The Massachusetts Supreme Court recently rendered a very significant decision in a case entitled U.S. Bank National Association vs. Ibanez. This case is being closely watched around the country, particularly by advocates of a theory of foreclosure defense called “produce the note”.

What does “produce the note” refer to? Recall that in the heyday of the housing boom, many residential mortgages were “securitized”; that is, the mortgage loans (mortgage notes) were purchased from banks and other lenders and assigned to a trust, the loans were assembled into collections, or “pools”, and the trusts securitize the pool and issue mortgage-backed securities, with documentation that identifies the underlying loans.

With many of the mortgages held within these trusts going into default, the trustees of these trusts found themselves in a position which they had not expected to be in; namely, foreclosing the mortgages which comprised the pools in an effort to mitigate the losses of those investors who purchased the mortgage-backed securities.

Somewhere along the way, some enterprising individual had a revelation: in order to foreclose a mortgage, there needs to be a debt, and what is the evidence for the debt? The promissory note. So, goes the line of thinking which has become known as “produce the note”, if these trusts go to foreclose the mortgages, why not ask them to produce the evidence of the debt owed to them, and if they cannot produce it, then they should not be allowed to foreclose.

The Ibanez decision is quite simple and straightforward: you need to own the mortgage which you intend to foreclose upon. Now, given that this is a state court decision, the scope of the Ibanez ruling remains to be seen, but this case is certainly a huge arrow in the quiver of foreclosure prevention strategists.

I personally first heard of the “produce the note” theory just over two years ago when a client of mine came to me with information on the strategy. After reviewing the concept, I came to the conclusion that, for the most part, “produce the note” would not work in the State of Minnesota. Why did I conclude that? Because Minnesota’s system of non-judicial foreclosure, also known as “foreclosure by advertisement”, created a number of procedural hurdles for a property owner seeking to require their lender to produce the promissory note which evidences the debt alleged to be secured by the mortgage.

Where the produce the note request typically arises is during the discovery phase of the foreclosure action. The borrower makes a request of the lender to turn over the note and, when the lender is unable to do so, the borrower brings a motion to dismiss the foreclosure on the grounds that the lender cannot show that it owns the mortgage being foreclosed.

In Minnesota, with a foreclosure by advertisement, there is no court lawsuit; the sheriff’s sale is scheduled, notices are given, the sale is held and, once the owner’s and junior creditors’ redemption periods expire, the high bidder at the sale (which is typically the lender) is the owner of the property. For a property owner to launch a produce the note offensive, the owner must first commence its own lawsuit against the lender for wrongful foreclosure and make the discovery request within that suit for the note. There is, however, more to the story. Because the foreclosure by advertisement proceeds so quickly, and litigation proceeds very slowly and in accordance with an agreed upon scheduling order, the borrower must seek some sort of emergency relief in order to stop the pending foreclosure sale. This emergency relief would be a motion for a temporary restraining order to stop the sale, and any such motion, to be successful, must include sufficient proof that the borrower is likely to prevail upon the merits of its claims in the lawsuit. This is a high bar to meet.

The Minnesota Supreme Court addressed a similar issue in 2009 in the case of Jackson, et al. v. Mortgage Electronic Registration Systems (MERS). In that case, the homeowners challenged the ability of mortgagees to foreclose mortgages which were held in the name of MERS rather than the actual mortgagee. The Supreme Court found in favor of MERS and held that it was not necessary for legal title to the mortgage to be transferred along with every transfer of the promissory note in order for the mortgage to be foreclosed validly by advertisement. The Jackson case would seem to indicate that the Minnesota Supreme Court would not be inclined to adopt the Ibanez ruling.

Essentially, the procedural hurdles created under Minnesota law for a borrower to use a “produce the note” strategy to stop a fast-moving non-judicial foreclosure require a well-funded plaintiff as the costs of preparing, filing and serving the complaint, not to mention the preparation of motion papers for the TRO and the required appearance at the hearing, will quickly lead to a steep tab from the attorney (and you have to use an attorney in order to successfully navigate the maze of rules necessary to ultimately get in front of a judge for a TRO motion). There could certainly be a handful of borrowers in such a position, but the odds are that if the person could not pay their mortgage payments, it is doubtful that they could afford an attorney to fight the foreclosure.

Contracts for deed are back in style as a method of financing a real estate transaction. A contract for deed is seller financing. Instead of a third party lender financing the buyer’s purchase of a piece of property from the seller, the seller accepts installment payments which include principal and interest, with the final payment typically being a balloon payment. Contracts for deed are useful where a buyer has funds to make the monthly payments but lacks the creditworthiness (hence, the contract for deed provides a dual benefit: the buyer gets to purchase the property and re-establish creditworthiness sufficient to obtain financing for the balloon payment).

To have a successful contract for deed transaction, though, requires close attention to several seemingly small details. These details, if ignored, can lead to big headaches for one or both of the parties to the contract.

Here are the top five most overlooked issues when dealing with contracts for deed in Minnesota, based upon my experience working with clients in these transactions:

1. Beware the “Due on Sale” Clause in the Seller’s Mortgage. Many mortgages have a clause that permits a lender to accelerate the note and call the entire loan due in the event that the borrower transfers title to a third party without consent. In Minnesota, where a contract for deed creates a split between legal title (which stays with the seller) and equitable title (which passes to the buyer at the time the contract is signed), selling a property on a contract for deed where the property is subject to a mortgage will trigger the lender’s right to accelerate the loan. The first step if you are one of those owners with a due on sale clause is to contact the lender and seek written consent. More and more lenders are, believe it or not, giving such consent (which would seem to beat the alternative of having to foreclose on the property when the owner cannot make the monthly mortgage payment(s)). For those owners whose lender(s) will not consent, a lease with option is the alternative.

