REI INK

Legal

Understanding the Difference Between RIN and RON

E-closings are likely here to stay, so make sure you understand how they can be used. Typically, the closing process includes a variety of inperson tasks, culminating in the actual signing ceremony. To help keep real estate transactions moving forward during the coronavirus pandemic, the closing and title world had to consider alternatives to traditional inperson closings. E-closing seemed like a reasonable option during a time of physical distancing. States with remote online notary (RON) laws could rely on existing processes that governed how to complete closings online. For other states, there was a push to lobby state governors to allow remote notarizations and closings. By the end of March 2020, some state governors had issued executive orders (pursuant to their authority to issue emergency orders) allowing for the expansion of the definition of the term “in the presence of” to also mean “electronic presence.” That allowed notarizations and closings to take place online and without actual person-to-person physical contact—and in the absence of existing RON state law. A primary purpose of these state orders was to help the housing market continue to close transactions during the health emergency. E-Closing Variations Variations of the e-closing process include Paper Remote Online Notarization and In Person Electronic Notarization. Two other variations that are more prevalent are Remote Online Notary (RON), as mentioned previously, and Remote Ink Signed Notarization (RIN). It is important to understand how RON and RIN are similar and how they are different. The overriding similarity is that both rely on a shared audio-video, real-time connection. Imagine the closing attorney in their office and the borrower at their home, office or anywhere else they can access the internet. With both RON and RIN, the borrower and attorney meet in an online session to review the loan and closing documents and then execute the documents to evidence the completion of the transaction. There are a few significant differences too. First, RIN is temporary. The state authorizations are orders issued by the governors pursuant to their emergency orders. They last just for the duration of the emergency orders. In contrast, RON is permanent. They are the laws of respective states. As of summer 2020, there were about 25 states with some type of RON statute, with Missouri the most recent to enact a RON statute effective Aug. 28, 2020. Second, RIN results in what is commonly thought of as a “wet” signature. RON, though, is fully digital—the borrower signs by applying a digital signature or mark, as does the notary when applying their notary seal or certification. Third, with RIN, the notary must manually verify the borrower’s ID. The rules governing how this is accomplished can vary across jurisdictions, but ultimately it is a manual review process. With RON, most software uses automated ID verification and/or knowledge-based questions to authenticate the signor. Finally, RIN requires the customary pile of papers to print, organize into a package, send to the signor to sign, copy, ship to the lender and store in a file. Anyone with experience closing a real property transaction is familiar with all the paper. RON, however, is a fully digital process. Software and Hardware Needed Regardless of which e-closing process you use, you must obtain the specialized software and hardware necessary to complete it. The software connects the signor and closing attorney or notary and acts as an interface. There are a variety of RON software providers. A vital consideration when researching one to fit your needs is whether the company is approved by regulators and your underwriters. Another important point of analysis is whether and what changes or improvements they have made since onboarding other clients. Keep in mind that this is a very new industry, so you should expect changes and modifications. RIN providers don’t require a similar onboarding process as RON companies. The RIN process can be as simple as downloading software and registering online. Still, a similar important factor when choosing a RIN provider is whether the provider is approved by your title insurance company. Title insurance companies have different requirements; for example, whether the online closing should be recorded, or where and for how long the audio and visual data should be stored. It also is important to keep in mind that at a traditional closing all the consumer must do is show up. The paper, pens, coffee and everything else needed to complete the closing is supplied by the closing office. But for an e-closing, the signing party must have the necessary hardware. A desktop computer or laptop is required because most guidelines don’t allow smartphones or tablets. And the hardware must have a camera and microphone to allow for that shared audio/video connection. Keep in mind that not everyone knows whether their device has a camera or microphone or how to install drivers or otherwise enable the functions if there is a technological problem. It saves time to have a borrower test their device before the closing date. Where E-Closings Go From Here While a new process, e-closings seem here to stay. The number of states with RON statutes is rising each year, and real estate closing professionals in states that issued RIN orders in 2020 may have become accustomed to the e-closing process and push for full-blown RON statutes once the RIN orders expire. As more and more closings are completed online, it is vital to maintain loan document integrity. A RON signing is completely digital, with prompts along the way. For example, the signor can’t skip to a signature field on page 3 until pages 1 and 2 are completed. All required pages and signature fields are required to be completed in order to finalize or complete the signing. RIN still results in the traditional, blue-ink signature, and even experienced real estate professionals know the process sometimes results in a missed or incomplete signature. It also will be important to consider the roles realtors and loan officers will play in an e-closing. Typically, they rely on personal connections and customer

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Leases, Mortgages and Court Proceedings in the Age of COVID-19

