Tucson Land Use Law Blog : Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

Bank of America, which bought Countrywide Financial for $4 billion in stock in early 2008, has come under pressure from the Massachusetts Attorney General, as a result of Countrywide's notorious lending practices.  Bank of America's move is part of an agreement to settle claims over certain high-risk loans made by Countrywide.  See link to Wall Street Journal article.

Bank of America's program is limited to Countrywide borrowers whose loan balance is at least 120% of the estimated home value, who are at least 60 days overdue, and who can show that financial hardship makes them unable to meet current payments. The bank estimated that 45,000 customers will qualify for principal reductions averaging more than $60,000.  In the end, only the riskiest loans will be eligible. They include sub-prime loans; "option adjustable-rate" mortgages entailing minimal payments now but big increases later; and certain loans that have a fixed rate for two years and then adjust annually.

Any thought that principal reduction is the path the lenders are heading in should consider the limited scope of the agreement between Bank of America and the Massachusetts Attorney General.  Nonetheless, the action by Bank of America is notable because it is the largest mortgage servicer, collecting loan payments on one of every five home loans in the U.S. At the end of last year, 14.76% of them were at least 30 days past due or in foreclosure, versus an industry average of 12.31%, according to Inside Mortgage Finance. 

Principal reduction is clearly the direction that the large majority of underwater borrowers clearly are hoping the major banks are leaning towards.  Given that lenders must incur substantial costs in foreclosing, only to take a wash when they sell the foreclose property as a Real Estate Owned property, it only seems practical to try and keep people in their homes by reducing the principal.  I have seen many properties where the bank ended up selling a foreclosed property for substantially less than they would have made had they just worked with the homeowner.  No one claims that reason is driving this ship. 

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In the tax lien foreclosure world, appropriate service of process is absolutely crucial.  Consider what is at stake in a tax lien foreclosure case - the potential forfeiture of the right of the owner of a property to pay off their delinquent property taxes, which practically speaking means the likely loss of their property.  If you are going to foreclose on someone's property, for their failure to pay property taxes for five consecutive years, you better give them adequate notice of the pending case against them.  

A recent memorandum decision from Division 2 of the Arizona Court of Appeals, Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057, deals with the issue of what happens in a tax lien foreclosure case where the owner of record has only been served by publication in a newspaper.   Memorandum decisions, while instructive for lawyers to consider how the courts may rule in a future case, unfortunately cannot be cited by as legal authority.  

In Hodges, the tax lien investor filed a complaint to foreclose the owner's (Hodges) right to redeem the tax lien.  The tax lien investor apparently was unable to serve Hodges personally and served Hodges by publication.  A default judgment was eventually entered against Hodges and the tax lien investor obtained a Treasurer's Deed and then sold the property.  Hodges later filed a motion to set aside the default judgment, arguing in part that the judgment was void because he had "good cause" entitling him to a new trial.  The trial court denied his motion and Hodges appealed. 

Hodges argued in his appeal that he was "ready, willing, and able to redeem the property" and that entilted him to a new trial.  Under Rule 59(j)(1) of the Arizona Rules of Civil Procedure, when a judgment has been entered on service by publication, and the defendant has not appeared, a new trial may be granted upon application of the defendant for good cause shown by affidavit, made within one year after the judgment has been entered.  Relying on a 1942 case that was very similar in facts, the appeals court held that because Hodges was "ready, willing and able to redeem the property," the trial court erred in not granting the new trial.  The court remanded the case back to the trial court stating that the trial court should give Hodges a new trial. 

After sending the case back to the trial court, Hodges paid off the property taxes after working with some third-party investor who took a partial legal interest in the property.  The tax lien investor appealed the new judgment of the trial court arguing that Hodges did not have the ability at the time of the original case to pay off the tax lien, which Hodges admitted he did not.  The appeals court went on to rule that "the end result of a successful Rule 59(j) challenge is the restoration of a defendant's right to redeem."  The appeals court, applying equitable principles, stated that "purchasing tax liens entails risk and the onus is on the purchaser to protect its own interests."  The Court also stated that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for a year, and the fact that the tax lien investor decided to sell the property before that time had run was their own fault. 

Warning tax lien investors: if you are going to get into the tax lien investment world; beware, as there are pitfalls that come up that late night infomercials do not tell you that. 

Warning attorneys: do your due diligence upfront and get people served personally. 

Additional warning attorneys: it seems pretty clear that the court does not look too favorably on tax lien investing. 

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