Both mortgage lenders and cities have an interest in ensuring that a relevant city department receives notice when owners of inclusionary homes default on their mortgages. With adequate notice, the program can often help a homeowner to refinance or find a buyer rather than proceeding through foreclosure. However, it is difficult for mortgage servicers to reliably provide this notice even when it is required of them.
While there is no single widespread best practice to remedy this situation, some common responses include:
- Record a second lien in order to improve the chance of receiving notice of default. In California and several other states, state law ensures that junior lien holders are notified when a homeowner defaults on a first mortgage. A growing number of California jurisdictions have taken to recording “Performance Deeds of Trust” or “Excess Proceeds Deeds of Trust” in addition to deed restrictions/covenants specifically because they are more likely to receive notice of default if there is a recorded deed of trust.
- Require mortgage holders to enter into separate agreements which require notice or have refused to fully subordinate their covenants to the first mortgage. In states where junior lien holders are not reliably notified of defaults, some programs have pursued this option. For example, a program agrees to release a unit from resale restrictions only if it has received prior notification of a default and been given an opportunity to cure. Fannie Mae guidelines explicitly allow this kind of requirement as long as the lender certifies that they have the capacity to provide notice when required. Currently FHA prohibits this approach and requires that FHA-insured homes be released from restrictions in foreclosure without any conditions. This approach has become far less practical in recent years as it has become much harder to find lenders willing to underwrite price-restricted homeowners.
- Monitor title reports or newspaper notices of foreclosure proceedings for evidence of foreclosures. Some communities, recognizing the limitations on their ability to require notice, choose this option instead. This approach requires more staff time than the other alternatives and may involve other costs. It also generally identifies problems at the last moment before a foreclosure.
It may also be a good idea to contract with an outside agency (e.g., housing counseling agency, realtor, or local Community Land Trust) to provide a set of administrative and outreach services related to preventing foreclosures. These may include:
- Contacting owners of all MPDU homes (IHO and Large Scale Developments), notifying them of approved waivers, and encouraging them to reach out for assistance if they experience difficulty selling their affordable unit.
- Monitoring (through the MLS or otherwise) the sales of any MPDU homes and offering assistance to listing realtors.
- When necessary and appropriate, making recommendations to the department when waivers are approved to enable subletting or unrestricted sales of a MPDU.
- Evaluating the feasibility of financing purchase of unsold MPDU homes by a nonprofit organization for temporary or permanent use as affordable rental housing.
- Tracking any foreclosures that do occur and providing brief reports every six months that identify the cause or causes of each foreclosure that has occurred, along with recommendations for changes to policies or procedures which could help prevent further foreclosures in the MPDU stock.
