Happy New – Real Estate Laws- Year

By: Stephen D. Richman, Senior Counsel- Kohrman, Jackson & Krantz

As you may know, Ohio Governor John Kasich and the Ohio Legislature have been very busy passing laws and putting same into effect at the end of 2016 and the beginning of this year. Among the twenty-eight bills signed by Governor Kasich on January 4^th are two real estate related statutes worth noting: 1) Am. Sub. SB 257 (regarding the validity of recorded real property instruments); and 2) Am. H. B. 532 which revises the Ohio Revised Code (“O.R.C.”) relating to real estate brokers and salespersons.

I.                   Am. Sub. SB 257

A.                What does this bill do? Am. Sub. SB 257 first amends O.R.C. Section 5301.07 (B) by establishing two rebuttable presumptions regarding deeds, mortgages, installment contracts, leases, memorandums of trust, powers of attorney, and other instruments accepted by the county for recording. Namely, that 1) the recorded instrument conveys, encumbers, or is enforceable against the interest of the person who signed the instrument and; 2) that the instrument is valid, enforceable, and effective as if the instrument were legally made, executed, acknowledged, and recorded, without any defects. These presumptions can only be rebutted by clear and convincing evidence of fraud, undue influence, duress, forgery, incompetency, or incapacity, and must be rebutted, if at all within four (4) years of recording the defective instrument (See revised O.R.C. Section 5301.07 (C)). The prior version of Sec. 5301.07 (C) allowed a challenger twenty-one (21) years to rebut the validity of a defective instrument. S.B. 257 also provides that the filing of an instrument, albeit defective, is constructive notice to all third parties of the validity of the instrument notwithstanding a defect in the making, execution, or acknowledgment of the instrument (See revised O.R.C. Section 5301.07 (C)). In other words, pursuant to amended Section 5301.07 of the Ohio Revised Code, a recorded instrument is presumed valid when recorded, and deemed valid four years afterwards.

Am. Sub. SB 257 also amends O.R.C. Sec. 5301.07 (C) such that the specific defects enumerated in the statute (instrument not witnessed, not acknowledged [or defectively acknowledged]) and person holding property interest not identified in the granting clause) are now examples of the type of defect covered by the statute vs. the only defects covered.

Finally, Am. Sub. SB 257 amends various sections of Ohio Revised Code Section 5709 to “establish a procedure by which political subdivisions proposing a tax increment financing (TIF) incentive district must notify affected property owners and permit them to exclude their property.”

B.                 When does it become law? Am. Sub. SB 257 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? Basically, deeds and other instruments that would otherwise need to be re-signed or re-recorded to correct defects will automatically be cured by operation of law (by virtue of the language in the revised statute). For example, let’s say you are applying for a loan and the title report shows the deed you received was signed by an individual who forgot to add “Jr.” at the end of his name. You should now be able to convince the bank that the deed does not have to be corrected and re-recorded, as a condition to your loan. Additionally, title companies should now be more willing to remove defectively made/signed/acknowledged instruments from their lists of title exceptions in title commitments.  

Even if banks and title companies don’t rush to relax their practices in accord with this statute, the statutory presumptions and deemed validities inherent in Am. Sub. SB 257 should reduce the risks inherent in completing transactions in spite of these types of title “defects”. This is especially true with regard to defective oil and gas leases which are typically excluded from title insurance coverage.

II.                Am. HB 532

A.                What does this bill do? Am. HB 532 incorporates recommendations stemming from a 2012 special task force created by the Ohio Real Estate Commission including: defining/ categorizing brokers (as “Associate Brokers” or “Principal Brokers”), consolidating the duties of a Principal Broker in one new Ohio Revised Code section (Sec. 4735.081 (C)), allowing a broker to be a Principal Broker at more than one company, allowing prospective licensees the option of completing their pre-licensing education in the classroom or on-line, and increasing post-licensing education requirements.

Re: the “New Broker Categories”- Pursuant to new Section 4735.01 (AA) and (GG) of the Ohio Revised Code, respectively, "Associate Broker" means an “individual licensed as a real estate broker under this chapter [4735] who does not function as the principal broker or a management level licensee”; and "Principal Broker" means an “individual licensed as a real estate broker under this chapter [4735] who oversees and directs the operations of the brokerage.” Pursuant to O.R.C. Section 4735.081 (A), “each brokerage is to designate at least one affiliated broker to act as the principal broker of the brokerage and any affiliated broker not so designated is to be considered an associate broker or management level licensee for that brokerage.” "Management level licensee" means a “licensee who is employed by or affiliated with a real estate broker and who has supervisory responsibility over other licensees employed by or affiliated with that real estate broker.” The supervisory responsibilities are not new, but are packaged nicely in an easy to read format in O.R.C. Sec. 4735.081 (C). Such responsibilities include: overseeing and directing the operations of the brokerage including the licensed activity of affiliated licensees, renewing and maintaining licenses and generating and maintaining company policies (and practices and procedures) and transactional records. The principal broker or brokers of a brokerage may assign to a management level licensee any of the afore-mentioned duties.

Re: Licensing Education- According to Am. HB 532, prospective licensees may now complete the required 120 hours of pre-licensing education “by either classroom instruction or distance education.”  O.R.C. Section 4735.01 (DD) defines “distance education” as instruction “accomplished through use of interactive, electronic media and where the teacher and student are separated by distance or time, or both.” Currently, only brokers have the option of on-line licensing.  All pre-licensing course work must still be taken by an accredited, public or private “Institution of Higher Learning.”

