The foreclosure maze

The bankruptcy case that was issued in September and put the Arkansas foreclosure market in turmoil is still lingering.

The case at issue is In Re Johnson, a Chapter 13 bankruptcy case in the Eastern Division of Arkansas, Jonesboro Division. In a decision rendered on Sept. 13, the court ruled that an out of state mortgage servicer must be registered to do business in Arkansas if it wants to take advantage of the state's non-judicial foreclosure statute. Those companies are still free to foreclose on homes through the courts.

The non-judicial foreclosure statute has become the preferred method for taking homes from borrowers in default as it is less expensive and less time consuming than going the traditional route of going through the courts system to foreclose on houses. The decision caused a few problems for title companies and people who purchased homes taken through foreclosure.

Title companies refused to issue title insurance on those homes unless there was no doubt the houses were foreclosed upon by financial institutions registered to do business in Arkansas. That left more than a few buyers in the lurch — they'd made offers on foreclosed homes that had been accepted, but couldn't close on them for want of title insurance.

The impact of the decision on foreclosure filings in the state became obvious fairly quickly.

Irving, Calif.-based RealtyTrac reported that Arkansas foreclosures dropped by 90% in November when compared to the same month in 2010. There was evidence that In Re Johnson was to blame. In February, foreclosure filings were down 73.6% compared to the same month last year, RealtyTrac reports.

Joel Hargis, a bankruptcy attorney with Crawley & DeLoache in Jonesboro, said the Johnson case is still weighing on the foreclosure market in Arkansas as some national servicers are choosing to fight the decision rather than registering to do business in Arkansas or cure their noncompliance with the non-judicial foreclosure. Hargis was involved in the Johnson case and represented debtors who had lost their homes through foreclosure to J.P. Morgan Chase Bank and the related Chase Home Finance.

He said the Johnson case has been appealed and there are parties in Arkansas fighting to amend the non-judicial foreclosure statute so that a financial institution can take advantage of it even if it isn't registered to do business here. Arkansas Senate Republican Whip Michael Lamoureux, R-Russellville, introduced in late February an amendment to the Secretary of State's appropriation section of the state budget that would so alter the non-judicial foreclosure statute.

That measure was removed from consideration, but Hargis said he expects to see the issue return next year during the regular legislative session. The amendment, he observed, seemed out of place during this year's fiscal session of the Legislature.

Hargis said the Johnson decision impacts a lot more than whether a mortgage servicer is registered to do business in Arkansas or not. Registering to do business here, he said, costs no more than $300, but companies that take that step are subject to paying corporate taxes on income derived through transactions in Arkansas.

He pointed out there's another consideration. Counties receive a fee when they auction homes taken through judicial foreclosure in the state. When it comes to non-judicial foreclosures, third-party companies auction those and they collect fees after the properties are sold.

In short, the issue seems relatively simple on the surface, but it gets complicated in a hurry. The non-judicial foreclosure route may be the preferred way to go, but the law requires companies located out of Arkansas to register and pay taxes if they want to use that statute. Meanwhile, the third-party companies that turn a profit off of non-judicial foreclosures may not want to see non-Arkansas mortgage companies get around the registration requirement by opting for judicial foreclosures.

There's also the state of Arkansas to consider. Prior to Johnson, it was losing out on a lot of revenue that might have been generated by foreclosures. It wasn't getting revenue from companies that weren't registered to do business in the Natural State but were using the non-judicial foreclosure statute. Counties were losing out, too, in that they receive fees when a home is foreclosed on through the court, but not when houses are taken through non-judicial foreclosure.

If Hargis is right, the issues raised by Johnson will linger in the months to come.