My crystal ball tells me to anticipate the passage of new mortgage foreclosure legislation during the 2014 session of the Minnesota State Legislature. And if I am right, what will be unique about this is that, unlike the numerous foreclosure bills of the past five years, the legislation will not be driven by either the economy, bad practices by some lenders or by the need for additional consumer protection. Instead, it will likely be a response to an April 2013 Minnesota Supreme Court case, known in lending and legal circles as the Ruiz case.
Most people’s familiarity with mortgage foreclosure is the process called foreclosure by advertisement. It involves, among other things, certain documents being recorded in the County Recorder’s office, a notice published in the local/legal newspaper for six weeks and an auction at the County Sheriff’s office at which most often only the foreclosing lender shows up to bid. All of the requirements for foreclosure by advertisement have been created by legislation. Prior to this legislation (which goes back to pre-1924), foreclosures were all done by court action, that is, by law suits. It was very time consuming and expensive, which was bad for both borrowers and lenders.
Once the Minnesota Legislature wisely created foreclosure by advertisement, the inevitable happened. People doing the paperwork sometimes made mistakes, both big and small. This led to court cases which set the standards for which mistakes were a problem, and which were not. In 1925 the Minnesota Supreme Court decided the Hudson case, in which the Court said that “…mere irregularities [in the process of foreclosure by advertisement] do not avoid the sale unless the statute so provides… [unless they] operate to prejudice the rights of a party in interest.” This was a very common-sense decision. If the mistake was a typo that did not mislead anyone or affect anyone’s legal rights, then “no harm - no foul”. But if, for example, the mistake was one of describing the wrong property or not giving adequate notice to the borrower, the foreclosure could be voided, and the lender would have to start the process over. As time passed the Legislature added and modified the statutes controlling foreclosures by advertisement, and I would argue that the vast majority of these changes made the process more understandable and gave borrowers additional opportunities to avoid the foreclosure sale.
Fast forward to April 17, 2013 and the Ruiz decision, in which the Minnesota Supreme Court stated that “Minnesota’s foreclosure by advertisement statutes require strict compliance and…a foreclosing party’s failure to strictly comply renders the foreclosure void.” Suddenly the standard applied to foreclosure by advertisement procedures changed from ‘non-prejudicial substantial compliance’ to ‘strict compliance.’
For those who would give this a shrug and a “So what?” the Ruiz decision has big implications for both lenders and borrowers. If I want to buy a house that has recently been through a foreclosure, neither I nor my lender can risk the possibility that there was some even minor flaw in the foreclosure paperwork. If foreclosed properties have to sit empty for longer periods of time, that’s bad for neighborhoods. If lenders have to go back to doing all foreclosures by expensive and time consuming lawsuits, the costs of borrowing will go up for homebuyers. Add to all of this a June 2013 decision by the 8th Circuit Court of Appeals (the Badrawi case) which conflicts with the Ruiz decision. The 8th Circuit Court in Badrawi held that a homeowner may not challenge a foreclosure because of “an omission of some prescribed act which cannot have affected him, and cannot have been proscribed for his benefit.” That sounds like the pre-Ruiz “no harm – no foul” standard, and adds more uncertainty to an already bad situation. The foreclosure by advertisement statutes are crying out for a fix, and as the Minnesota housing market continues its much needed recovery, let’s hope that the 2014 Legislature can help it along.