I read with interest the recent Massachusetts case of Property Acquisition Group, LLC v. Kenneth Ivester et al. 95 Mass. App. 170 (2019) where the Massachusetts Appeals Court found that a foreclosing mortgagee’s failure to evaluate the development potential of residential property may have entitled the former mortgagor/homeowners to damages. It seemed to me the Appeals Court did not take into account all relevant factors.
Although the property was assessed by the municipality at $361,900, the homeowners, the Ivesters, argued that since the property could have been subdivided into two lots, the value at the time of foreclosure was $975,000.00. The property sold at auction for $355,000.00. The Appeals Court found that since FNMA failed to obtain an appraisal of the property and did nothing beyond statutory compliance in promoting the foreclosure sale, there was an issue of fact as to whether FNMA complied with its foreclosing mortgagee’s duty to exercise good faith and reasonable diligence. It sent the case back to the lower court to determine the Ivester’s damages.
The court failed to consider several legal and factual issues.
The opinion does not disclose whether the lender that originally gave the loan had any knowledge of the property’s alleged development potential. It is possible the Ivesters themselves were not aware of it since they used the buyer at foreclosure’s plan for subdivision of the property to support the $975,000 alleged value. It is possible the alleged development potential leading to the Ivesters higher alleged valuation resulted from zoning or other legal changes that permitted the alleged subdivision of the property after the mortgage was given. Alternatively, the lender may have been aware of the possible higher value of the property but was not concerned because the loan amount the Ivester’s sought was well within the value of the property as a single family residence,. The Ivesters purchased the property in 2003 for $399,000, leading to the inference that neither the lender nor the Ivester’s were concerned about the property’s alleged development potential. If all this is true, it is hard to imagine why FNMA would do anything other than market the property as a single family residence.
Further, the court appeared to require FNMA to control factors no foreclosing lender can. It appeared to equate an appraisal and additional marketing expenditure with automatic higher bids. It is impossible to say that obtaining an appraisal and expending more on marketing would conclusively have produced higher bids. Nothing in the opinion compels the conclusion that all permits necessary for a two lot subdivision were obtainable. Typically in arms length transactions involving small lots builders purchase such properties with sales agreements conditional on the builder obtaining the appropriate permits, usually requiring many months to do so. Such purchases by builders depend on many factors, such as the location of the property, the surrounding neighborhood, the state of the real estate market at the time of purchase, availability of financing and current interest rates. A builder bidding at auction would have to convince a bank to lend money in an amount far in excess of the property’s appraised value based on its current use as a single family residence.
It is entirely possible the purchaser at the foreclosure sale only purchased the property because the price was low enough that the purchaser could obtain a profit after the expenditures of holding the property for a period of time while obtaining permits, removing the existing dwelling, building new dwellings and paying a broker to sell them. It is also possible the purchaser at the foreclosure sale obtained the $975,000 appraisal only as a marketing tool for its own sale of the property. Online estimates for the value of the single family residence at issue in the case are $455,000-$500,000. If this is the price range for the prospective new houses on the property, it would make little business sense for a bidder at auction to pay $975,000.
The court appears to suggest FNMA should have set a higher opening bid in order to have ‘bid up’ the sale price. This is unwise for a foreclosing lender. A ‘surplus’ at a foreclosure sale is calculated as the high bid amount in excess of the amount owed the foreclosing lender. So, if FNMA was owed $320,000 at the time of auction, and the high bid at the foreclosure was $355,000, FNMA was required to remit the difference between the $320,000 mortgage amount and the $355,000 high bid sale price to the mortgagor.
The problem with a foreclosing lender bidding to raise the ultimate high bid is that the lender may end up having to pay the mortgagor. Were Fannie Mae the purchaser at the foreclosure in the above hypothetical, it would be required to pay the mortgagor the surplus of $35,000.00.
Foreclosure of real property is a lengthy, expensive, cumbersome process of last resort and can produce liability for the lender, as the Ivester case shows. Lenders reasonably accept bid amounts below the amount owed to liquidate the account and put an end to further loss and expenditure. “Bidding up’ the purchase price, i.e., making bids in excess of the amount owed on the mortgage is antithetical to these concerns. It is doubtful that most mortgage bank employees have the skill or stomach for the risk this entails.
Admittedly, the court’s ruminations as set forth above were not part of the court’s holding. The holding of the case is a requirement that a foreclosing lender “…in some way ascertain the fair market value of the property in order to satisfy its duty of good faith and reasonable diligence…” It also held that the correct measure of damages was to be the difference between what the property would have brought at auction had FNMA met its duty of good faith and reasonable diligence and the sale price FNMA obtained. Based on all of the above, it is hard to see how the Ivesters could conclusively show what the property would have brought at auction.
Further, it is questionable that a foreclosing mortgagee’s possession of an appraisal would somehow garner higher bids for the property. Even if FNMA had obtained an appraisal showing a value based on the property’s alleged development potential, it is uncertain what FNMA would have done differently. Marketing the foreclosure sale stating the property’s alleged development potential would have to be done with extreme caution. Purchasers at foreclosure sale are entitled to rescission if the foreclosing mortgagee makes inaccurate representations.
Outside of the case’s holdings, the court’s observations are difficult to square with lender’s legal duties and the practicalities of foreclosure sale.