Am. HB 532 also increased from ten (10) to twenty (20) hours the post licensure educational requirements.

B.                 When does it become law? Am. HB 532 was signed by Governor Kasich on January 4, 2017 and becomes effective ninety (90) days thereafter.

C.                 Why is it significant? According to the bill’s sponsor, the new categories of “broker” were created to: 1) better reflect the way brokerage organizations operate; and 2) to hold those who engage in supervisory functions (i.e. Principal Brokers) accountable, while removing such accountability from brokers who do not have oversight responsibility.

Apart from limited opposition, the licensure modifications have been heralded as simply modernizing real estate education. Supporters of the legislation (including the Ohio Board of Realtors) assert that real estate courses and the profession in general can now be made more accessible to those previously hindered by geographic limitations, those looking to real estate as a second career and those who have difficulty learning in a classroom setting.

Ohio UCC Provision Re: Constructive Notice Applies to All Recorded Mortgages, Even With Defective Acknowledgement

On February 16, 2016, the Ohio Supreme Court decided In re Messer, Slip Opinion No 2016-Ohio-510, which addresses the application of ORC 1301.401 to recorded mortgages that were deficiently executed under ORC 5301.01.

This decision was issued at the request of U.S. Bankruptcy Court for the Southern District of Ohio, Eastern Division (the “Bankruptcy Court”), who asked the Ohio Supreme Court (the “Ohio Court”) determine whether ORC 1301.401, which provides that the recording of certain documents provides constructive notice, applies to all mortgages recorded in Ohio and whether 1301.401 provides constructive notice of a recorded mortgage that was deficiently executed under ORC 5301.01.

In this matter, Daren and Angela Messer (the “Messers”) took out a loan in 2007 which was secured by a mortgage. The notary acknowledgement was left blank bringing into doubt whether or not they executed the mortgage in front of a notary. The mortgage containing incomplete notary section was recorded with the Franklin Counter Recorder.  In 2013 the mortgage was assigned to JP Morgan Chase Bank (the “Bank”).

The Messers subsequently filed a Chapter 13 bankruptcy and commenced an adversary proceeding requested that the mortgage be avoided as defectively executed under ORC 5301.01. If successful, the Bank would have lost its secured position.

The Bankruptcy Court in this matter decided that the Ohio Court should make the determination on the application of 1301.401, which is part of Ohio’s Uniform Commercial Code (the “UCC”), to a recorded mortgage that is clearly defectively executed under ORC 5301.01.

ORC 5301,01 provides that a mortgage must be signed by the mortgagor and the execution must be acknowledged by the mortgagor in front of a judge or clerk of court in Ohio, or a county auditor, county engineer, notary public or mayor, who shall certify the acknowledgement and subscribe the official’s name to the certificate of the acknowledgement.

ORC 1301.401(B) provides that the recording with any county recorder of any document described in ORC 1301.401(A)(1) is constructive notice to the whole world the existence and contents of that document as a public record and of the transaction referred to in that public record. ORC 1301.401(C) further provides that any person contesting the validity or effectiveness of any transaction referred to in a public record is considered to have discovered that public record and any transaction referred to in the record as of the time that the record was first tendered to the county recorder for recordation.

The documents described in ORC 1301.401(A)(1) specifically includes documents referenced in ORC 317.08, which expressly references mortgages.

While the Messers argued that 1301.401 only applies to transactions governed by the UCC and shouldn’t apply to mortgages since mortgages are governed by Ohio contract law. The Court disagreed, finding that the statute’s clear language indicated that it applied to any document referenced in ORC 317.08, which included mortgages. Based on the express language in the statute, the Court held that ORC 1301.401 applies to all recorded mortgages.

The Court went on to disagree with the Messers other contentions and further held that the portion of ORC 1301.401 that states the act of recording provides constructive notice to the whole world of the existence and contents of the mortgage document is compatible with provisions of ORC 5301.01 and ORC 5301.23 and the rest of the Ohio Revised Code and the fact that it is part of the UCC and not ORC Chapter 5301 does not prevent it from applying to mortgages.

In conclusion, the Court has clarified that ORC 1301.401 applies to all recorded mortgages, and acts to provide constructive notice to the world of the existence and contents of a recorded mortgage even if it was deficiently executed under ORC 5301.01. This is a win for common sense.

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Real Estate Law 101: Open-End Mortgages

The following article was prepared by Alex Jones, Law Clerk for Kohrman Jackson & Krantz LLP.

What it is?

Generally, an open-end mortgage is one that remains open after it has been delivered to the county recorder, and it permits the lender/mortgagee to make advances on the loan that are secured by the original mortgage, but only to the extent the total indebtedness does not exceed the maximum principal amount identified. An open-end mortgage acts as a lien on the property described in the mortgage.

 

For example, let’s say borrower takes out a loan for $100,000 that the lender secures with a mortgage, and borrower draws down $10,000 in principal under the loan at closing. With an open-end mortgage, the lender may loan the additional $90,000 in principal and continue to secure the full amount of the loan with the original mortgage.

