans After Default
Ten years ago, residential housing markets across the United States collapsed. The questionable residential lending practices that existed in the early 2000s combined with an economic recession to produce unprecedented numbers of mortgage defaults, which in turn led to the collapse of financial firms that invested heavily in mortgage-based securities. Mortgage loan servicers were overwhelmed, many borrowers sought frantically to renegotiate terms, and state court systems were flooded with foreclosure filings. To most observers, the housing crisis revealed serious flaws in our legal and financial systems.
In the fall of 2011, the Uniform Law Commission (ULC) formed a study committee to assess possible improvements to the law governing residential foreclosures. The following spring the ULC appointed a drafting committee, and after a three-year process the Uniform Home Foreclosure Procedures Act (UHFPA) was approved in July 2015.
The UHFPA, a comprehensive law governing foreclosures of residential properties, has proven difficult to enact. Despite the involvement of mortgage lenders and consumer advocates on the drafting committee, and the inclusion of terms sought by advocates from both sides, the final product has no strong supporters. Current state laws vary widely, and local interests on all sides are wary of proposed changes. As a result, UHFPA has not yet been adopted in any jurisdiction.
Carving Out a New Model Act
UHFPA was an ambitious project and may still be considered by state legislatures in the future. But the act contains provisions that are not controversial, and potentially popular with advocates for both lenders and borrowers.
Last summer, the ULC Executive Committee approved a recommendation from the Joint Editorial Board for Uniform Real Property Acts to carve out Article 5 of UHFPA on Negotiated Transfers and offer it as a stand-alone act. The result is the Model Negotiated Alternative to Foreclosure Act (MNAFA).
MNAFA is a short and simple statute that allows a lender and borrower to voluntarily negotiate a workout arrangement (sometimes called a “cash for keys” transaction or a “deed-in-lieu of foreclosure”). If the negotiated agreement meets the statutory requirements, it falls within a legal safe harbor and has a predictable and enforceable effect for both parties.
To qualify under MNAFA, an agreement between the lender and borrower must include all the following terms:
- the proposed transfer must result in full satisfaction of the borrower’s obligation;
- all persons owning an interest in the mortgaged property, other than a security interest, must agree to the transfer;
- all parties with a security interest in the mortgaged property (or all parties to a foreclosure action concerning the mortgaged property, if an action has been commenced) must receive notice of the agreement and not object within 20 days of receiving the notice; and
- the agreement must state it is made under the state’s MNAFA statute.
The agreement can include other terms negotiated and agreed to by the lender and borrower.
If no objection is received from an interested party, the transfer of mortgaged property to the secured lender has the following effects:
- the borrower’s obligation is discharged in full;
- all the borrower’s rights in the property are transferred to the lender (except that the borrower may retain a right to continue occupying the property under terms incorporated into the agreement);
- the lender’s mortgage is discharged;
- any subordinate interests are terminated unless preserved under other law; and
- the right of any borrower to redeem the property is terminated.
When more than one person holds a security interest in mortgaged property, the interests are prioritized according to existing state law. MNAFA then provides the following rules:
- A security interest higher in priority than the interest owned by the lender who is party to the agreement (that is, a “senior interest”) is unaffected. The lender takes possession of the property subject to the senior interest.
- A security interest lower in priority than the interest owned by the lender who is party to the agreement (that is, a “junior interest”) is extinguished, unless the junior lienholder objects. A junior lienholder who objects can redeem the property—in other words, tender an amount equal to the obligation to be satisfied under the negotiated agreement and thereby receive the benefit of the proposed transfer.
If there are multiple junior lienholders, MNAFA provides a procedure for each lienholder to exercise an option to tender funds in reverse order of their priority.
Of course, even without MNAFA lenders and borrowers are free to negotiate workout arrangements under other law. MNAFA provides the additional advantage of extinguishing junior liens so that all parties to the agreement can be certain of its final effect, even without a formal foreclosure proceeding.