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With foreclosures on the rise, it is no wonder that Colorado’s unique public trustee approach to the bank/borrower relationship finds itself in the limelight.  The CEO of RealtyTrac was quoted in a recent USA Today article suggesting that foreclosure-related sales will increase this year “as lenders start to more aggressively dispose of distressed assets held up by the mortgage servicing gridlock over the past 18 months.”

While many believe that Colorado’s foreclosure statutes afford a reasonably inexpensive and prompt remedy for lenders while providing property owners a fair chance to protect their interests, others strongly disagree.  As a recent article in the Denver Post put it, “No other state allows for a foreclosure without the lender first proving it is the right entity to do so;” and those in agreement have been working on legislation to tighten Colorado’s foreclosure process.

Rep. Chris Holbert, R-Parker, however, sees these efforts as adding more unnecessary regulations to an already overregulated industry.  Another recent Denver Post article quoted Rep. Holbert as saying, “Since 2005, the legislature has run and enacted 15 different bills to affect and change the foreclosure process in Colorado.  Now is a good time to leave it alone and stop changing things.  The process we have in place works fine.  Changing things for the 16th time isn't the right solution.”

At the heart of the debate is which specific documents a foreclosing lender must provide to the public trustee, especially when that lender’s interest is based on an assignment of the debt.  Currently, Colorado law allows lenders to foreclose on real property even if their interest is based on an assignment from the original lender and that assignment is not produced.  Instead, all that is necessary is a statement signed by the lender, or its attorney, stating that the lender’s interest is valid.  House Bill 1156, which died in committee last month, sought to tighten the rules by, among other things, striking that option for foreclosing parties.

But advocates of the bill are trying again and going further this time with a ballot proposal that would require all documents necessary to institute a foreclosure, including any endorsements, assignments, and transfers of the debt, be recorded in the real property records prior to commencing a foreclosure.  If proponents of the initiative are successful, an amendment to the Colorado Constitution will be put before voters in November.

Photo by Taber Andrew Bain (Flickr)

On Wednesday, October 13th, a group of attorneys general and bank regulators from all 50 states and the District of Columbia announced a coordinated probe into potentially improper foreclosure practices of various national lenders.  At the heart of these investigations are allegations that some banks used erroneous or incomplete paperwork in foreclosing on residential mortgage loans.  Getting particular attention is the alleged practice of using “robo-signers” to sign foreclosure documents without reviewing the background materials and loan documentation.

According to news reports, it is not expected that many individuals will regain homes they lost to foreclosure even if improper steps were taken.

Economists speculate that these investigations and the related internal reviews of foreclosure procedures by various lenders could have the short-term effect of temporarily propping up residential housing prices but the long-term effect of prolonging the housing downturn by delaying the inevitable.

Photo by Casey Serin (flickr).

A question that all creditors wish they faced: what happens if a foreclosed property sells for more than the foreclosure purchase price?  Does the extra amount received need to be credited against the deficiency balance or does the creditor get to keep the “profit”?  The short answer is that Colorado law does not require a creditor to apply the profit realized from the subsequent sale against the deficiency balance -- all so-called profits are the creditor’s to keep.  However, that does not mean creditors should simply bid low, sell high, and then pursue the debtor or guarantor for a large deficiency.

Any person sued on a deficiency can raise the defense that the creditor failed to bid its good faith estimate of the fair market value of the property (less amounts withheld for taxes, prior liens and holding costs).  For instance, lets say the creditor bids $500,000.00 of a $1,000,000.00 debt at the foreclosure sale, then, one month later, sells the property for $750,000.00.  A debtor sued on the resulting $500,000.00 deficiency will undoubtedly raise failure to bid fair market value as a defense and ask that the deficiency be reduced accordingly.  The result will be costly litigation and a possible reduction to the deficiency amount. 

Another factor that needs consideration is the ability of junior creditors to redeem.  Under Colorado law a junior creditor can redeem the foreclosed property from the senior creditor by paying the senior creditor the amount of the senior creditor’s bid, in cash.  If the senior creditor bids less than the property’s fair market value then a junior creditor, with available funds, has an incentive to redeem and realize the latent profit.  That leaves the senior creditor in the position of receiving less than fair market value for the property while also facing the prospect of a possible reduction to the deficiency.

The best practice is to bid close to the property’s most recently appraised value (taking into account any prior liens and applicable holding costs).  With an appraisal in hand, a creditor has the proof necessary to overcome most any claim that the bid was not a good faith estimate of the property’s fair market value.

Photo by respres (Flickr).