 

Ohio’s Open End-Mortgage Statute

In Ohio, ORC § 5301.232 governs open-end mortgages, and lenders must be certain to comply with the requirements of the statute in order to reap the benefits of an open-end mortgage. Specifically, to comply with the Revised Code, in addition to the parties intending it to be an open-end mortgage, the mortgage must state at the beginning that it is an “open-end” mortgage and indicate the total amount of principal (exclusive of interest) that may be outstanding at any time.

 

Why Lenders Use them

Lenders use open-end mortgages to advance loan funds to borrowers while maintaining a first priority lien and without having to issue a new mortgage after each advance. However, this right is not absolute.  The right is contingent upon whether the lender has the option to advance future loans or the obligation to advance future loans – the distinction matters.

 

When the future loan advances are optional, an intervening third party loan or mechanics lien may take priority over future additional advances. If the original lender/mortgagee makes additional loan advances after having received notice of the subordinate mortgage loan or other lien, and it was not obligated to make the advance, then it loses its first priority lien with respect to those later advances However, when the lender/mortgagee has an obligation to make an additional advance on the mortgage, then its lien on the additional advances will relate back to the time the original mortgage was recorded and will take priority over any intervening third party loan, including a mechanic’s lien.

 

There is flexibility under Ohio law as to the contractual language needed to make an advance obligatory.  A contractual obligation to make an advance arises even if the advance is conditioned upon the occurrence or existence, or the failure to occur or exist, of any event or fact. The Ohio Supreme Court has explained that as long as the language requires the lender/mortgagee to advance a certain and definite sum in a particular manner then it will be deemed obligatory even if no advancement is ever actually made.  Thus, a properly drafted open-end mortgage can ensure a lender maintains its first priority lien.

 

Borrower’s Right to Limit Indebtedness; Notice requirements

A borrower/mortgagor can limit the amount of the indebtedness secured by the original mortgage to the amount then outstanding.  To do so, the borrower must serve a notice to that effect on the lender/mortgagee prior to recording the notice. The notice must reference the volume/page number or the recorder’s file number, and the borrower’s signature  must be notarized. 

***

The above information is meant to provide a brief summary regarding open-end mortgages and is not intended to cover every issue that might arise in the context of an open-end mortgage.

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Casualty and Condemnation Provisions in Loan Agreements

Every mortgage loan agreement contains provisions that address casualty and condemnation (i.e., eminent domain) affecting the property.  All such provisions give the lender some degree of control over the proceeds and identifies what happens to the proceeds, and are usually given scant attention. However, these provisions often can be negotiated, at least with respect to how the proceeds are handled for any restoration of the property.

As a borrower, a property owner doesn’t want to be hamstring with red tape if the proceeds are not material, and a lender shouldn’t want that either. However, a lender needs to protect its security interest in the property.  The trick is to determine where to draw the line.

Typically, the loan agreement includes casualty and condemnation provisions that simply provide all proceeds from such events go to the lender, which may be applied to paying down principal on the loan.

Consider the following scenario, a new storm sewer is scheduled for construction along the road where mortgaged property is located. Eminent domain is being utilized to take a tiny sliver of the properties adjacent to the road. The amount of property to be taken has no material impact on the value of the mortgaged property and accounts for maybe 1-2% of the property.  However, if the loan agreement’s condemnation provision does not include a materiality threshold then the borrower will need to notify the lender, pay a few thousand in fees to the lender to cover its legal fees and contend with red tape over the use of the proceeds.

Typical approaches to identifying what condemnation or casualty events are material include a dollar threshold and a percentage of the property that is affected. When such an event does not trigger these thresholds then the borrower will retain all or some level of control over how the insurance or condemnation proceeds are spent.

For example, a restoration threshold will typically be set at around 5% of the outstanding principal balance on the mortgage loan. Therefore, if the proceeds the result from the casualty or condemnation event do not exceed that threshold then the lender is more likely to permit borrower to keep the proceeds.

Additionally, a lender will want to look at how the property is functionally affected by such events. For example, if the land taken by eminent domain is less than 10%, the percentage of leases that remain in full force and effect after a casualty event exceeds 75% or the less than 35% of the improvements were destroyed, then the lender will be more likely to permit the borrower to restore the property and, depending on other criteria, receive the proceeds for restoration.

When negotiating loan agreements, borrowers should give some attention to the casualty and condemnation (eminent domain) provisions, with the goal of obtaining as much flexibility as possible.
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Mortgage Releases: New Ohio Law Expands Requirement of Mortgage Lenders to Timely File Releases to Cover Commercial Mortgages

Under prior Ohio law, the requirement that a lender holding a mortgage lien had to timely file a release evidencing its satisfaction or face penalties only applied to residential mortgages and the penalty was paltry. Anyone who has refinanced commercial mortgages or has represented a lender or borrower on commercial mortgage refinancing, knows how often a prior mortgage that was paid off still shows up in the title report because the mortgage release wasn't filed.  This drives up the legal costs and can delay closing while the borrower and counsel are chasing down that lender to obtain the release that already should have been recorded.

