REAL ESTATE TRANSACTIONS AND FINANCE
Fall Semester 2015
Statutory Redemption, Lien Revival, and Deficiency Judgments
Deeds in Lieu of Foreclosure, “Short Sales,” and Loan Modifications
Reading Assignments: Pages 630-635, 643-662, 796-824, and First Bank v. Fischer & Frichtel (link
to case on class website).
1.
As a policy matter, does it make sense to say that if the Mortgagor reacquires the property after
the foreclosure sale (as in Old Republic Ins. Co. v. Currie, p. 796), then the foreclosed mortgage and any
junior liens are revived? Why or why not?
This issue has become something of a cause for advocates of homeowners victimized by the mortgage
crisis. Many homeowners wanted to get loan modifications that would involve “principal reduction” (i.e.,
a voluntary decision by the lender to “write off” a portion of the debt, but the Federal Housing Finance
Agency (which oversees Fannie Mae and Freddie Mac in their conservatorship) would not allow Fannie
and Freddie to agree to principal reduction (thus, loan modifications under HAMP and HARP were limited
to deferral and reduction of interest, extension of loan terms, and the like).
As a result, some nonprofit organizations began buying homes at foreclosure sales (at current market
values) and then selling them back to the prior owners. [For an example, see the website of Boston
Community Capital, http://www.bostoncommunitycapital.org/foreclosure-relief.] In this situation, is it good
policy to say that the mortgage lender’s lien is revived?
2.
Why should the mortgagor have a right of statutory redemption even after a foreclosure sale has
occurred? Why don’t all states allow that (only about half do)?
3.
If a state allows statutory redemption and the mortgagor exercises a right of statutory redemption,
should that revive liens that were extinguished at the foreclosure sale? Why shouldn’t those liens remain
extinguished?
4.
Should a deficiency judgment be calculated based on the actual foreclosure sale price, or based
on the “fair market value” of the mortgaged premises? Do you think that the Missouri Supreme Court was
correct in First Bank v. Fischer & Frichtel, or should the Court have instead adopted Restatement § 8.4
and its “fair value” standard?
5.
A few western states (notably California, Nevada, and Arizona) have statutes that prohibit any
deficiency judgment following some or all foreclosures. As a policy matter, should Missouri adopt similar
anti-deficiency legislation?
6.
Audubon owns a large home which he financed 10 years ago using a first mortgage loan from
Boone County Bank. Audubon still owes Boone County Bank a total of $325,000 in principal. Audubon
also owes $100,000 on a home equity line of credit from RegionsBank, which is secured by a home equity
deed of trust on the home. Unfortunately, because of the mortgage crisis and the fact that real estate values
have dropped by nearly 50% in the past seven years in the area, Audubon no longer has an “equity” in the
home. The home’s current fair market value is $250,000.
When Audubon is transferred to a new job, Audubon decides to surrender the house to Boone County
Bank and executes a deed transferring the home to Boone County Bank, mailing the deed to the Bank’s
loan officer. Should Boone County Bank accept this deed? Why or why not? What other information,
if any, would you want to know?
7.
Now assume that Audubon has found a prospective buyer (Myers) for the home. Myers is willing
to pay $260,000 for the home, but only if he will receive a marketable title to the home free of liens.
Should Boone County Bank consent to this “short sale”? Does RegionsBank have anything to say about
this proposed short sale?
In this regard, consider U.C.C. §§ 9-620 through 9-622 (printed below). Should the Missouri legislature
adopt a similar statute to facilitate deeds in lieu of foreclosure and short sales?
§ 9-620. ACCEPTANCE OF COLLATERAL IN FULL OR PARTIAL SATISFACTION OF
OBLIGATION; COMPULSORY DISPOSITION OF COLLATERAL.
(a) [Conditions to acceptance in satisfaction.] Except as otherwise provided in subsection (g), a secured
party may accept collateral in full or partial satisfaction of the obligation it secures only if:
(1) the debtor consents to the acceptance under subsection (c);
(2) the secured party does not receive, within the time set forth in subsection (d), a notification of
objection to the proposal authenticated by:
(A) a person to which the secured party was required to send a proposal under Section 9-621;
or
(B) any other person, other than the debtor, holding an interest in the collateral subordinate to the
security interest that is the subject of the proposal;
(3) if the collateral is consumer goods, the collateral is not in the possession of the debtor when the
debtor consents to the acceptance; and
(4) subsection (e) does not require the secured party to dispose of the collateral or the debtor
waives the requirement pursuant to Section 9-624.
