Mortgage Law Roundup

Sharp  Thinking

No. 200   Perspectives on Developments in the Law from Sharp-Hundley, P.C.   September 2021

Foreclosure Fee Unconstitutional, High Court Rules

Illinois’ special $50 fee for filing mortgage foreclosure cases is unconstitutional, the Illinois Supreme Court has ruled.

Acting in Walker v. Chasteen, 2021 IL 126086, the high court characterized the fee as “a tax on litigation” and said it offended the free-access-to-justice clause of Illinois Constitution, art. I, § 12.

The court first ruled that the case was governed by the so-called “rational basis” test, under which a statute generally will be upheld “if it bears a rational relationship to a legitimate legislative purpose and is not arbitrary or unreasonable.”  But it found that the mortgage foreclosure filing fee of 735 ILCS 5/15-1504.1 failed that test.

Quoting Crocker v. Finley, 99 Ill. 2d 444, 454 (1984), it said “court filing fees and taxes may be imposed only for purposes relating to the operation and maintenance of the courts.  We consider this requirement to be inherent in our Illinois constitutional right to obtain justice freely.”  It said “the relationship between the fee and its impact on the operation and maintenance of the courts cannot be too attenuated; rather it must be relatively direct, clear, and ascertainable.”

The court found that the relationship asserted by the State was “too remote.”  The fees, it said, “are a revenue-raising measure designed to fund a statewide social program. . . . The benefits for foreclosure prevention programs are indirect at best and have no direct relation to the administration of the court system.”

“We therefore hold that there is no rational basis for imposing this filing fee on mortgage foreclosure litigants”, it said.

Standing Dismissal Doesn’t Bar Second Suit

Res judicata does not bar a subsequent action to foreclose a mortgage when the first foreclosure action was dismissed on standing grounds, a panel of the Appellate Court’s Third District has held.

Ruling in Wells Fargo Bank, N.A. v. Coghlan, 2021 IL App (3d) 190701, the panel dealt with a situation where the note and mortgage were not actually assigned to Wells Fargo until after it had filed its first foreclosure suit.  Noting that that discrepancy meant plaintiff lacked standing when it commenced that suit, the trial court granted summary judgment for the homeowners.

After the homeowners continued to default on the mortgage, Wells Fargo sued to foreclose again, but the homeowners responded with a res judicata defense.  The panel rejected that defense.

“The current action does not arise from the same operative facts as the first,” the panel stated.  “The Coghlans’ continuing failure to make payments on the loan presents new facts and conditions that were absent at the time the initial judgment was rendered.”

Moreover, the panel said, “even if all the elements of res judicata were satisfied . . . we will not apply the doctrine where it would be fundamentally unfair to do so.”

Court Explains Limits To Unconscionable Price Doctrine

Where the mortgagee purchases at a foreclosure sale and pays between 54% and 64% of defendants’ suggested fair market value of the property, the sales price is not unconscionable such as to support denial of confirmation under 735 ILCS 5/15-1508(b), a panel of the Appellate Court in Chicago has held.

Acting in T2 Expressway, LLC v. Tollway, L.L.C., 2021 IL App (1st) 192616, the panel surveyed cases involving unconscionability price challenges and found that “case law suggests that a sale price below 50% of fair market value is a reasonable threshold for unconscionability.”

Moreover, it said, “mere inadequacy of price is an insufficient reason to disturb a judicial sale without some other irregularity.”

Failure To Follow HUD Regs Doesn’t Forever Bar Foreclosure

A mortgagee’s failure to follow Department of Housing & Urban Development (HUD) regulations on meeting with the mortgagor before filing a foreclosure on a federally-insured mortgage does not forever bar foreclosure on that mortgage, a panel of the Appellate Court’s Second District has held.

However, it does bar foreclosure until those regulations have been obeyed and it results in a forfeiture of payments accruing before compliance occurs.   Freedom Mortgage Corp. v. Olivera, 2021 IL App (2d) 190462.

In Olivera, defendants originally defaulted in 2011 and plaintiff filed to foreclose without complying with 24 C.F.R. § 203.640(b)-(d), which requires an attempt at a face-to-face meeting after the default has occurred and before suit is filed.  The suit was met with a defense of failure to comply with the HUD regs.  Plaintiff voluntarily dismissed and refiled after it had allegedly complied with the regulations – but using the same 2011 default date as the basis for its claim.  The court held that the eventual compliance could not retroactively cure the non-compliance back in 2011.  “We see no reasonable compliance where plaintiff did not even attempt to comply with the regulations until five years after the default date alleged in the complaint,” it said.

However, the panel said, “it would be inequitable to presume that, where a lender fails to comply within the initial three-month time frame, foreclosure is forever barred and that borrowers may simply remain in the premises indefinitely without ever paying their mortgage.”  Noting that where a money obligation is payable in installments, a separate cause of action arises on each installment, it said the mortgagee could file based on a later default – in effect forgiving the defaults that occurred prior to compliance with the regulations. “Any loss realized upon the sale of the property without a deficiency judgment stems from plaintiff’s own initial noncompliance with the regulations,” the court said.

–John T. Hundley