I. Notice Requirements
There are several notice requirements, which may be applicable to a particular foreclosure action, and which must be strictly followed before a mortgage foreclosure action can be commenced.
First, there are occasionally contractual notice requirements contained either in the promissory note or in the mortgage securing the note, which constitute a condition precedent to the commencement of a foreclosure action. Needless to say, the practitioner must read the promissory note and the mortgage, and assure that there has been compliance with the contractual notice requirements, before proceeding with the mortgage foreclosure process.
Second, before a residential mortgage can be foreclosed in Pennsylvania, the lender must give a 30-day notice of intention to foreclose (also known as an Act 6 Notice), giving the borrower an opportunity to cure, and prohibiting the lender from collecting attorneys’ fees incurred during the notice period. See Act. No. 6 of 1974, 41 P.S. § 403. For a definition of a “residential mortgage,” see 41 P.S. § 101.
On August 9 2012, Governor Corbett reinstated the PA Homeowner’s Emergency Assistance Program (“HEMPA”) administered by the Pennsylvania Housing Finance Agency (“PHFA”). Accordingly, as of October 2, 2012, Act 91 Notices are required. See Act No. 91 of 1983 (as amended), 35 P.S. §§ 1680 et seq. The form of the Act 91 Notice should be substantially in the form available on PHFA’s website. Lenders are also required to attach a list of counseling agencies for the applicable county where the property is located. Failure to do so, or attaching additional counties, render the Notice void. An Act 6 Notice is not required if an Act 91 Notice is being sent. Act 91 expressly states that an Act 91 Notice is in lieu of any other notices. 35 P.S. §1680.403c. Notices must be sent to the mortgagor(s) at the property and at his/her/their mailing address, if different.
II. Commencing a Mortgage Foreclosure Action
A. Lien Priority
Prior to commencing a foreclosure action, counsel must ascertain the lien position of the mortgage to be foreclosed. Generally, the foreclosing plaintiff takes a property at the conclusion of the sheriff’s sale “under and subject” to all prior liens.
Liens against real property shall have priority over each other on the following basis:
(1) Purchase money mortgages, from the time they are delivered to the mortgagee, if they are recorded within ten days after their date; otherwise, from the time they are left for record. A mortgage is a “purchase money mortgage” to the extent that it is:
(i) taken by the seller of the mortgaged property to secure the payment of all or part of the purchase price; or
(ii) taken by a mortgagee other than the seller to secure the repayment of money actually advanced by such person to or on behalf of the mortgagor at the time the mortgagor acquires title to the property and used by the mortgagor at that time to pay all or part of the purchase price, except that a mortgage other than to the seller of the property shall not be a purchase money mortgage within the meaning of this section unless expressly stated so to be.
(2) Other mortgages and defeasible deeds in the nature of mortgages, from the time they are left for record.
(3) Verdicts for a specific sum of money, from the time they are recorded by the court.
(4) Adverse judgments and other orders, from the time they are rendered.
(5) Amicable judgments, from the time the instruments on which they are entered are left for entry.
(6) Writs which when issued and indexed by the office of the clerk of the court of common pleas create liens against real property, from the time they are issued.
(7) Other instruments which when entered or filed and indexed in the office of the clerk of the court of common pleas create liens against real property, from the time they are left for entry or filing.
42 Pa. Cons. Stat. Ann. § 8141
In Pennsylvania, a mortgage foreclosure action must be brought in the county in which the real property is located. Pa.R.C.P., Rule 1142. (If foreclosing on real property located in more than one county, see Pa.R.C.P., Rule 3131.)
C. The Foreclosure Complaint
The plaintiff in the foreclosure action is typically the current holder of the mortgage, i.e. the original mortgagee or its current assignee. The defendants are the mortgagor(s) (or the personal representative, heir, or devisee of a deceased mortgagor) and the real owner of the property (or if he is unknown, the grantee in the last recorded deed).
The plaintiff must set forth the following in its complaint:
(1) the name, address, and interest of the plaintiff;
(2) the names, addresses, and interests of the defendants;
(3) if the present real owner is unknown, a statement to that effect;
(4) the identity of the parties to the original mortgage;
(5) the date of the mortgage;
(6) if the mortgage being foreclosed has been recorded, state the place of record of the mortgage, and incorporate the mortgage by reference (see Pa.R.C.P., Rule 1019(g)). If it has not been recorded, then attach a copy of the mortgage;
(7) the date of any assignments;
(8) if the assignments have been recorded, state the place of record of each assignment, and incorporate by reference. If they have not been recorded, then attach a copy of each assignment;
(9) a description of the real property being foreclosed upon;
(10) a specific averment of default;
(11) an itemized statement of the amount due;
(12) an averment of compliance with any required notice provisions, such as compliance the provisions of Section 403 of Act No. 6; and
(13) a demand for judgment for the amount due. See Pa.R.C.P., Rule 1147.
