Co-Author: Karen J. Radakovich, Esq.
This article is Part II of a two part series. Part I is available at Foreclosure Revolution (Part I).
A prior issue of this column explained the revolutionary change in Colorado’s foreclosure law. For foreclosures started after January 1, 2008, the owner no longer has a post-foreclosure sale redemption right. The time allotted to the owner as a post-sale redemption period has been moved prior to the sale, giving owners a longer period of time to cure, and no right to redeem. In the new system, an owner has approximately four months to cure a default in a foreclosure of non-agricultural property, and approximately seven to eight months to cure in a foreclosure of agricultural property. This article explores the more subtle changes in the new law.
Better lender responsiveness for cure figures
The new statute requires the foreclosing lender to provide cure figures to borrowers in a more timely manner. Consider a situation where shortly after a lender commences a foreclosure, the borrower files a notice of intent to cure. Under the old statute, a lender could provide cure figures as late as the seventh calendar day prior to the foreclosure sale. If, under the new statute, the borrower files a notice of intent to cure early enough so that the foreclosing lender receives the notice from the public trustee more than thirty days before the foreclosure sale date, the lender must provide cure figures within ten business days after its receipt of the intent to cure. If the foreclosing lender receives the notice of intent to cure thirty or fewer days before the foreclosure sale, cure figures must be provided by noon on the seventh calendar day before the date upon which the sale is set. It remains to be seen, however, how much practical significance this change will have. If a lender is tardy in providing cure figures, the public trustee merely postpones the foreclosure sale. Under the new statute, the lender may delay foreclosure sales for up to one year after the initial scheduled sale date.
No manipulated redemption rights
Under both the old and new statutes, lien holders have redemption rights after the foreclosure sale. Under the old statute, a lien created as late as 60 days after the foreclosure sale (in a non-agricultural foreclosure) could create redemption rights. The ability to create liens after the foreclosure sale allowed investors and friends to loan the borrower small sums to manufacture redemption rights junior, for example, to a second mortgage. Because a significant percentage of second mortgage holders fail to redeem, the ability to create redemption rights after the foreclosure sale created opportunities to redeem from finessed junior liens. For a junior lien holder to have redemption rights under the new foreclosure statute, the lien must have been recorded prior to the recording of the Notice for Election and Demand.
Junior Lien Holder Redemption Rights
Under the old law, junior lien holders had to file notices of intent to redeem not later than fifteen days prior to the end of the owner’s redemption period under the old law. Now, there is no owner’s redemption period to mark the deadline.
In the new statute, junior lien holders must file their notices of intent to redeem within eight business days after the foreclosure sale. After that eight-day period, the public trustee has a five-day period (from day nine through day fourteen) to determine the relative priority of the lien holders who filed notices of intent to redeem and fix their redemption periods. Then the senior-most lien that is junior to the lien being foreclosed (typically a second mortgage) has fifteen to nineteen days after the foreclosure sale to redeem. (Day fourteen seems to be a dead day.) Each subsequent junior lien holder gets a subsequent five-day period. If a junior lien holder waits until his or her last day to redeem, the funds must be tendered by noon, not by close of business permitted under the old law.
Under the old statute, if the certificate of purchase holder (i.e. the highest bidder) also had a junior lien on the property, it had to redeem from itself to protect against redemptions by other junior lien holders. Under the new statute, the C.P. holder needs only to file a notice of intent to redeem. Similarly, if a junior lien holder holds two liens, it can preserve its right to be redeemed out from its junior lien by even more junior lien holders by merely filing a notice of intent to redeem.
With the old law, if a lender was foreclosing on two parcels secured by one deed of trust and it wished to release one of the two parcels from the foreclosure (because, for example, a REALTOR ® had sold one of the two parcels for a good price, but less than the price that it would take to pay off the whole mortgage) the lender would need to withdraw the whole foreclosure. Under the new statute, the lender can release one of the two parcels encumbered by the foreclosed deed of trust and continue with the foreclosure on the other parcel.
The new statute requires lenders to submit bid letters by noon on the second business day prior to the foreclosure sale. Foreclosure sales are typically on Wednesdays, so lenders will typically submit bid letters by noon on Mondays.
The new foreclosure law specifically permits lenders to include prepayment penalties in the calculation of the mortgage payoff within the lender’s bid letter.
As noted in the last article, one of the goals of the new foreclosure statute is to make an owner less attractive as prey for predatory foreclosure investors. As a consequence, if the owner at the time the foreclosure is commenced conveys title, the grantee might not be able to cure. Only specifically defined grantees (who may be best summarized as “related grantees”) such as a spouse, a personal representative of an estate, or a business entity wholly owned by the original owner, can cure. Foreclosure investors who acquire title to the property after a foreclosure has been commenced will not inherit the owner’s right to cure. (It is beyond the scope of this article to explain all the details of this change.)
Under the old statute, if the successful bidder at the sale wanted to take less than it was owed to be redeemed out, the public trustee was not explicitly authorized to accept “short redemptions.” The new statute allows the public trustee, with the consent of the holder of the certificate of purchase, to accept short redemptions.
If the foreclosing lender is the highest bidder at the sale, the lender has an opportunity to rescind the public trustee sale, in certain narrow circumstances, within eight business days after the foreclosure sale.
Much of the success of the new foreclosure statute will depend upon whether investors compete against lenders and bid at foreclosure sales. Only time will tell.
A version of this article appeared in the Colorado REALTOR® News, the monthly publication of the Colorado Association of REALTORS®.