Upon passage of Am. Sub. H.B. 201 (HB 201) earlier in 2015, the rules have changed.  HB 201 was effective March 23, 2015 and does several things with respect to mortgage satisfactions:

• It expands the statute to cover commercial mortgages as well as residential.
• A current property owner can pursue the mortgage lender of a prior owner for damages (This is critical when a property transfer is involved and the new owner financed the purchase with a new loan. The fact that the prior owner's lender failed to file its mortgage release may not be discovered until after closing.). The current owner's right to seek civil damages of $250 remains but does not bar the current owner from seeking other legal damages and remedies.
• The mortgagee (i.e., the lender holding the mortgage) included the original lender/mortgagee and any successor or assignee of the original mortgagee.
• If a mortgage is not released upon 90 days of having been satisfied, the currently owner must provide written notice to the mortgagee of its failure to release the mortgage of records.
• The owner's notice must notify the mortgagee of the following: (1)  the duty to record a release, (2) the identify of the satisfied mortgage, (3) the mortgagee's failure to record the release, (4) the consequences of failing to record the release within 15 days of receiving the notice (i.e., actions for damages, costs, and reasonable attorney fees, as provided in HB 201).
• If the mortgagee fails to record the mortgage satisfaction within the 15 days, the current owner will be entitled to seek recovery in a civil court action of reasonable attorney fees and costs that are incurred as a result of having to bring such action or otherwise obtain compliance by the mortgagee, plus damages of $100 per day for each day of noncompliance, up to a cap of $5,000. This does not preclude the current property owner from seeking other legal damages or remedies that might be available to the owner depending on the facts and circumstances of each individual situation.
• The property owner can seek both the initial $250 in damages plus the additional damages that become available after having provided the required notice.
• Mortgagees that timely file a release will not be held in violation of HB 201 just because a county recorder's office or division fails to timely process the mortgage release.

While not perfect (I think the $5,000 cap is too low with respect to larger lenders for whom that amount is pocket change.), this is a huge step in the right direction.
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When a Mortgage Covers More Than One Property

When packaging several properties into one mortgage loan, the lender often files one mortgage that covers all the properties. Add to this the fact that in Ohio, the mortgage is often structured as an open-end mortgage with the maximum total indebtedness identified on the first page.

This has occasionally caused problems for property owners in Ohio due to aggressive attorneys acting on behalf of local school systems. The maximum total indebtedness is used as the basis of a challenge against the current property valuation in hopes of increasing the property values and therefore the real estate taxes on the property.  Although the property owner will ultimately win against this faulty logic on the part of the school system and its counsel, its time and expense from the fight cannot be recouped. 

When negotiating the mortgage document, the property owner/borrower’s preferred solution would be a separate mortgage document for each property identifying only the amount of the loan allocated to that property. This solution doesn’t work for a lender as the properties are intended to be cross-collateralized, each property securing the whole loan amount not just the ‘allocated’ amount.

One compromise that lenders have accepted is to identify the allocated value per property on the first page along with the maximum principal indebtedness.  To protect the lender’s position, additional language can be added acknowledging that the properties are cross collateralized. For example, the following language can be included as a new provision:

"Mortgagor acknowledges that Mortgagee has made the loan to Mortgagor upon the security of its collective interest in the real property and in reliance upon the aggregate of the projects constituting the real property taken together being of greater value as the collateral security than the allocated value of each individual property taken separately.  Mortgagor agrees that such cross-collateralization shall in no event be deemed to constitute a fraudulent conveyance."

While the foregoing solution may not be perfect, it is a workable solution. Property owners who have this concern should communicate the issue to their lenders early in the loan process to allow time for the loan documentation to be properly drafted.

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U. S. Supreme Court Issues Decision in Favor of Bank of America in Chapter 7 Lien Stripping Case

The U.S. Supreme Court issued its decision today in the consolidated cases of Bank of America, N.A., Petitioner v. David B. Caulkett, and Bank of America, N.A., Petitioner v. Edelmiro Toledo-Cardona, declining 9-0 to void the junior mortgage liens on the respondents’ homes when the senior lienholder’s debt exceeds the property’s value. This decision reverses the judgments of the Eleventh Circuit.

The facts in each of these cases are essentially the same. The debtors, respondents David Caulkett and Edelmiro Toledo-Cardona, each had 2 mortgages on their respective homes. The petitioner, Bank of America, holds the junior mortgage lien on each of the homes. The junior mortgage liens are completely underwater as the amount outstanding on the senior mortgage liens exceeds the current value of the homes. The debtors moved to have the junior mortgage liens voided, i.e., ‘stripped off”, under §506(d) of the Bankruptcy Code.

Section 506(d) states that “[t]o the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” Therefore, the secured claim can be stripped off only if its right to repayment from the debtors is not an allowed secured claim. With minor exceptions that do not apply in these cases, a claim filed by a creditor is deemed “allowed” under Section 502 of the Bankruptcy Code if no interested party objects or, if an interested party objects, the bankruptcy court makes the determination that secured claim should be allowed. The parties in these cases had agreed that Bank of America’s claims were “allowed” claims. Their disagreement was over whether Bank of America’s claims were “secured” claims as defined under §506(d) of the Bankruptcy Code.

A straight reading of §506(d) of the Bankruptcy Code would tend to support the debtors’ construction of a secured claim. However, back in 1992, in Dewsnup v. Timm (502 U.S. 410), the Court came to a different interpretation that defined the term “secured claim” under §506(d) to mean a claim supported by a security interest in property, regardless of whether the value of that property would be sufficient to cover the claim. This interpretation essentially limited §506(d)’s application to voiding only those liens where the claim it secures has not been allowed. 