It is impermissible, under Pennsylvania law, to combine a foreclosure cause of action with any other cause of action in a single complaint. Pa.R.C.P., Rule 1146.
D. Service of Process
The defendants must be served in accordance with the usual rules applicable to civil actions. Pa.R.C.P., Rule 1141(b). Typically, defendants in Pennsylvania (outside of Philadelphia) must be served by the sheriff. Pa.R.C.P., Rule 410(a). If personal service is not possible, defendants may be served by publication, posting, registered mail, or other methods, as the court deems appropriate. See Pa.R.C.P., Rule 410 generally.
Pa.R.C.P., Rule 410(b)(3) provides that if a defendant in a mortgage foreclosure action cannot be served under the applicable rule, the plaintiff may move the court for a special order directing the method of service, which may include service by posting a copy of the original process on the most public part of the property. The motion shall be accompanied by an affidavit stating the nature and extent of the investigation which has been made to determine the whereabouts of the defendant and the reasons why service cannot be made.
In addition to the defendants, the complaint must also be served on any person found in possession of the property subject to the mortgage foreclosure action. Pa.R.C.P., Rule 410(a).
E. Conciliation Conferences
Pennsylvania does not have a statewide conciliation program. Counties can voluntarily choose to adopt one. The current counties in our area that have conciliation conferences in place include the following:
o Borrowers who are in foreclosure may opt into the program by calling the Allegheny County Department of Economic Development’s “Save Your Home Hotline” at 1-866-298-8020. Go to www.alleghenycourts.us for more information. Choose “Civil” and “Mortgage Foreclosure Program”.
o Borrowers may opt into the program, which triggers a stay of all proceedings while conciliation takes place.
o Borrowers can request a conciliation conference. Go to www.buckscounty.org and click on “Online Services” and Mortgage Foreclosure Diversion Program for more information.
o Borrowers can call a hotline, speak to a housing counselor, and request a conciliation conference. For more information, go to www.pabulletin.com/secure/data/vol39/39-40/1829.html.
o Borrowers may participate in a conference with a housing counselor and obtain a 30-day stay of foreclosure. The purpose of the stay is to give the borrowers time to work with the lender to find a way to avoid foreclosure. For more information, go to
www.co.delaware.pa.us/sheriff/realestate.html and click on “Administrative Order and Notice of Foreclosure Program”.
o Borrowers may seek a 90-day stay in the mortgage foreclosure proceedings for the purpose of reaching a mutually acceptable agreement with the lender to resolve the case. For more information, go to www.pabulletin.com/secure/data/vol40/40-14/583.html.
o Borrowers may opt into the program by contacting a housing counselor and filing a request for a conciliation conference. For more information, go to www.pabulletin.com/secure/data/vol39/39-24/1055.html.
o The court will schedule a conciliation/case management conference in every eligible case upon the filing of the complaint for foreclosure. For more information, go to www.lccpa.org/rules.nex and click on “Mortgage Foreclosure Conciliation Program”.
o Borrowers may opt in to the program by filing an election to participate with the court.
o When borrowers file a written request for a conciliation conference under this program, an order will be entered that refers the matter to a conciliation conference. For more information, go to www.pabulletin.com/secure/data/vol42/42-18/802.html
o Conciliation conferences are scheduled in all owner-occupied residential foreclosure cases.
o Conciliation conferences are scheduled in all owner-occupied residential foreclosure cases. Go to www.phila.gov and search for “Foreclosure Diversion Program” for more information.
o To be eligible to request a court-supervised conciliation conference, the borrowers must contact a housing counselor and schedule an appointment. For more information, go to www.pabulletin.com/secure/data/vol41/41-47/1989.html.
o If the borrowers call a hotline and attend a counseling session, they may seek a 60-day stay in the mortgage foreclosure proceedings to give them time to negotiate with the lender and find a way to avoid foreclosure. For more information, go to www.pabulletin.com/secure/data/vol40/40-13/549.html.
o If the borrowers call a hotline and attend a counseling session, they can obtain a stay in the foreclosure proceedings to give them time to negotiate with the lender and find a way to avoid foreclosure.