2. Use the Uniform Form Contract for Deed. There exists in Minnesota a uniform form contract for deed document; I recommend using it. One common mistake I have seen in this area time and again is the parties’ reliance on the contract for deed financing addendum which can be attached to a purchase agreement. This document is not intended to be the final and complete contract and it should not be used in such manner. The uniform form addresses almost all of the salient points of the contract for deed transaction and its use will minimize the possibility of a later dispute over contract terms.

3. Use the Contract for Deed Addendum. In addition to the uniform contract for deed form, Minnesota has created a uniform “contract for deed addendum” that contains some important clarifying terms to the transaction and, for that reason, should also be utilized in any contract for deed transaction. This form, which contains a series of yes/no check-the-box provisions on such issues as whether 1/12 of taxes and insurance amounts will be paid in addition to any monthly payment, what amount of improvements the buyer can perform on the property without the seller’s written consent and whether, on a default by the buyer, whether the seller can accelerate the entire contract balance and require that it be paid in order to stave off a cancellation of the contract. This short document carries significant implications as to its terms and should be executed along with the uniform contract for deed form.

4. Record the Contract for Deed. One way in which parties to a proposed contract for deed (particularly sellers) attempt to get around the due-on-sale clause issue is to simply not record the contract for deed. This is not a solution and, in fact, Minnesota law provides for civil penalties to the buyer of up to 2% of the original contract balance if the contract is not recorded. Always record your contracts for deed.

5. Close the Transaction With a Title Company. Finally, given that a contract for deed is between two parties and does not involve an outside third party lender, the temptation exists to simply sit down as buyer and seller, sign the contract and record it. In other words, since no third party lender is involved who will force the parties to close at a title company as a condition of financing a purchase, the parties simply choose to save a few hundred dollars by skipping out on using a title company. This is a terrible idea. First and foremost, in order to have an insured closing (where both the contract seller – known as the “vendor” and the contract buyer – known as the “vendee”, obtain policies of title insurance), the parties must engage a title company to close the deal. Second, and equally important, title companies are expert in closing all sorts of real estate transactions and if an “i” is not dotted or a “t” is not crossed, a good closer catches the issue and takes steps immediately to correct it. Without that type of oversight, a mistake could arise with the contract this is only discovered years later when the cost to fix it increases substantially.

Just when we thought there would be true progress in the short-sale process (Federally mandated, I swear!) comes the “robo-signing” controversy.

It’s never good when terms like “improperly handled” paperwork and “myriad of missteps” get used in conjunction with Real Estate “procedure” of any kind.  Then comes news of Bank of America’s complete moratorium on their foreclosures.  But let’s face it, this was bound to happen.  Lenders and service providers are stretched thin and have been at the tipping point the last couple years; anyone who’s tried to buy a foreclosure in recently can concur.

The bigger picture is that the ramifications of any type of large-scale policy and procedures audit will have a ripple effect across the industry it’s affecting, and the short-sale process just received its latest smack across the back of the head.

I don’t think it’s any coincidence that in the last week or so I’ve experienced a marked slow down in short-sale negotiator communiqués.  I’m talking no emails, no phone calls.  None.

Since in many cases a short-sale is often a pre-cursor to a foreclosure, a lot of the same policy and procedures apply.  It’s unknown how or if anything will be changed, how long those changes will take, or even if they’ll stick, but long story short folks, the short-sale process just got a tad bit harder.

flickr photo cred: Jeff Turner

As a potential first time home buyer, you know the sacrifices made to save sufficient money to make a down payment on a home. For some, it seems impossible to even begin to save enough cash without some form of down payment help, much less saving that money in the time necessary to take advantage of today’s low mortgage rates.

A few of the programs are listed below:

Minnesota Mortgage Program (MMP) – Mortgage loans available throughout Minnesota with entry cost assistance for targeted borrowers
Community Activity Set-Aside (CASA) – Mortgage loans for specific community initiatives with entry cost assistance available
Homeownership Opportunity Program (HOP) - Mortgage loans for short term, temporary financing for the acquisition and rehabilitation of vacant properties in, or in imminent danger of, foreclosure and for properties (vacant or occupied) in Foreclosure Impacted Area
Urban Indian Housing Program – Mortgage loans for Native Americans with entry cost and monthly payment assistance
Dakota County Community Development Agency has several bond programs availible for First Time Home Buyers.
Minneapolis CityLiving Program-CityLiving loans offer homebuyers an opportunity to purchase Minneapolis homes at an interest rate that historically has ranked well below market rates. The City sells tax exempt mortgage revenue bonds, making the funds available to private lenders for low-interest mortgages.

There is also a great new Down Payment Resource availible to find out if you could potentially quailify for these types of programs and also if a property you have interest in would quailfy. I tested the website myself. I had to input a sales price and some general information of myself. Within an hour I was emailed a list of over 30 down payment assistace programs I could quailify for based on the information I entered.

Most people don’t realize that Federal, state and local governments provide hundreds of millions of dollars to help homebuyers. If you want to utilize the programs, you must consult with an experienced real estate agent near you. Once you qualify and have all the papers ready for the down payment assistance programs, it will be easy for you to own a new home.