To remain consistent with its prior decision, the Court reversed the lower court decisions and refused to void Bank of America’s junior mortgage liens. The Court noted that it was not being asked to overrule its decision in Dewsnup and noted to decide as requested by the debtors, it would in the same term having more than one definition and would leave an “odd statutory framework in its place.” One has to wonder what the Court’s decision would have been if it was in fact asked to overrule Dewsnup.

The end result is Bank of America’s junior liens remain in place on the homes.  Bank of America won the battle in protecting its future interest as a junior lien holder. However, if the bankruptcy courts were to grant a motion for the senior lenders to proceed with foreclosure actions, Bank of America’s junior liens could still be stripped if the winning bids at sheriff’s auction are not high enough to cover both the senior and junior liens.
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Supreme Court Clarifies Rescission Right Under the Truth in Lending Act

On January 13, 2015, the U.S. Supreme Court issued its decision in Jesinoski et us. V. Countrywide Home Loans, Inc., et al. (No. 13-684) addressing a split in the appeals courts regarding what a borrower must do to rescind a home mortgage by the three-year deadline provided under the Truth in Lending Act (“TILA”).

Under TILA, the lender on certain home mortgage refinancings or home equity lines of credit must provide certain disclosures to the borrower. The borrower then has three days after receiving these disclosures to rescind the loan, and then give the money back.  However, if the lender fails to provide the required disclosures or the disclosures are found to be inaccurate, the borrower has up to three years to notify the lender that he or she wants to rescind the mortgage.

The issue has been what is borrowers must do to exercise their rescission right. Some courts have held that a written notice is all that is required within the three year deadline, while other courts have held that a lawsuit seeking rescission must be filed within the three years.

The U. S. Supreme Court unanimously held in its ruling that the statute states the borrower can rescind the mortgage simply by notifying the lender, and there is no requirement in the law that a lawsuit has to be filed within that time frame. This decision is a blow to lenders who are seeking ways to stem the bleeding from foreclosures that drag out for years.

The purpose of a rescission right under consumer protection laws is to provide protection for homeowners from deceptive or abusive lending practices. If a homeowner closes on a mortgage loan that is subject to the act only to learn that critical information on the fees or interest charged  as not communicated correctly, if at all, in violation of federal disclosure requirements, then that homeowner would have the right to seek rescission of the mortgage and return the money.

In practice, things are a little murkier. A rescission cannot be completed unless the borrower gives the money back.  However, it is not uncommon for borrowers that do not have the means to repay, to use the rescission process as a stall tactic because it allows them to remain in the home without making payments during this process. Also, a lot of gamesmanship comes into play, as the rescission notice is often filed on the last possible day before the three year deadline expires.  Lenders believe that requiring borrowers to file a lawsuit seeking rescission by the three year deadline would help weed out those who know their claims are frivolous and are using the process merely as a stall tactic.

In 2010, the Federal Reserve Board proposed new rules that would provide clarifications to rescission claims in court proceedings as well as other changes to rules under TILA. However, the proposed changes were never implemented and jurisdiction over TILA regulations has been transferred to the Consumer Financial Protection Bureau.

While lenders have legitimate concerns, it is not up to the courts to rewrite TILA or the TILA regulations. Maybe it is time for Congress to step in and bring some reason into the process.
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New Year, New Ohio Real Estate Legislation

CTI Commercial Title Update Reprinted with Permission from Linda M. Green, Esq., Underwriter, Chicago Title Insurance Co.

Happy New Year to all and to start the New Year we want to make you aware of two important bills that were passed by the Ohio legislature at the end of 2014.

Amended Substitute House Bill 201 requires lenders on both residential and commercial property to record a satisfaction of mortgage within 90 days from the receipt of funds sufficient to satisfy the mortgage debt.  If the mortgage is not satisfied within 90 days, the current owner of the property may provide the lender with a written notice of lender's failure to file a satisfaction. If after 15 days of the receipt of the notice the lender has still failed to record a mortgage satisfaction the owner may bring a civil action to recover reasonable attorney fees and costs incurred in filing the action plus damages of $100 for each day of lender's non-compliance, not to exceed $5,000 in damages.

Substitute House Bill 9 creates a statutory framework for a receiver to sell real property by private sale, private auction or public auction, including the sale of real property free and clear of all liens except for a lien for real estate taxes and assessments.  Before authorizing a receivership sale the court may require the receiver to provide evidence of the value of the property and market the property for sale.  The bill also provides that any receivership sale can be made only after the following have occurred:

    a.    An application is made by either the receiver or the first mortgage holder to sell the property and either the specific terms of the offer to purchase are disclosed or the procedure for the conduct of the sale is outlined.

    b.    10 days prior to the application, a written notice of the intent to sell is served on all parties having an interest in the property as determined by a preliminary judicial report or a commitment for an owner's policy of title insurance.

    c.    An opportunity for a hearing is given to all interested parties.

    d.    The court has issued a final appealable order of sale of the real property.

This is just a brief synopsis of these two bills.  If you would like any further information or copies of either of these bills please contact Linda Green at linda.green@ctt.com

 Chicago Title has been serving Ohio for over 50 years. Through their nationwide network, they provide title insurance, underwriting, escrow and closing services to every spectrum of the real estate industry. For more information, visit them at :  www.cticnow.com

Real Estate Resolutions and Predictions for 2015

It is that time of the year again to ponder what is expected to happen next year and what we should resolve to do about it. One prediction that I suspect will hold true (even though it is sunny and 55 degrees in Cleveland today) is that it will snow again in Ohio this winter. Other predictions that I hope become true in 2015 are a victory by Ohio State over Alabama, an NBA title for Cleveland and a Super Bowl victory for Cincinnati.

