New foreclosure redemption law: Unnecessary, unfair, unworkable?
By Joon H. Sung
Knock, knock.
Who’s there?
Bank.
Bank who?
Bank on losing your redemption period if you don’t let me in to check for damage.
All right, I admit this joke was not very funny. However, it does illustrate a possible exchange between a bank and the borrower created as a result of changes to Michigan’s foreclosure laws.
Most homeowners and even some attorneys are surprised to learn that Michigan does not require a lender to obtain a judgment to foreclose. The lender only needs to publish a notice of the foreclosure of the sale for 4 weeks. Because foreclosure by advertisement is a relatively quick process versus a judicial foreclosure, Michigan has had a 6- or 12-month redemption period to allow homeowners to pay the full mortgage amount or find another place live. Homeowners also use the time to sell their property or challenge the foreclosure in court. Throughout the redemption period, the borrowers have the same rights to live in and enjoy the property as they had prior to the sale.
Public Act 104 of 2013 significantly alters homeowners’ redemption rights in Michigan.
Starting January 10, 2014, purchasers of properties at foreclosure sale may shorten or eliminate the redemption period in some cases. MCL 600.3240(13) will allow banks to demand an inspection of the home with no prior notice. The inspection includes not only the exterior of the home for damage but the interior as well. If the borrower refuses to permit the inspection or if there is damage, the bank can immediately proceed to evict the borrower through summary proceedings. If court enters a judgment for possession, the right of redemption is extinguished and full title vests with the purchaser.
Examples of “damage” in the new law include boarded up or closed off window or entrance, multiple broken and unrepaired window panes, broken off or unhinged door, accumulated debris, stripped plumbing, and missing fixtures.
Fictitious Problem
Proponents of section 3240 argue that the changes are necessary to prevent borrowers from tearing up properties during the redemption period. They reason that if homes are destroyed, it creates vacant houses and blight on the community.
Unfortunately, the new law seeks to create a solution to a problem that may not exist. The changes are based on incorrect assumptions which lead to bad policy. No data exists to support the contention that borrowers trash homes during the redemption period. In fact, anecdotal evidence indicates that most homes are damaged after the homes become vacant. A greater problem especially in urban areas has been associated with lenders failing to properly secure properties after foreclosure completion. This has led to a large number of properties to be stripped and fall into disrepair.
Other remedies already exist to address possible damage and blight for properties in foreclosure. Lenders may file a complaint for any damages to the property beyond the normal wear and tear resulting from the use of the property. In addition, the foreclosure statute abbreviates redemption period to one month for any abandoned property.
Anticipated Issues
Even assuming that there is an issue that needs to be addressed, the application of the new law may be problematic for homeowners, lenders, and judges.
It is likely that many well intended homeowners will deny the banks’ representatives from entering their homes even when no damage is present. There are numerous reasons why well meaning homeowners might refuse entry under the new law. Banks are not required to advise homeowners that they must reasonably allow the bank to inspect the property to preserve redemption. Generally, most people rightfully believe that they have a right to privacy in their home. The idea that no one has a right to enter their home without their consent or court order is ingrained.
In addition, for safety reasons, homeowners may be reluctant to let strangers into their home. Even if homeowners ask for identification, they would not be able to determine whether the person standing in front of them is actually with the bank. I wonder how many people would allow someone who appears at their door without any prior notice.
It is foreseeable that criminals, who seek to harm homeowners, may impersonate bank representatives and refer to the new law to gain entry into homes. Home invasions, robberies, other more serious crimes may be a byproduct the new law.
The changes create problems for the bank as well. To inspect the inside of the property, bank’s representatives will be forced to face the homeowner. Emotions for homeowners run high when foreclosed especially if they feel as they have been treated unfairly by the bank. Potential for a confrontation and escalation is ripe in this volatile environment.
Courts will be forced to address the ambiguous definition of “damage” in the new law. Although the statute gives examples of some of the items which can be considered as “damage,” it does not define the term. The court is left with little guidance to determine what level of damage may trigger an eviction. As importantly, the statute makes no distinction for malicious damage as distinguished from destruction by vandals.
Possible Solutions
Interestingly, Governor Snyder acknowledged many of these issues in his letter to the legislators when he signed the law in July. He recommended that follow-up legislation was necessary to protect homeowners, lenders, and the community. He urged the legislature to clarify what constitutes a reasonable inspection, including what notice must be given and how frequently such inspections can occur. Governor Snyder added that a new bill should clarify the meaning of damage to prevent eviction of homeowners victimized by vandalism. Unfortunately, no bills have been proposed to address the deficiencies with the new law.
I agree with the governor that revisions are required to fix the law. Necessary amendments include:
• Allow only exterior inspections.
• Define damage to only include substantial injury to the property or serious health hazard existing on the premises.
• Require purchasers to send a written notice indicating their intention to seek a court judgment that the property has been damaged. The notice should indicate the items claimed to be damaged and a reasonable time to repair.
• Allow purchaser to obtain immediate possession only upon a showing that the homeowner intentionally damaged the property after the foreclosure sale.
Let us hope that the legislature quickly addresses the problems before the homeowners, banks, and communities feel the harmful effects of the new law.
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Prior to coming to the University of Detroit Mercy School of Law, Professor Joon H. Sung worked as the Managing Attorney in the Civil Division of Legal Aid and Defender Association Inc. (LAD), where he specialized in housing and consumer law. He represented victims of lending scams and assisted in drafting legislation to stop abusive lending practices. While at LAD Sung also established and led Legal Aid for Children at Children’s Hospital of Michigan, a program to remove legal barriers that adversely affect the health of sick children through direct representation and systemic advocacy.