III. Responding to a Foreclosure Complaint
In response to a foreclosure complaint, the defendants may serve and file preliminary objections or serve and file an answer, responding paragraph by paragraph to the allegations of the complaint. The answer must admit or deny each averment of fact. Pa.R.C.P., Rule 1029(a). A general denial or a demand for proof constitutes an admission. Pa.R.C.P., Rule 1029(b). However, averments in a pleading to which no responsive pleading is required are deemed to be denied. Pa.R.C.P., Rule 1029(d).
The answer may also include affirmative defenses (designated as “new matter”), see Pa.R.C.P., Rule 1030, and counterclaims, provided the counterclaims arise from the same transaction or occurrence or series of transactions or occurrences from which the plaintiff’s cause of action arose. See Pa.R.C.P., Rule 1148.
Any shortcoming of the complaint, with respect to the formal requirements set forth above, can serve as a basis for preliminary objections or an affirmative defense in an answer. Failure to effect proper service is a jurisdictional defect. Failure to comply with applicable notice requirements (e.g., serving an Act 6 Notice) is a jurisdictional defect.
In addition, any defense which shows that the mortgagee is not entitled to foreclose may be set up as a defense against a foreclosure. For example, defendants may plead that they have made payment in full, that they were never indebted, that the mortgage or its assignment was induced by fraud, that the mortgage or any assignment is a forgery, that there is a want of consideration, there is a release or discharge, there exists a setoff, waiver, estoppel, discharge in bankruptcy, and so forth. (Fraud must be alleged with specificity. Pa.R.C.P., Rule 1030.)
IV. Judgment and Execution
In the event the plaintiff prevails in its mortgage foreclosure action, either because the defendant(s) default in responding to the complaint, or the court grants summary judgment upon plaintiff’s motion, or there is a verdict in favor of the plaintiff following a plenary trial, the plaintiff becomes entitled to file a judgment against the defendant(s). The judgment is exclusively a money judgment for an amount representing the debt, interest, and other authorized costs and charges up to the time of the judgment. However, a judgment in mortgage foreclosure action is not a judgment for money damages. Its sole purpose is to effectuate a judicial sale of the property subject to the mortgage lien. Reed v. S&T Bank (In re Reed), 274 B.R. 155 (Bankr. W.D. Pa. 2002).
The mortgage disappears, once a judgment is entered in a mortgage foreclosure action. In other words, the mortgage is merged in a judgment entered in a mortgage foreclosure action. Stendardo v. Federal Nat’l Mortgage Ass’n, 991 F.2d 1089 (3d Cir. Pa. 1993). This means, among other things, that the mortgagee is entitled to post-judgment interest at the legal rate, rather than the rate specified in the mortgage. Soto v. PNC Bank (In re Soto), 221 B.R. 343 (Bankr. E.D. Pa. 1998). The lien of a judgment founded on a mortgage relates back to the mortgage. De Witt’s Appeal, 76 Pa. 283 (1874).
V. Sheriff’s Sale
Following the entry of a writ of execution, plaintiff’s counsel must prepare and submit to the sheriff a “foreclosure package,” containing, inter alia, the writ of execution, a deposit check for the sheriff’s fees, a Notice of Sheriff’s Sale, a Rule 3129.1 Affidavit, the text of the handbill, the text of the advertisement of sale to be published, a Verification of Non-Military Service, an Affidavit as to Act No. 91 (where applicable), and a Rule 3129.2 Affidavit.
Notice of the sheriff’s sale must be given by handbills, by publication, and by written notice to all persons whose names and addresses are listed in the Rule 3129.1 Affidavit. See Pa.R.C.P., Rule 3129.2(a). The required handbills must be posted by the sheriff in the sheriff’s office and upon the property at least thirty days before the sale, and must include: (1) a brief description of the property to be sold, its location, any improvements, the judgment of the court on which the sale is being held, the name of the owner or reputed owner, and the time and place of sale; and (2) a notice directed to all parties in interests and claimants that a schedule of distribution will be filed by the sheriff on a date specified by the sheriff not later than thirty days after sale and that distribution will be made in accordance with the schedule unless exceptions are filed thereto within ten days after the filing of the schedule. Pa.R.C.P., Rule 3129.2(b).