(b) [Purported acceptance ineffective.] A purported or apparent acceptance of collateral under this section
is ineffective unless:
(1) the secured party consents to the acceptance in an authenticated record or sends a proposal
to the debtor; and
(2) the conditions of subsection (a) are met.
(c) [Debtor's consent.] For purposes of this section:
(1) a debtor consents to an acceptance of collateral in partial satisfaction of the obligation it secures
only if the debtor agrees to the terms of the acceptance in a record authenticated after default; and
(2) a debtor consents to an acceptance of collateral in full satisfaction of the obligation it secures
only if the debtor agrees to the terms of the acceptance in a record authenticated after default or the
secured party:
(A) sends to the debtor after default a proposal that is unconditional or subject only to a condition
that collateral not in the possession of the secured party be preserved or maintained;
(B) in the proposal, proposes to accept collateral in full satisfaction of the obligation it secures; and
(C) does not receive a notification of objection authenticated by the debtor within 20 days after the
proposal is sent.
(d) [Effectiveness of notification.] To be effective under subsection (a)(2), a notification of objection must
be received by the secured party:
(1) in the case of a person to which the proposal was sent pursuant to Section 9-621, within 20
days after notification was sent to that person; and
(2) in other cases:
(A) within 20 days after the last notification was sent pursuant to Section 9-621; or
(B) if a notification was not sent, before the debtor consents to the acceptance under subsection
(c).
(e) [Mandatory disposition of consumer goods.] A secured party that has taken possession of collateral
shall dispose of the collateral pursuant to Section 9-610 within the time specified in subsection (f) if:
(1) 60 percent of the cash price has been paid in the case of a purchase-money security interest
in consumer goods; or
(2) 60 percent of the principal amount of the obligation secured has been paid in the case of a
non-purchase-money security interest in consumer goods.
(f) [Compliance with mandatory disposition requirement.] To comply with subsection (e), the secured party
shall dispose of the collateral:
(1) within 90 days after taking possession; or
(2) within any longer period to which the debtor and all secondary obligors have agreed in an
agreement to that effect entered into and authenticated after default.
(g) [No partial satisfaction in consumer transaction.] In a consumer transaction, a secured party may not
accept collateral in partial satisfaction of the obligation it secures.
§ 9-621. NOTIFICATION OF PROPOSAL TO ACCEPT COLLATERAL.
(a) [Persons to which proposal to be sent.] A secured party that desires to accept collateral in full or partial
satisfaction of the obligation it secures shall send its proposal to:
(1) any person from which the secured party has received, before the debtor consented to the
acceptance, an authenticated notification of a claim of an interest in the collateral;
(2) any other secured party or lienholder that, 10 days before the debtor consented to the
acceptance, held a security interest in or other lien on the collateral perfected by the filing of a financing
statement that:
(A) identified the collateral;
(B) was indexed under the debtor's name as of that date; and
(C) was filed in the office or offices in which to file a financing statement against the debtor covering
the collateral as of that date; and
(3) any other secured party that, 10 days before the debtor consented to the acceptance, held a
security interest in the collateral perfected by compliance with a statute, regulation, or treaty described in
Section 9-311(a).
(b) [Proposal to be sent to secondary obligor in partial satisfaction.] A secured party that desires to accept
collateral in partial satisfaction of the obligation it secures shall send its proposal to any secondary obligor
in addition to the persons described in subsection (a).
§ 9-622. EFFECT OF ACCEPTANCE OF COLLATERAL.
(a) [Effect of acceptance.] A secured party's acceptance of collateral in full or partial satisfaction of the
obligation it secures:
(1) discharges the obligation to the extent consented to by the debtor;
(2) transfers to the secured party all of a debtor's rights in the collateral;
(3) discharges the security interest or agricultural lien that is the subject of the debtor's consent and
any subordinate security interest or other subordinate lien; and
(4) terminates any other subordinate interest.
(b) [Discharge of subordinate interest notwithstanding noncompliance.] A subordinate interest is
discharged or terminated under subsection (a), even if the secured party fails to comply with this article.