Beyond sports dreams and weather expectations, since this is the Ohio Real Estate Blog, we have also uncovered the following real estate resolutions and predictions for 2015:

Commercial Real Estate Predictions

According to the National Association of Realtors [“NAR”]), the forecast looks pretty bright for commercial real estate in 2015 in the following sectors:

1.    Apartment Sector: The rental market is likely to remain a “landlord’s market” in 2015, with vacancy rates expected to stay below 5 percent in 2015. This will likely lead to demand pushing rents up even higher and keeping them above inflation.  Apartment rents are projected to increase 4.1 percent in 2015.

2.    Office Sector: Vacancy rates are likely to fall from 15.7 percent to 15.6 percent in 2015, with rents expected to rise 3.3 percent next year.

3.     Industrial Sector: Vacancies are likely to rise from 8 percent to 8.4 percent next year, while annual rents are expected to rise 2.9 percent in 2015.

4.     Retail Sector: Vacancy rates are projected to drop from 9.7 percent this year to 9.5 percent in 2015. Average retail rents are likely to rise 2.5 percent next year.

Residential Real Estate Predictions

A review of predictions from the National Association of Realtors (“NAR”), the Mortgage Bankers’ Association, Freddie Mac economists, Trulia, Zillow and Forbes Magazine indicates:

1.         Mortgage Rates: Most of the experts expect the Federal Reserve to increase the federal funds rate by mid-year, with a rise in mortgage interest rates soon to follow. The predictors estimate mortgage rates to rise between 4.5 and 5 percent by the end of 2015.

2.   Home Prices:  Zillow predicts home prices will rise just 2.5% in 2015; Freddie Mac expects appreciation to drop to an average 3 percent in 2015 (continuing a slide from 9.3% in 2013, and 4.5% in 2014) while Realtor.com predicts an annual gain of 4%-5%.  Most experts agree that slowing price increases doesn’t mean that homes will become more affordable, because of the expected rise in interest rates and the fact that the rate of home price appreciation will be faster than the rate of increase in incomes next year. Ohio home values have gone up 5.4% over the past year and Zillow predicts they will rise 2.3% within the next year.

  

3.    Housing Starts: According to Freddie Mac, homebuilding is expected to ramp up in the new year, projected to rise between 16-20 percent from 2014. That will likely help total home sales to climb by about 5 percent, reaching the best sales pace in eight years.

4.        Rents: In 2015, demand for new households is expected to increase, but instead of buying many will rent, because they will not be able to afford a down payment. This factor is expected to increase demand for multi-family housing, which is projected to push rents up 3.5% in 2015.

5.       Multi-family Mortgage Originations: Mortgage originations for the multi-family sector have increased approximately 60 percent between 2011 and 2014. As mortgage rates begin to climb, and refinancings level off, a more modest 10-15% increase is projected for 2015.

While it appears the leading real estate indicators demonstrate a mixed bag of tricks for 2015, (at least re: housing) pundits have a straightforward explanation: the housing market has been shifting out of rapid recovery and into a more stable phase that economists are calling the new normal. In other words, according to a recent blog commentator, “It appears 2015 is the best time to fix your credit and start looking for a home you can settle into.”

Real Estate Resolutions

Whether or not you own commercial real estate, or your own home, following through with these resolutions could dramatically increase your bottom line:

1. Make additional mortgage payments. Making extra monthly payments can dramatically shorten the time until your mortgage will be paid in full. One example by Bankrate.com shows that paying an extra one-twelfth of a 30 year, $852/month, $150,000 mortgage (at 5.5%)  or $71, each month increases the payment to $923, but shortens the term by five years and cuts the interest expense over the term of the loan by $30,789.

2.      Pay off a second mortgage.

3.      Refinance. While you always need to factor in closing costs, “points” (percentage points of the loan) and how long you expect to own the property, all of the forecasters show rates increasing in 2015. In other words, if you are waiting for rates to decrease further before you refinance, odds are you will have waited too long.

4.     Challenge your property tax assessment. If property prices have dropped in your neighborhood, you may want to consider appealing your real estate taxes since the tax is based on your property’s value.

5.            Take smart steps before you buy or sell. If you expect to buy in the near future, work on your credit score and engage a broker sooner vs. later to get a feel for the market. If you expect to sell in the near future, start the de-clutter process now. It is also time to stop deferring maintenance, and to start repairing major items that devalue your property.

Here is hoping all the good predictions come true, all the not so good predictions never materialize and all of our readers have a happy and healthy New Year.

It is a Good Time to Borrow Again

“Low” is the operative word of the day.

According to the US Energy Information Administration, U.S. weekly regular gasoline retail prices averaged $2.78/gallon (gal) on December 1, the lowest since October 4, 2010. U.S. regular gasoline retail prices are projected to continue declining for the remainder of the year, and average $2.60/gal in 2015.