Notice containing the information required in the handbill must also be given by publication by the sheriff once a week for three successive weeks in a newspaper of general circulation in the county and in the legal publication, if any, designated by rule of court for publication of notices, the first publication to be made not less than 21 days before the date of sale. Pa.R.C.P., Rule 3129.2(d).
The required written Notice of Sheriff’s Sale must be prepared by the plaintiff’s counsel, and must contain the same information as the handbill, or may consist of the handbill, and such notice must be served at least 30 days before the sale on all persons whose names and addresses are set forth in the Rule 3129.1 Affidavit. Pa.R.C.P., Rule 3129.2(c).
Service of the Notice of Sheriff’s Sale must be served: (1) upon each defendant in the judgment who has not entered an appearance and upon the owner of the property, as provided by statute (i.e., normally by the sheriff); (2) upon each defendant in the judgment who has entered an appearance, by plaintiff’s counsel; and (3) upon each other person named in the Rule 3129.1 Affidavit, by plaintiff’s counsel, via ordinary mail at the address set forth in the Affidavit. Service is complete upon mailing. Pa.R.C.P., Rule 3129.2(c).
After service is complete, plaintiff’s counsel must prepare and file a Rule 3129.2 Affidavit, attesting to the completion of the required service upon all of the persons identified in the Rule 3129.1 Affidavit.
In the event the sale is stayed, continued, postponed, or adjourned to a date certain within 130 days of the originally scheduled sale date, and a public announcement of the new date is made to the bidders assembled at the time and place of the originally scheduled sale, no new Notice of Sheriff’s Sale is required, but there may be only two such stays, continuances, postponements, or adjournments without new notice or court order. Pa.R.C.P., Rule 3129.3.
On the appointed day, and barring a stay, continuance, postponement, or adjournment, the property in question is sold to the highest bidder, in accordance with the rules of the local sheriff. Typically, as each property scheduled for sale is announced by the sheriff or his representative, the attorney on the writ opens the bidding, normally bidding either a nominal amount or “costs.” At the same time, the attorney on the writ announces an upset price (not to exceed the amount of the judgment), and the bidding then proceeds, starting with the next permissible increment above the upset price. If there is no actual bidding, the property is knocked down to the attorney on the writ.
VI. Post Sheriff’s Sale
Within 30 days after the auction, the sheriff is required prepare and file a schedule of proposed distribution and a list of liens for each property sold at the auction. Pa.R.C.P., Rule 3139(c). However, no schedule of distribution or list of liens need be filed when the property is sold to the attorney on the writ for costs only. Pa.R.C.P., Rule 3136(a).
Ten days after the filing of the schedule of distribution, the sheriff must prepare, execute, and deliver to the Recorder of Deeds a deed to the property sold. Pa.R.C.P., Rule 3135(a). In addition, ten days after the filing of the schedule of distribution, the sheriff must distribute the proceeds of sale in accordance with the proposed schedule of distribution, unless written exceptions are filed with the sheriff within ten days after the filing of the proposed schedule. Pa.R.C.P., Rule 3136(d).
Of course, this timetable may be disrupted in the event a petition to set aside the sale is filed. Upon petition of any party in interest before delivery of the sheriff’s deed to the real property, the court may, upon proper cause shown, set aside the sale and order a resale or enter any other order which may be just and proper under the circumstances. Pa.R.C.P., Rule 3132. Some of the grounds cited in support of a petition to set aside a sale include defects in the proceedings prior to the sale, or defects in the course of the sheriff’s auction itself, or gross inadequacy of the sale price, or fraud or collusion among the bidders. The applicable standard to determine whether a sale should be set aside is whether “proper cause” is shown. Merrill Lynch Mortg. Capital v. Steele, 859 A.2d 788 (Pa. Super. Ct. 2004).
VII. What Does the Successful Bidder Actually Obtain?
In general, the successful bidder at the sheriff’s auction obtains title clear of all junior liens, and unaffected by defects in title not apparent from the record. The effect of a foreclosure sale is to wipe out all junior liens on notice of the sale, including tax liens assessed against a former owner. Commonwealth v. Hoffman-Henon Co., 382 Pa. 213, 114 A.2d 92 (1955). (However, in order to wipe out a validly recorded federal tax lien the United States must be made a party to the foreclosure action. Miners Sav. Bank v. United States, 110 F. Supp. 563 [M.D. Pa. 1953]).
By the same token, the successful bidder takes title subject to encumbrances and interests of record superior to the mortgage upon which the foreclosure judgment had been obtained. And, with respect to the condition of the property, the successful bidder takes the property as is. Therefore, a great deal of due diligence is advised before anyone ventures to purchase property at a sheriff’s sale.
