There are many benefits for out of state lenders or investors looking to engage in business in Connecticut, one of the wealthiest (per capita) states in the United States of America. For example, Connecticut has relatively stable property values. However, Connecticut also has a number of legal pitfalls for lenders or investors who acquire Connecticut mortgages as part of a loan sale transaction. These pitfalls may end up causing undue delays and unnecessary expense when it comes to the legal process. A lender or entity unfamiliar with Connecticut specific laws and procedures should, prior to committing to acquire an asset secured by property in Connecticut, undertake due diligence and seek advice on what programs and statutes are or are not applicable prior to consummating the deal. Below are a few of the procedural thickets that must be navigated prior to being able to seek to foreclose a mortgage deed, the most common form of collateral for a financial transaction, in Connecticut.
Preliminarily (and interestingly), Connecticut is unique in the United States in that it, as of January 1, 2015, recognizes three separate and distinct methods of foreclosure of a mortgage deed: Strict Foreclosure (appropriation of the mortgaged property after passage of law days set by judicial order); Foreclosure by Sale (created by statute and permits judicially ordered and overseen auction process); and Foreclosure by Market Sale (created by statute and permits agreement for marketing and private sale of property by mortgagor with consent of the mortgagee). Every foreclosure commenced in Connecticut is a judicial proceeding regardless of which of the above three forms the judgment of foreclosure will eventually take. The fact that every foreclosure is a judicial action alone can create havoc to the plans of a party who is otherwise unfamiliar with the foreclosure process in Connecticut and is best understood up front before committing any sum to a transaction where the main source of potential recovery is a parcel of property in Connecticut.
Secondly, Connecticut has many legislatively imposed requirements which must be met prior to even commencing an action for foreclosure of a mortgage deed. The vast majority of these programs were implemented either during or immediately after the financial crisis of 2007 through (roughly) 2014 and, accordingly, revolve around 1 to 4 family owner-occupied residential property but are nonetheless worded vaguely enough so that they arguably apply to non-owner occupied or commercial properties as well. Amongst these programs are the Emergency Mortgage Assistance Program (“EMAP”), codified at Conn. Gen. Stat. 8-265dd, et seq., and the Foreclosure by Market Sale procedure, codified at Conn. Gen. Stat. 49-24b, et seq.
By way of example, both the EMAP and Foreclosure by Market Sale procedure contain statutory requirements stating that, if applicable, no mortgagee may commence a foreclosure action until a notice complying with the terms recited therein is provided to the mortgagor. The requirements for applicability of each program differ. For instance, to qualify for the Market Sale procedure the mortgage must be a consensual lien the funds from which were used primarily for personal, family or household expenses which is in first lien position on a 1 to 4 family owner-occupied parcel of residential real property. See Conn. Gen. Stat. § 49-24a. Conversely, to qualify for EMAP the mortgage must be a mortgage deed which is in first or second lien priority position on a 1-4 family owner-occupied residential real property. See Conn. Gen. Stat. 8-265cc (3). While the difference in the verbiage of the respective statutes may appear semantic, it is not inconsequential in its impact in practice due to the notice requirements set forth. It is entirely feasible that what would otherwise be deemed a commercial loan (for example a mixed use commercial/ residential building with a storefront and 2 apartments above) if occupied by the owner would be subject to the EMAP notice requirements but may not be subject to the Market Sale procedure.
Third, at the time of commencement of any foreclosure in the State of Connecticut, the foreclosing mortgagee is required to execute affidavits of the applicability (or inapplicability) of the EMAP and Market Sale programs. The foreclosing mortgagee must also execute an affidavit which informs the Court as to whether or not the underlying loan is subject to any of the Making Home Affordable federal loss mitigation plans and whether or not the loan is related to one or more of the GSE entities (i.e. FNMA, FHLMC, etc.).
Fourth, every mortgagee that commences a foreclosure of a mortgage in the State of Connecticut is required to file a specific registration of a local person or agent that can be notified in the event of an emergency at the property. Conn. Gen. Stat. 7-148ii requires this notice to the municipality of foreclosure to be recorded by the foreclosing mortgagee. This registration form must be updated upon the occurrence of any change in party to the foreclosure action as well as at the time of taking title to the property through the foreclosure action. Notably, this statutory scheme also provides for monetary penalties to be imposed upon a foreclosing mortgagee that does not comply with its requirements.
Lastly, every foreclosure action of a 1 to 4 family owner-occupied residential property in Connecticut is subject to mandatory foreclosure mediation. See Conn. Gen. Stat. § 49-31l, et seq. The mediation period is defined as extending for the shorter of either 3 in-person mediation sessions between the mortgagor, mortgagee and mediator or 7 months from the return date of the foreclosure action (the procedural start to the legal requirements of the foreclosure action). However, notwithstanding the limitation on the length of time the mediation program is supposed to take, the Courts will frequently use their “equitable powers” to refer cases for mediation that do not qualify within the statutory requirements for the same or are otherwise outside of the parameters for mediation as prescribed by the legislature. As a result, many lenders who operate in states without these requirements will likely not comprehend that once a matter is included in the foreclosure mediation program all activity in the case (aside from mediation) stops and is subject to a bar on filings for a minimum of eight months from the return date of the foreclosure action. This is contrary to the notion of a swift recovery of collateral property in any sense but a large percentage of the foreclosure included in the mediation program are there in excess of the legislatively mandated maximum mediation period of seven months. A lender should be cognizant of the fact that this program costs time and money for continued attendance at mediation sessions which may be at odds with any goal to efficiently obtain a return on investment through foreclosure of collateral property.
In totality, the above constitutes merely a snowflake on the tip of the iceberg of procedural requirements for foreclosure of a mortgage deed in Connecticut and is not meant to be an all-inclusive list of requirements but a cautionary tale for any party that may be involved in a transaction with collateral located in Connecticut. It is best to consult with knowledgeable local counsel to be certain of an understanding of the entire procedure before simply assuming recovery of a distressed asset encumbered by a mortgage deed can be swift and inexpensive. After all, it is in no small part to the legislative and procedural requirements recited above that, as of September 3, 2015, FNMA permits its designated servicers a period of 810 days (aka 2 years and 80 days) to complete a foreclosure of a residential property in Connecticut.