What are your options for seeking relief? American business was functioning rather well before the COVID-19 pandemic. Contracts were predictable to follow, based upon ordinary operations and expectations. COVID-19 changed all that. Overnight, American business had to contend with local and state executive orders to stay at home, engage in social distancing and substantially limit, if not cease, certain business operations. As a result, many companies have experienced a downturn in business. Based on shelter-in-place orders, some have closed and others have resorted to video consultations. Challenging Governmental Orders The decrease in business income has caused some tenants, such as Pier I, to file for Chapter 11 protection. Other businesses sought to challenge the municipal and state executive orders on constitutional grounds. Business owners have yet to successfully challenge Connecticut’s stay-at-home and related executive orders. A recent decision discussing Connecticut’s executive orders held that one restaurant and bar owner did not demonstrate sufficient evidence to support a temporary restraining order to stay enforcement of the orders (Amato v. Elicker, 2020 U.S. District Lexis 87758). Indeed, given the severity of the health crisis, successful challenges in hard-hit states may be few and far between. It is noteworthy that the governor of Wisconsin’s orders were reversed entirely on procedural grounds, due to a failure to follow that state’s rulemaking procedure in an emergency. However, beyond challenging governmental orders, private parties have litigation options. Litigation Options In the Pier I Chapter 11, the debtor, a tenant, sought to delay its rent obligations for a short period of time, by invoking the equitable powers of the bankruptcy court under Section 105. The landlords naturally objected, but the court sided with the debtor, noting the delayed rent payments would still be due, and insurance, utility and related payments would continue to be made by the debtor. It was also interesting the bankruptcy court noted the following:  While landlords may be able to take advantage of the funding recently made available under the Coronavirus Economic Stabilization Act of 2020 (CARES Act), the Debtors are unable to obtain such funding due to certain eligibility and solvency requirements associated with receiving funding under the CARES Act promulgated by the Small Business Administration. Courts will continue to deal with exercising equitable powers to administer bankruptcy and other cases involving leases and other contracts. The doctrines of frustration of purpose, impossibility of performance and force majeure may provide relief to parties who were unable to perform contractual obligations during the COVID-19 pandemic. Black’s Law Dictionary defines force majeure (French for “superior force”) as an event or effect that can be neither anticipated nor controlled. The term is commonly understood to encompass both acts of nature, (e.g., floods and hurricanes) and acts of man (e.g., riots, strikes and wars). Black’s Law Dictionary further defines force majeure clauses as contractual provisions that address circumstances in which contractual performance becomes impossible or impracticable due to events that could not have been foreseen and are not within a party’s control. It is important to note force majeure clauses do not generally provide for termination of an agreement; rather, they generally suspend a party’s obligation to perform under the agreement for the duration of the force majeure event. The rationale behind force majeure clauses is there will always be events that cannot be anticipated and addressed and for which neither party to an agreement is responsible. In such circumstances, it is equitable and reasonable to suspend performance and extend contract deadlines. However, contracts can and usually do include terms as to what qualifies as a force majeure event and what notice requirements must be met to obtain relief from required performance. Finding Resolution Both landlords and tenants should benefit from negotiations to resolve rent, expense and modified space issues. Increases in common operating expenses for cleaning leased space will be required to be compliant with current health requirements. Space may need to be modified to meet distancing guidelines, and some tenants, like restaurants, may need outdoor dining to stay afloat in the COVID-19 world or face closing their doors. A landlord with a rent abatement request from a tenant may be well advised to accommodate such a request. Some employers may be considering reducing existing office space as more employees work from home, so having a tenant vested in a long-term relationship should provide sufficient incentive to negotiate. Of course, there are always disputes that cannot be resolved. Parties wishing to go on the offensive can seek declaratory relief and damages from the courts. Courts faced with leases that lack a force majeure provision will be asked to invoke equity to solve contractual disputes. A landlord anticipating rents to satisfy mortgage obligations may need to exercise litigation rights immediately to avoid a default under a mortgage loan. The short-term federal stimulus programs may have alleviated some of those concerns for the time being. Once the federal stimulus process is exhausted, commercial property owners will see the tenants that remain as long-term business partners. For investors with commercial mortgages that may be in default, many state courts either are not permitting foreclosure judgments to enter or are not currently accessible for court proceedings. The bankruptcy courts appear to have continued their operations. At least one bankruptcy court has approved an auction of property during the COVID-19 pandemic. In that case, which involved a luxury single-family home on waterfront property, the court approved an auction during this pandemic. In its opinion, the Court stated as follows: Perhaps on the sunniest of summer days, when potential buyers would be wearing not just dark-tinted glasses, but rose-colored ones as well, such circumstances may converge to yield a substantially higher sale price. However, absent the presence of such optimal conditions, and given the administrative expense burn rate and the Debtor’s corresponding inability to cover those administrative costs, the stayed state court foreclosure, the major economic disruptions caused by the Covid-19 pandemic, and the logistical and health concerns associated with attempting to re-market and auction a substantially encumbered trophy property

