Documents

BY KATHRYN KELLAM, ESQ.
BWW LAW GROUP, LLC^∗ 
USFN MEMBER (MD, DC, VA)

As published in the Summer 2024 USFN Report

New Requirements for Foreclosing Subordinate Mortgages in Virginia

Virginia – also known as the “Old Dominion” – is not historically recognized for innovating new consumer protections. Indeed, the non-judicial foreclosure process in Virginia has remained largely unchanged for many decades. Surprisingly, in its 2024 legislative session, and for the second time in four years, the General Assembly enacted substantial changes to the procedures governing foreclosure sales in the Commonwealth.

This year’s enactments focus on foreclosure sales pursuant to “subordinate mortgages,” are nested in Virginia Code Section 55.1-321, and require the holders of subordinate deeds of trust to jump through additional hoops to foreclose on defaulted subordinate deeds of trust. The impetus for the bill was concern over junior deeds of trust on which borrowers had not made payments in many years. While the bill was met with some opposition in Virginia’s Senate, it was eventually passed, and Virginia’s governor signed the bill which went into effect on July 1, 2024.

The new additions to the statute will require subordinate lienholders to submit an affidavit confirming whether monthly periodic statements were sent to the property owner for each period that any interest, fees, or other charges were assessed towards the loan balance. If periodic statements were not sent, the lienholder is required to identify the exemption upon which they have relied to justify not having sent periodic statements. If the lienholder cannot identify such an exemption, the newly constituted statute seems to envision waiving the interest, fees, and other charges accrued during periods in which statements were not sent. The affidavit is also required to provide an itemized list of the current amount owed and identify any periods of time for which interest, fees, and other charges have been waived.

In addition, a copy of the affidavit must be sent to the borrowers, via certified mail, return receipt requested, with a written notice that after 60 days, the lender will request that the trustee under the deed of trust proceed with scheduling a foreclosure sale. This creates a 60-day delay in foreclosure timelines for deeds of trust that fit within the parameters of the statute. The statute also provides consumers with a mechanism for petitioning the Circuit Court to determine the proper balance secured by the subordinate mortgage and allows for recovery of their attorney’s fees and costs if the courts determine that interest, fees, and costs were charged towards the loan improperly pursuant to the statute.

Fortunately, there are several exemptions. For example, the affidavit and notice requirement does not apply to subordinate lienholders who are the original creditor or a mortgage servicer acting on the original creditor’s behalf. In addition, federal or state-chartered banks and credit unions are exempt.

The statute also requires a Trustee to obtain certification from any purchaser of property at foreclosure sale that any superior security instruments will be paid in full within 90 days of the recordation of the foreclosure deed. This applies to sales where the property reverts to the investor (REO) as well as sales to third-party purchasers. Put another way, if the written one-price bid submitted by the lender is the winning bid at the sale, the junior lienholder has 90 days (from recordation of the Trustee’s Deed) to pay off the senior deed of trust. If the purchaser does not comply, then the borrower has the right to again petition the Circuit Court for the applicable jurisdiction for recovery of any payments that the borrower made towards the senior instrument post-foreclosure sale. In practice, this enforcement mechanism will be rarely triggered. It is a rare case where a foreclosed borrower continues to make monthly payments towards their senior deed of trust post-sale. This portion of the statute is not likely to be enforced on a regular basis.

These new statutory provisions certainly should be taken into account when formulating strategies for moving forward with foreclosure of defaulted junior deeds of trust in Virginia, especially those on which payments have not been made for long periods of time. In addition, lenders and servicers should pay careful attention to the requirements for sending periodic statements moving forward.