March 15, 2011
By: Stephen J. Nash
Nash Law Firm, PLLC
The e-mails are coming in fast and furious, the phone won't stop ringing....everyone wants to know if Fannie Mae has enacted a new lending requirement that does not allow for short sales during the period of redemption. Since a great number of short sales in Minnesota occur during the period of redemption, if true, this would be another blow to the market.
First, some background. Most states do not have a period of redemption following the Sheriff's Sale. In Minnesota, the period of redemption for most residential properties is 6 months. Once the Sheriff Sale occurs, the foreclosed mortgage is gone and the only way the borrower can keep the property is to redeem by paying the amount paid at the Sheriff's Sale plus reasonable costs. The redemption must occur before the period of redemption expires. During the period of redemption, the borrower continues to own the property subject to the Sheriff's Certificate and has the right or occupancy.
I don't believe that the rumour is true and, if it is, it is misguided.
On May 27, 2010, Fannie Mae issued Announcement SEL 2010-07, which was clarified by the August 12, 2010, Announcement SEL 2010-10 which dealt with mortgage loans secured by properties with unexpired redemption periods. The most recent Fannie Mae Selling Guide dated January 27, 2010, left unchanged the August guideline on this issue.
So what, is this rule? Well, as typical of so many rules, the language is not very precise which can and does lead to confusion. The general rule states,"...The length of the redemption period varies by state and does not expire automatically upon sale of the property to a new owner."(emphasis added).
Unfortunately, this statement is incorrect at least in Minnesota. If the sale to the new owner is by the borrower, the borrower will take the sales proceeds and redeem. The redemption by the borrower stops the foreclosure and eliminates the Sheriff's Certificate.
The only way that I can come up with a scenario where the statement is true is if the sale of the property is by the holder of the Sheriff's Certificate (normally the foreclosing lender) and not the borrower. This sale would have to be subject to the redemption rights. If this is what Fannie Mae is referring to, this would not impact short sales since the borrower, not the lender, is the seller.
Fannie Mae goes on to state,
"...although an unexpired redemption period will be generally be deemed to be an unacceptable title impediment, Fannie Mae will consider it to be acceptable provided the following requirements are met:
The property must be located in a state where it is common and customary to sell single family residential property during the redemption period.
The mortgagee policy of title insurance must take specific exception to the unexpired right of redemption but also affirmatively insure the mortgagee against all loss arising out of the exercise of any outstanding right of redemption, without qualification.
If any party exercises a right to redeem the mortgaged property, the mortgage must be paid off directly out of the redemption proceeds with no requirement for any further action or claim for repayment.
By delivering the mortgage loan to Fannie Mae, the lender warrants that Fannie Mae will not incur any loss due to the exercise of any party of a right to redeem the mortgaged property, including without limitation, a loss related to a borrower default due to a dispute with the redeeming party over the terms of the redemption, and lender agrees to indemnify Fannie Mae if Fannie Mae should incur a loss that can be directly attributed to the impediment(s)."
As pointed out earlier, I agree that an unexpired redemption period would constitute a cloud on title; however, if their position is that the redemption period continues to exist after the borrower redeems, I do not agree. How can the property still be subject to the right of redemption that has already been exercised? Makes no sense.
Assuming Fannie Mae does take this position, the first exception should apply. Single family residential properties are commonly sold during the period of redemption.
The second requirement is a bit more challenging. It requires the title insurance company to specifically show the "unexpired redemption period". I would, of course, ask,"Why do they have to show something that does not exist?". They go on the state that the insurance company must give them coverage for any losses arising out of the unexpired redemption right. Again, I would ask, "Why would you require a title company to show an excemption and then require them to insure over it?"
Sometimes it is easzier to go with the flow, so the real question might be will title insurers do this? I don't know the answer yet but, if they aren't showing in a short sale the title subject to the redemption rights, I don't see how insuring over them would cause a problem.
The third requirment should not apply to a short sale situation since there no longer is a redemption right. If the sale is by the lender, selling the Sheriff's Certificate, the redemption proceeds would go to the holder of the Certificate. The mortgage used to secure the loan to purchase the Certificate would have to have language in it requiring the redemption proceeds to be paid to the mortgagee.
The final requirement is that the lender indemnify Fannie Mae for any losses attributable to the "phantom" unexpired redemption rights. This should be no problem since there are not redemption rights remaining and the lender has a lenders title policy. Of course, that assumes that lenders understand Minnesota law, which is a leap of faith.
Legally, I see not reason to restrict sales of properties in Minnesota during the period of redemption. The seller is the borrower who has to redeem and provide good title in order to sell the property. If Fannie Mae or anyone else, actually enforces a restriction on sales during the period of redemption, lenders should expect to obtain many more properties through the foreclosure process as many more short sales will fail. It is hard enough to get a sale and short sale approval as it is, but to cut off another 6 months from the process makes short sales that much more difficult.
To review Fannie Mae Selling Guide (January 27, 2011) Part B, Subpart 7, chapter 2-05, Title Exceptions and Impediments, click this link.
The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation.
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