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COVID-19 Forbearance Plans and Residential Defaults

What will happen when the plans end, and what opportunities does the situation provide for investors? Not wanting to repeat the number of foreclosures during the previous financial crisis, both federal and state governments placed moratoriums on residential foreclosures across the country. To keep borrowers in their homes, foreclosures were stopped and new forbearance plans were created. How the Plans Work Under the Federal Cares Act, a borrower wanting a forbearance plan can contact their mortgage servicer affirming a financial hardship, and the servicer must put the borrower in a forbearance plan. This relief is available to any borrower who has a federally backed mortgage, regardless of delinquency status. No documentation is required to prove the financial hardship beyond the borrower asserting they are suffering from a financial hardship. The original term of the forbearance is usually 3-6 months and can be extended up to 12 months. The forbearance agreement allows borrowers experiencing a temporary hardship to make a reduced mortgage payment or no mortgage payment at all during the plan’s term. During the forbearance period, the mortgage servicer will not place the borrower in foreclosure and will not collect any late payment penalties. The borrower must pay back missed payments after the forbearance period ends. Mortgage servicers then will evaluate borrowers for repayment options, if qualified, or the loans will be referred to foreclosure. Impact on Foreclosures Once the Covid-19 forbearance plans began in mid-March, borrowers called their mortgage servicers in record numbers to reduce or eliminate their monthly mortgage payments. In March, this caused the national delinquency rate to double to the largest single monthly increase ever recorded. Approximately 3.6 million homeowners were past due on their mortgages (including those already in foreclosure), which is the highest number since January 2015. As of the end of May, approximately 4.2 million homeowners had entered a COVID-19 forbearance plan. About 26,000 loans entered forbearance plans per day, with the daily number decreasing in May and June. It is expected by the end of June or early July, the number will increase to over 5 million borrowers in Covid-19 forbearance plans. In addition to the forbearance plans, the moratorium on foreclosures was extended through June 30, 2020. Once the foreclosures restart, what will happen? Delinquency and foreclosure rates were at a generational low in February 2020 as the U.S. unemployment rate matched a 50-year low. Due to COVID-19, the foreclosure rate will significantly increase, most likely not to the level of 2008-2014, but to a level consistent with the unemployment rate of borrowers. The results will be highly dependent on the number of borrowers who are able to return to the workplace at approximately the same wage, allowing them to enter a repayment option or to take advantage of any additional government intervention assisting homeowners that may be offered. In CoreLogic’s Loan Performance Insights report released in May 2020, Dr. Frank Nothaft, the chief economist for CoreLogic said, “The pandemic-induced closure of nonessential businesses caused the April unemployment rate to spike to its highest level in 80 years and will lead to a rise in delinquency and foreclosure. By the second half of 2021, we estimate a fourfold increase in the serious delinquency rate, barring additional policy efforts to assist borrowers in financial distress.” In that same CoreLogic report, Frank Martell, president and CEO of CoreLogic, said: “After a long period of decline, we are likely to see steady waves of delinquencies throughout the rest of 2020 and into 2021. The pandemic and its impact on national employment is unfolding on a scale and at a speed never before experienced and without historical precedent. The next six months will provide important clues on whether public and private sector countermeasures—current and future—will soften the blow and help us avoid the protracted, widespread foreclosures and delinquencies experienced in the Great Recession.” Foreclosure may be inevitable for borrowers who remain in forbearance plans for 12 months and remain unemployed. Loans that were already over 31 days past due at the time of the COVID-19 forbearance plans may not be able to take advantage of the same repayment options as those who were current before COVID-19, causing more foreclosures. The economic restart of the country that allows the borrowers to enter the workforce will be the determining factor. Investor Opportunity With defaults increasing and the potential for foreclosures to increase at the termination of the forbearance plans, a significant increase of foreclosures is expected by March 2021—a year after the first borrowers were placed in forbearance. Borrowers will be looking for viable options for the sale of their homes to keep them out of foreclosure. This will lead to investors having many opportunities to buy residential properties directly from the borrowers. If investors are unable to buy directly from borrowers, another avenue for the purchase of the distressed properties is through the foreclosure sale process. Both judicial and nonjudicial states allow investors to purchase at the foreclosure sales. Each state and county may have their own process for purchasing properties. Check with the specific state or county in which the property is located for their processes. Some may hold inperson foreclosure sales; many have moved to online auctions. The websites of the online auction vendors provide very good information; for example, some include the step-by-step process for bidding at a foreclosure sale. The websites list the properties set for auction along with the date and time of the auction. Companies with online auctions include Auction.com, Foreclosure Action Servicer-Altisource, Hudson & Marshall, Xome, Hubzu and Williams & Williams. With the forbearance plans ending in the first quarter of 2021, there will be a dramatic increase in defaulted loans moving to foreclosure. Investors interested in residential properties will be able to add to their portfolio by being ready with helpful solutions for distressed homeowners and by having the cash liquidity to purchase properties at foreclosure sales.

