Mortgage Foreclosures and Property Tax Liens

In these difficult economic times, one of the impacts will surely be a rise in the number of mortgage foreclosures. When a foreclosure occurs, many things change, including the owner of the property, the occupant of the property and, sometimes, the use of the property. The tax collector and other local officials need to understand the impact of the event on their ability to actually enforce the property tax and water and sewer obligations assessed on the parcel. We do have some guidance based on cases decided by the New Hampshire Supreme Court after the last serious downturn, which occurred in 1991. It is sobering to note that many of the financial institutions involved in those cases are either not doing business in New Hampshire or are no longer in existence.

Q. What exactly is a “mortgage," and who has the ability to “foreclose"?

A. When a person borrows money from a financial institution, the borrower signs a “note" that describes the borrower’s promise to repay the money, how much money was borrowed, when and how it must be repaid and the rate of interest charged. The institution wants more security for repayment than just the bare promise of the borrower. To provide this security, the borrower (mortgagor) also executes a deed conveying the real estate title to the financial institution (mortgagee) using special language called mortgage covenants, as set forth in RSA 479.

If the money is repaid as promised, the deed becomes void, the mortgage is discharged and the full title is restored to the borrower. If the money is not repaid as promised, both the note and the mortgage covenants have been breached, and the mortgagee can look to the real estate itself to recover the amounts due. That process is called “foreclosure."

Unlike most states, New Hampshire foreclosures usually proceed without judicial oversight. Using the “power of sale" contained in the mortgage covenants, the foreclosing mortgagee must publish notice in a newspaper for three successive weeks, with the first publication not less than 20 days prior to the date of sale. Notice must be sent to the mortgagor at least 25 days prior to the sale and to all lienholders of record at least 21 days prior to the sale. The sale is held upon the premises. The sale occurs using an auction method, and, within 60 days, a return of the sale in the form of an affidavit and a deed of the premises to the new owner shall be recorded at the Registry of Deeds. The process creates a new title for the real estate and, if conducted strictly in accordance with statutory requirements, wipes out liens and other encumbrances of a lower priority. Once the property is sold, the former owner has no option to redeem and recover the property. Prior to the sale, a bankruptcy petition or a court petition to enjoin the sale may be filed. If no objections are filed to the procedure within one year and one day of the sale, the title of the new owner becomes incontestable. If the sale nets more money than is owed to the mortgagee, the remainder goes to the original owner or to other creditors. If the sale nets less than is owed, the mortgagee may bring a lawsuit against the borrower based upon the note to try to collect the additional money from other assets that the debtor may have.

Q. If the mortgagee can wipe out lower priority interests, how can there be “second mortgages," “equity lines," or other secured interests in the property which are not of first priority?

A. Technically, these interests are also mortgages. Sometimes a debtor will keep a first mortgage current, but not be able to pay other obligations. If there is a foreclosure of a lower priority interest, what is received is the right to repay everyone ahead in line. If the lower priority creditor has the ability to pay off the amount owed to someone ahead in line, they may be able to eventually obtain their repayment from the value of the real estate.

Q. Are local property taxes given special treatment in this whole scheme?

A. Yes. Pursuant to RSA 80:19, a lien for unpaid real estate taxes is granted a super priority status for 18 months from the date of assessment. Since all taxes must be assessed on April 1, that means until October 1 of the next year. This obligation jumps ahead of any and all mortgages, even those taken out years before the taxes are assessed. If the taxes remain unpaid, the property can be deeded by the tax collector to the municipality, and the lien of the mortgage is extinguished. That is why many financial institutions collect money for taxes in an escrow account each month in order to ensure that these taxes are in fact paid. That is also why a failure to pay taxes when due is a breach of the mortgage covenants and can itself be cause to commence a foreclosure.

Q. If local taxes have this special super priority, where do the problems get started?

A. Tax collectors are required by RSA 76 and RSA 80 to use certain procedures to send tax bills to property owners. They are also required to use certain procedures to collect unpaid taxes, which for most municipalities are found at RSA 80:58-86. With both functions, the procedures must be followed precisely, or the municipal lien may not be enforceable, or may lose its priority status.

