The January/February 2018 issue of Probate and Property includes the article “The New Model Negotiated Alternative to Foreclosure Act” written by Professors Dale A. Whitman and R. Wilson Freyermuth. The article encourages state legislatures to enact the new Model Negotiated Alternative to Foreclosure Act, which the Uniform Law Commission promulgated in 2017. If adopted by a state, the Model Act would help facilitate more efficient resolution of distressed mortgage loans by allowing deeds in lieu of foreclosure and “short sale” transactions that would extinguish junior liens with the same effect as if a foreclosure sale had occurred.
Under the common law, the only way that a junior mortgage lien could be extinguished without the junior lienholder’s consent was by a foreclosure sale by a senior lienholder. During the mortgage crisis, junior lienholders would frequently block deeds in lieu of foreclosure or short sale transactions between the property owner and the senior lienholder, by refusing to consent to release their junior liens even though the property’s value was not sufficient even to satisfy the senior lienholder’s claim. This conduct forced senior lienholders to conduct foreclosure sales to eliminate the junior lien claims. The Model Act creates a process to allow for the elimination of junior liens in these circumstances without the need for a foreclosure sale, thereby facilitating the orderly resolution of distressed mortgage loans during periods of economic downturns like those experienced after 2007.
The Joint Editorial Board for Uniform Real Property Acts recommended the Model Act to the Uniform Law Commission. Professor Freyermuth is the executive director of the board and Professor Whitman is an emeritus member. The publication, Probate and Property, is the magazine of the American Bar Association Real Property, Trust and Estate Law Section.