Lessons from the Past can Protect you in the Future

The past several years can provide valuable lessons to lenders in the unfortunate event that current or new loans end up in foreclosure. A proactive eye towards certain aspects of the lending transaction can provide the key to a successful foreclosure. Therefore, before securing a loan with a mortgage on real property, take into account these considerations and circumstances which may affect the foreclosure process down the road.

1. Marshalling Waiver Clause. Minnesota law requires the sale of separate parcels. The inclusion of a marshalling waiver clause gives the foreclosing lender much more discretion in the foreclosure process, and it allows the lender to foreclose multiple parcels in the same sale, saving costs and expenses while expediting the foreclosure process.

2. Waiver of 12 Month Redemption Period. Under Minnesota law, in certain circumstances, a mortgagor may have a 12 month redemption period. This can be waived when the 12 month redemption period is based upon the property being in agricultural use as of the date of execution of the mortgage. The waiver must be written in a document separate from the mortgage or as a separately executed and acknowledged addendum to the mortgage on a separate page.

3. Waiver of Jury Trial. In Minnesota and Wisconsin, a mortgagor can waive the right to a jury trial within the loan documents. Jury trials are far more expensive and time consuming than bench trials (a trial where the judge determines the final outcome). Eliminating the possibility of a jury trial will expedite the foreclosure process if trial becomes necessary. Make sure the waiver is broad enough to include the waiver of the right to a jury trial on attorneys’ fees claims.

4. Assessment of Tax Classification. It is good practice to investigate the tax classification of potential collateral. When property is classified as agricultural, the foreclosure process can vary. For example, the mortgagor may be able to request pre-foreclosure mediation, the redemption period could be 12 months, and the time period to collect a deficiency from the sale could be shortened. If the property is classified as agricultural, assess whether the property is currently in agricultural use. If not, consider requiring the borrower to petition the county to change the tax classification.

5. Obtain Signatures of All Property Owners. Before executing a mortgage, determine who all the owners of the property are. It is best practice to get all owners to sign the mortgage. When a mortgage is not signed by all the property owners, the mortgage only secures the interest of those signing the mortgage. If foreclosure becomes necessary, the lender can only foreclose on that interest–leaving the successful bidder at the foreclosure sale as a co-owner of the property with the non-signing property owners at the expiration of the redemption period. These interests are much harder to sell post-foreclosure.

It is also prudent to determine the marital status of a mortgagor. Under both Minnesota and Wisconsin Law, generally a mortgage on a homestead is deemed invalid if the mortgage is not signed by both spouses. Therefore, lenders are unable to enforce its mortgage against homestead property without the signature of both spouses or obtaining a spousal waiver.

6. Title Issues. It is good practice to have a lender’s policy of title insurance on any mortgaged property. If title issues are revealed during the foreclosure process that are not disclosed on a policy, a lender can look to the title insurance company for resolution.

While lenders cannot eliminate all possible roadblocks in foreclosure, these practice pointers can provide a higher certainty of a smooth and successful foreclosure.

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