Here are some examples of problems that may arise:

Notice of an impending tax lien, in other words, notice that delinquent taxes are due must be given to a current owner. If a property is conveyed after April 1, and notice is only given to a former owner, the notice is defective. See RSA 80:60 and White v. Lee, 124 N.H. 69 (1983). The tax collector should not send out notices of delinquent taxes due without examining the record of ownership of the parcels at the Registry of Deeds down to a date which is as close as possible to the date that the notices are sent to the current owners.

If the taxes remain unpaid following the date in the notice of impending tax lien, an additional notice of execution of the tax lien is required to be given to “…all persons holding mortgages upon such property as recorded in the office of the register of deeds." See RSA 80:65. Note that the term “mortgage" is not defined in this law. While we have no case law requiring notice to anyone other than the “holder of a mortgage," we do have law suggesting that any creditor who has filed notice of interest in the real estate at the Registry of Deeds, but is not provided notice of the tax lien or a later tax deeding of the property, may not be bound by the procedure. See First N.H. Bank v. Windham, 138 N.H. 319 (1994), which discusses the due process rights of mortgage creditors to notice of these procedures. Read broadly, the term “mortgagee" may well include not only banks, but also the Internal Revenue Service, the State of New Hampshire if it holds a statutory lien, or creditors who have recorded evidence of a pending or completed lawsuit. Therefore, the cautious tax collector should examine the record of documents filed at the Registry of Deeds down to a date which is as close as possible to the date that the notices of execution of the lien are sent, and include a notice to anyone claiming an interest in the parcels, regardless of the apparent validity or priority of their claim.

Additional notice to mortgagees is required before the property is deeded by the tax collector to the municipality. See RSA 80:77-a. Since this is likely to be some two years following the notice of the lien execution, the names and addresses of those with an interest may very well have changed. A search done prior to the notice of execution of the tax lien described above is not adequate; it must be updated to the date of any tax deed notice. See First N.H. Bank v. Windham, 138 N.H. 319 (1994). See also Dime Savings Bank of New York v. Pembroke, 142 N.H. 235 (1997) for a case where a notice was sent to an address on the original mortgage documents, but the bank later claimed that no notice had been received.

Mortgages and notes are often sold to other financial institutions, or are passed to receivers or conservators of failed financial institutions. Sometimes the successors record the necessary documents to show the new ownership of the mortgages (a document called an “assignment"), but often they do not. The tax collector may need to do a good deal of detective work outside of the Registry of Deeds to find out who actually holds the mortgage on a property. It is not enough to rely on the address provided in the original documents. See FNMA v. Fremont, 141 N.H. 156 (1996), where notice to a bankrupt mortgage company was deemed insufficient when the tax collector had actual notice of the recording of an assignment of the mortgage to the FNMA, even though the recording occurred after the tax collector had sent notice to the original mortgagee at the address on the recorded mortgage.

Q. It sounds like the tax collector needs to be an expert on real estate titles and debtor-creditor law. What can the municipality do to try to keep up with all of the information?

A. These issues are difficult and confusing, and errors can be very costly. If the tax collector is unfamiliar with methods of research at the Registry of Deeds, it is possible to hire a title company to research the records. The New Hampshire Tax Collectors Association website is an excellent source for information on these issues. See www.nhtaxcollectors.com. If the tax collector needs help, use the town attorney to assist in finding the necessary information or to give advice on how to handle specific situations.

Q. Assuming that the tax collector performed the procedures correctly, are there other situations that require a special approach?

A. Yes. Manufactured housing may be situated not only on land owned by the owner of the housing but, also, on land owned by someone else. Even though it has been affixed to land once, the structure can be picked up and moved to another location. There are special rules relating to the taxation of these structures at RSA 72:7-a. If the housing is brought to the site after April 1 and before January 1, it is assessed a pro rata tax, unlike other structures which are not assessed until the following April 1. Once the housing is assessed, the time for the perfection of the tax lien is extended to one and one-half years from the date of assessment, which may be beyond October 1 of the following year.