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Property Preservation in Illinois: Know before you go!

Servicers and investors should be sure to know their options when code violations and preservation issues arise. As is often the case in mortgage servicing, properties secured by defaulted mortgages can wind up vacant or in need of repair. Depending on the condition of the property, the municipality may issue code violations and file suit, naming both the owners of the property as well as anyone with a recorded interest. Neighbors also may report conditions to the city or county. In addition, the properties may be vulnerable to vandalism and thievery. Given all this, should servicers or the investor secure the property?  It can be difficult to provide an easy answer. However, from a best practices approach, consider the path with the least exposure for litigation. Under the terms of the standard Fannie Mae & Freddie Mac Mortgage, the answer typically is yes, you can secure.  Still, it is imperative that you always review the actual terms of the mortgage at issue. Most of the time, the mortgage will contain a paragraph relating to what actions the mortgagee may take to protect its interest in the property. The mortgage will call for the borrower to maintain the property and keep it from deteriorating. It will also include specific language allowing the mortgagee to do and pay whatever is reasonable to protect both its interest in the property and its rights under the terms of the mortgage in certain circumstances. Caution is Key From a servicing standpoint, when ample evidence suggests a property is vacant and needs securitization or repair, it may be easy to rush an order to a vendor to secure or repair the property; however, exercise caution. The cautious approach is to first review the terms of the mortgage to ensure you have the option to secure or take actions with respect to the property. Second, evaluate the potential risk and exposure. Would your actions lead to additional litigation? Is the property in foreclosure and has the foreclosure become contested? Is the mortgagor represented by counsel? Does there appear to be personal property within the property? Third, does the municipality have any vacant building registration or securitization requirements?  For example, the City of Chicago requires that a mortgagee shall, within the latter of a residential building becoming vacant for more than 30 days or 10 days after a default, register the building and secure the property to prevent unlawful entry and pay a $700 registration fee. The registration must be renewed every six months for as long as the building remains vacant and unregistered by an owner and a renewal fee of $300 will apply. (Note that governmental entities are exempt from the payment of the registration and renewal fees pursuant to 13-12-126 of the municipal code of Chicago.) Additionally, the property must have a visible posted sign indicating the name, address and phone number of the registered mortgagee or mortgagee’s agent with the vacant building registration number. Further, the property must be maintained so that the exterior is clean and secure and the interior is winterized. (See 13-12-126 of the municipal code of Chicago.) Legal Consultation May Be Needed Because these situations can sometimes lead to confusion or instances in which both sides are pleading their case before the court, consult your attorney and consider seeking a court order allowing the repairs or any actions you wish to take at the property, unless you simply seek to secure the property pursuant to local ordinance requirements. The Illinois Mortgage Foreclosure Law has a specific statutory provision (735 ILCS 5/15-1701) that addresses the right to possession of mortgaged real estate during foreclosure. Specifically, in terms of residential real estate, the mortgagor/borrower shall be entitled to possession of the subject property except if the mortgagee/lender objects and shows the following elements: A sufficient basis why it should be entitled to possession. The terms of the mortgage allow the mortgagee to obtain possession. The court finds a reasonable probability the mortgagee will ultimately prevail in the pending suit. If you do elect to secure the property, ensure that ample photos are taken showing exactly what actions were taken at the property. If you do not obtain a court order, a situation may occur in which a property is secured and the mortgagor(s) or occupant(s) subsequently files a motion with the court seeking relief for time, mental anguish, lost personal items and anything that is reasonably related to being locked out of the property. In these scenarios, it can be difficult to disprove what personal property was or was not present and has subsequently disappeared. This leads to additional litigation fees in terms of having to retain counsel to defend the motion as well as extend funds for settlement, in many cases, to resolve the matter as quickly and efficiently as possible. What if your loan is current and the city or municipality files suit alleging code violations? It is equally advisable to seek the advice of counsel in this situation. If the servicer is named in a lawsuit seeking relief for municipal or building code violations and the loan is current, the servicer will still need to appear in the case and ensure the borrower is taking the appropriate steps toward curing whatever outstanding issues remain. Failing to appear could mean missing out on notice of actions the plaintiff may wish to take at the property, such as appointment of a receiver which could eventually record a lien that takes priority over the mortgage. Typically, in these cases, the court will want to be kept updated from the servicer side of things with respect to the status of the loan (i.e., current or in default). In some situations, the court may ask the servicer to take action at the property. The importance of recognizing building code violations and municipal ordinance issues is not unique to Illinois. As natural disasters continue to occur throughout the U.S. and Mother Nature reminds us of her strength, code violations and preservation issues will continue

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