But wait, there’s more. Mortgage rates are below 4% again, hovering around their lowest level since June 2013.They started the year a little over 4.5 percent. A 15-year-loan is now averaging 3.1 percent as opposed to 3.9 percent for a 30-year loan, according to today’s Bankrate.com averages

And that’s not all. The Federal National Mortgage Association (“FNMA” or “Fannie Mae”), as of December 13, 2014, and Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”) as of March 23, 2015 will back loans with 3 percent down payments for first-time home buyers. Fannie Mae, Freddie Mac, the National Association of Realtors (“NAR”) and other groups believe the “3% Down Payment Mortgages” could provide a boost to first time home buyers with good credit, but little cash. Industry surveys have shown that 40-45% of those who rent, do so because they cannot afford a down payment.

Critics are concerned that the program will just create more mortgage availability for customers who are more likely to default. In a recent press release, Federal Housing Finance Agency Director Mel Watt disagreed with the critics, stating that the program “provides a responsible approach to improving access to credit while ensuring safe and sound lending practices.”

Among the safeguards and other requirements to qualify for a 3% Down Payment Loan are:

“First Time Home Buyer” (Not having owned a home in the last 3 years)

·         “Primary Residence” (Not for vacation homes or investment property)

·         Minimum Credit Scores (FannieMae-620; Freddie Mac- 660)

·         Documentation of income, assets and employment

·         Credit Counseling

·         Private Mortgage Insurance (but may be canceled once mortgage balance drops below 80% of home’s value)

Whether or not the 3% Down Payment Loan opens the flood gates for first time home buyers, or clutters foreclosure dockets, one thing is clear: It is good time to borrow again. We may not see gasoline prices and mortgage rates this low and incentives this high again, without a time-traveling DeLorean.

Vacant Property Registration Ordinances: Understanding the Issues

Since the foreclosure crisis in 2008 – 2009, many communities in the U.S. have enacted “vacant property registration” ordinances (VPR ordinances) as a tool to help them deal with problem properties that are vacant. There are over 80 such ordinance issued or proposed in the state of Ohio alone.



VPR ordinances can take different approaches—some are triggered upon a property becoming ‘vacant’, others upon a foreclosure action being initiated, or use a combination of the preceding two approaches. The problem occurs with the implementation of these ordinances due to vague language and muddled objectives; i.e., the devil is in the details.


Many communities have a serious problem with vacant homes and buildings with owners that do not care (or do not have the resources) to properly maintain the property. Understandably, local communities want to address this problem, and VPR ordinances are often the result.  Because VPR ordinances don’t just apply to the bad actors, but pull in everyone else as well, it is important to look at the language in a draft VPR ordinance to evaluate how it might be unevenly enforced and what might be the unintentional results. Too many of these ordinances inadvertently punish the many for the crimes of a few.



Below are some of the potential issues in VPR ordinances:



How is “owner” defined? — Many VPR ordinances broadly define the “owner” of a property to include mortgagees and loan servicers, and agents of the foregoing, as well as anyone else who directly or indirectly controls the property.  There is often no clear guidance as to what constitutes “directly or indirectly in control of a property”.  With such vague language, any property manager or realtor or other vendor providing similar services could be pulled into the ordinance’s reach if an enterprising public employee chose to interpret it that way. Also, the vast majority of mortgages are owned by the federal government (e.g., FHA, HUD, VA, USDA-RD) or through one of its quasi-governmental entities (e.g., Fannie Mae or Freddie Mac). How does a local community expect to enforce its ordinance against the federal government? The likely result will be uneven enforcement that impacts the local lenders the hardest.



How does the ordinance define “vacant”? — Again, VPR ordinances can define how a structure is determined to be “vacant” in rather broad terms.  An over broad definition of “vacant” can pull in structures that are not in disrepair and therefore not a problem for the community. Definitions of “vacant” in many VPR ordinances include exclusionary terms such as “lawfully occupied” without ever defining what that means. Its use may be intended to appropriately exclude well-tended vacation homes and similar homes. However, vague and over broad language puts significant discretion into the hands of the local government to interpret it however is convenient, and results in arbitrary and unequal applications of the ordinance.


Inspections — Many VPR ordinances require property inspections as part of the registry process. Tightly drafted ordinances will make it clear as to what is being inspected and the precise standards against which the property will be measured. Unfortunately, many ordinances fall short, so property owners and other “owners” are left in the dark as to what will be expected of them. Also, many VPR ordinances fail to clarify what type of inspection will be conducted. Is the inspection only of the exterior grounds or can a municipal employee demand to inspect inside the structure? This latter demand triggers constitutional concerns as the 4^th amendment to the Constitution which protects citizens from unreasonable searches.

Cash Bonds — VPR ordinances often include requirements for a cash bond to be paid by the mortgagee prior to pursuing a foreclosure. Smaller local mortgage lenders cannot afford this and are more likely to simply stop making mortgage loans in that community. This reduces options for the residents living there.  Larger lenders might comply with the demand but will simply pass the higher risks and costs of VPR ordinances on to the borrower in the form of higher interest rates and closing costs. This again reduces affordable options for the residents of that community and increases the attractiveness of homes in other communities who have no such requirement. Further, if no problems arise on a particular property, how does the mortgagee obtain a return of the cash bond it provided?  Does the VPR ordinance provide a mechanism for segregating the cash bonds from its operating funds and a return of unused funds to the mortgagee when the property is no longer vacant?