If the structure is offered for sale by the park owner at a manufactured housing park, the structure may be taxable to the park owner even if it is not hooked up to utilities. See Green Meadows Mobile Homes, Inc. v. Concord, 156 N.H. 394 (2007).

If the structure is moved, it must be registered with the local assessors at its new placement within 15 days of arrival. See RSA 72:7-b. In addition, a person who actually moves the structure must have in their possession a statement from the tax collector or other official of the municipality where the structure was formerly placed that the property taxes have been paid in full. If the movement occurs without payment of the taxes or a written waiver by the selectmen, the person performing the move is guilty of a misdemeanor. See RSA 80:2-a.

Yes: condominium units. Until recently it had been somewhat unclear whether a foreclosure of a mortgage wiped out condominium covenants contained in a declaration of condominium. It is now clear that such covenants survive a tax sale. See Buchholz v. Waterville Estates Association, 156 N.H. 172 (2007).

Yes: water and sewer liens. In those municipalities that provide these services, unpaid water and sewer bills may be sent over to the tax collector, who can collect by asserting interests against the real estate in the same manner as though they were property taxes. The specific procedures required are set forth in RSA 38:22 for water liens and in RSA 149-I:11 for sewer liens.

Q. Are there special issues when the bank has completed the foreclosure process, but the former owner is still a resident of the property? Or, when the tax collector has deeded a property to the municipality in accordance with the tax lien procedure, but the former owner wants to continue to reside there?

A. Yes. In both of these cases, the former owner changes status from an owner to a tenant, specifically a “tenant at sufferance." If the new owner, either the bank or the municipality, seeks actual possession of the property, the new owner must follow the statutory procedures required of all landlords to evict a person from real estate, which are contained in RSA 540. If a municipality is seeking actual possession of property, we strongly recommend that the municipal attorney be consulted and that all formalities of the eviction process be followed. It is very easy to make a procedural or substantive error in the process, which may lead a court to later deny all relief to the municipality.

If disputes arise from a normal rental or lease agreement between a property owner and tenant, substantial penalties may be imposed upon landlords or tenants who engage in practices expressly prohibited by RSA 540-A, including possible monetary damages in the amount of $1,000 per day. For an example of a case where a landlord was found to have engaged in prohibited practices, see Kathleen Wass v. Carolyn Fuller (No. 2008-160, decided January 16, 2009). In that case, the Supreme Court upheld a damage award of $27,000 to a tenant after a landlord had a propane tank providing fuel to the rented premises locked by the vendor, because the action was taken while an eviction proceeding was on appeal and the tenant had continuing possessory rights in the apartment.

However, when a new owner seeks to gain possession of real estate immediately after a mortgage foreclosure or tax deeding of real estate, that is not a dispute arising out of a normal rental or leasehold arrangement. The Supreme Court has held that RSA 540-A does not apply in these situations. See Hill v. Dobrowolski, 125 N.H. 572 (1984). That does not mean that the municipality may engage in the process of “self-help" and just send in the police or others to physically remove an occupant and that person’s personal property from the real estate. On the contrary, the court has held that the process of “self-help" is no longer available under our state law to any owner of real estate. New owners following a foreclosure or a tax deeding must use the statutory eviction process and obtain a court order (called a writ of possession) to regain possession of the real estate. See Greelish v. Wood, 154 N.H. 521 (2006).

Great care must be taken in the period immediately following a tax deeding. If the municipality does allow the former owner to remain in possession and pay rent, it is arguable that a new tenancy is created. If the municipality later seeks to evict the person, all of the protections for a tenant contained in RSA 540 and 540-A now are applicable, and the process of regaining possession may become much more complex.

This Q & A does not attempt to cover all of the situations which may arise, especially in the context of foreclosed commercial property, or residential property with multiple tenants. Also, if the owner has filed bankruptcy in the federal bankruptcy court, that changes the entire method of response unless the court has granted relief from the “automatic stay" and sent the parties back to state statutory procedures to complete the resolution of their disputes. When these complex situations arise, or when documents need to be filed with the federal bankruptcy court, we strongly advise referring the matter to town counsel for assistance.