Penalties — VPR ordinances typically charge fines for violations and some even include criminal charges. The issue with many such ordinances is the lack of any provision for waivers or reduced fees when the community has suffered no harm. Based on the language in many VPR ordinances, it is possible for an owner to be subject to criminal charges for a mere paperwork violation. VPR ordinances that provide for both civil penalties and misdemeanor charges often do not provide clear direction as to when a violation can escalate to the more serious criminal penalties.



Enforcement — Given the vague and over broad drafting of many VPR ordinances, owners will likely need to appeal decisions and time frames for filing appeals are often short. Further, the forum to hearing the appeal may or may not appropriate. As communities typically envision vacant dilapidated structures owned by slum lords as the target of the legislation, the appeal board will often be one that deals with that type of structure. With the over broad reach of many VPR ordinances, the appeal forum may be ill suited for its purpose.   Also, VPR ordinances frequently include language to limit the process for further appealing the decisions. While it is good to have clear language as to when administrative orders become final, that should not prevent a final administrative order from then being appealed through the court system. Vague or unduly limiting language on the appeal process can create due process concerns.



Whether these VPR ordinances actually work is open to question. Most communities do not have clear metrics in place to determine this, and they may unintentionally harm their residents in the process.   

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Pay your Taxes before your Lender Redeems your Property

A mortgage holder has the right to redeem (take back) real property that is the subject of a real estate tax foreclosure when the owner does not pay taxes on the land, according to the recent decision of the Ohio Supreme Court in In re Foreclosure of Liens for Delinquent Land Taxes v. Parcels of Land Encumbered with Delinquent Tax Liens, Slip Opinion No. 2014-Ohio-3656).

The facts of this case are relatively straight forward. In June, 2003, Brandi and Troy Wagner executed a promissory note and mortgage in favor of Vanderbilt Mortgage and Finance to finance their purchase of a mobile home and land in Coshocton County. The Wagners failed to pay taxes on their property, so the county treasurer initiated a tax foreclosure proceeding for delinquent taxes (in the amount of $825.84). Because the Wagners did not respond to the foreclosure complaint, the trial court granted the treasurer’s motion for default judgment and ordered the sheriff to sell the property.

Although not explained in the record, the sheriff held two sales of the property; one at which Vanderbilt purchased the mobile home. At the other sale, James Matchett purchased the property with a winning bid of $15,100 and then deeded the property to Alan and Janette Donaker. Before either sale of the land was confirmed, however, Vanderbilt filed a notice to redeem the property and a motion to vacate the prior sales and foreclosure.

The trial court granted Vanderbilt’s motion, thereby vacating and setting aside the sale and entry of foreclosure. The trial court determined that Vanderbilt (a mortgage holder with a recorded interest in the property) was a “person entitled to redeem” under Ohio Revised Code Section (“R.C.”) 5721.25.

The Donakers and the Coshocton County Treasurer then appealed the trial court’s decision to the Fifth District Court of Appeals. The court of appeals held that Vanderbilt was not entitled to redeem the property, and reversed the judgment of the trial court.

Vanderbilt then appealed to the Ohio Supreme Court which characterized the issue

before the court as whether or not Vanderbilt, as a mortgage holder, qualifies as “any person entitled to redeem the land” under R.C. 5721.25.

Pursuant to the second paragraph of R.C. 5721.25: “any person entitled to redeem the land (emphasis added) may do so by tendering to the county treasurer an amount sufficient, as determined by the court, to pay the taxes, assessments, penalties, interest, and charges then due and unpaid, and the costs incurred in any proceeding instituted against such land under Chapter 323 or this chapter of the Revised Code, and by demonstrating that the property is in compliance with all applicable zoning regulations, land use restrictions, and building, health, and safety codes.”

Appellee Alan Donaker contended that the only reasonable interpretation of the statute is one that precluded anyone but the property owner from being a “person entitled to redeem” under R.C. 5721.25 and that broadly interpreting the phrase “any person” would thwart the intent of sheriff’s sales by allowing mortgage holders to sit and do nothing until after the sheriff’s sale.

Vanderbilt contended that when read in conjunction with R.C. 5721.181, which provides the form of notice required for tax foreclosure proceedings—the phrase “any person entitled to redeem the land” under R.C. 5721.25 includes “any owner, or lienholder of, or other person with an interest in the property” because those exact words are utilized in R.C. 5721.181.

The Supreme Court of Ohio agreed with Vanderbilt, reasoning that when statutes are clear and unambiguous, they must apply the statutes as written. The court cited previous cases holding that: (1) the court must “give effect to the words used, refraining from inserting or deleting words,” and (2) that the meaning of “any” [in a statute] is “every” or “all.”

The court also backed up its decision by contrasting R.C. Chapter 2329 (which governs judicial foreclosure proceedings such as mortgage foreclosure) with the language governing tax foreclosures in R.C. 5721.25. In R.C. 2329.33, the Ohio General Assembly specifically limited the right of redemption to “the debtor.” But in R.C. 5721.25, the legislature instead utilized broader language by granting the right of redemption in a tax foreclosure proceeding to “any person entitled to redeem.”

Acknowledging that their decision might be interpreted as unfair to property owners,

the court justified its holding by concluding that “any perceived inequity caused by our holding to purchasers or property owners like the Wagners must be balanced against the rights of others with competing interests, including those of a mortgagee, or lienholder, to protect its interest in the property where a mortgagor, or property owner, has fallen

delinquent in tax payments.”

What’s the moral of this story? Pay your taxes…at least before your county files a foreclosure action and your lender redeems your property.