With respect to existing leases on the property, if the lease was entered into before the mortgage being foreclosed, then the purchaser at the sheriff’s foreclosure sale takes title subject to the lease. On the other hand, if the lease was entered into subsequent to the mortgage, then the purchaser at the sheriff’s sale has the option of affirming or disaffirming the lease. Of course, if the prior owner or tenant refuses to vacate the premises, an ejectment action may be required.
VIII. Deficiency Judgments
A mortgage foreclosure sale discharges the mortgage and releases the mortgagor from liability, even though the sale price realized is less than the amount owed on the mortgage. Meco Realty Co. v. Burns, 414 Pa. 495, 200 A.2d 869 (1964). If there is a guaranty, in addition to the promissory note and mortgage, then of course the lender may pursue an independent action against the guarantor on the guaranty for any deficiency.
Furthermore, if the borrower made an independent promise to pay, independent of the mortgage, for example in the underlying promissory note, then the lender may pursue an independent action against the borrower for any deficiency. For rules governing the procedure relating to deficiency judgments, see Pa.R.C.P., Rule 3276 et seq.
In determining the amount of any deficiency, the price obtained at the foreclosure sale is conclusive as between the parties as to the value of the premises, unless the mortgagee is the purchaser at the foreclosure sale. In that case, the amount of any deficiency, and the extent of any liability by the mortgagor to the mortgagee, must be determined in accordance with the Pennsylvania Deficiency Judgment Act, 42 Pa.C.S. § 8103.
The statute requires any mortgagee wishing to pursue a deficiency judgment against the mortgagor to petition the court to fix the fair market value of the realty sold. The mortgagor is then discharged from all liability up to the amount of the fair market value determined by the court, regardless of the actual amount bid by the mortgagee at the sheriff’s auction. 42 Pa.C.S. § 8103. See also 42 Pa.C.S. § 5522.
The petition to fix the fair market value must be served and filed within six months after the sale of the property. Commonwealth Bank & Trust Co., N.A. v. Hemsley, 395 Pa. Super. 447, 577 A.2d 627 (1990).
Finally, if the mortgagee accepts a deed in lieu of a sheriff’s sale, the mortgagee forfeits any right to relief under the Deficiency Judgment Act, and takes title subject to all existing liens, including inferior liens that would have been wiped out to a sheriff’s sale.
IX. Ejectment Actions
If, after a sheriff’s sale, the property is occupied, a separate action in ejectment must be filed.
A. Complaint in Ejectment
Much like a foreclosure complaint, a Complaint in Ejectment is only concerned with real property and must be brought in the county in which the land is situated. When bringing an ejectment action the plaintiff must describe the property at issue and provide an abstract of the title upon which he or she relies. Pa.R.C.P. 1054. When bringing an ejectment action, you are required to name the individual(s) in possession of the property as defendants. To ensure that ejectment action is valid, the judgment debtor(s) along with “all occupants/tenants” should be named as defendants.
B. Service of Ejectment Complaint
A Complaint in Ejectment must be served in the same manner as any other civil action, including a foreclosure action. Pa.R.C.P. 410. Accordingly, with the exception of Philadelphia, service must be effectuated by the sheriff’s department.
C. Responding to a Complaint in Ejectment
A defendant may respond to a Complaint in Ejectment in the same manner in which a defendant may respond to a foreclosure complaint i.e. preliminary objection or admitting or denying each allegation. While a defendant may also raise affirmative defenses or file a counterclaim, a defendant cannot use this response as a means to attack the sheriff’s sale. Caplan v. Kent, 76 A.2d 764 (Pa. 1950). However, in an ejectment action it may be alleged that the judgment is void. A void decree can be attacked at any time. Brokans v. Melnick, 569 A.2d 1373, 1376 (Pa. Super.1989). Where a judgment is void, the sheriff’s sale which follows is a nullity. Id.
D. Judgment and Execution
Once a plaintiff has obtained a judgment, either by default or by order of court following a motion for summary judgment, the plaintiff must file a writ of possession to execute on the judgment. Pa.R.C.P. 3254. On the day of eviction, the sheriff will accompany plaintiff or its representative to the property. Plaintiff should also have a locksmith present to rekey the property.
E. Protecting Tenants at Foreclosure Act of 2009
In 2009, the Protecting Tenants at Foreclosure Act was passed to protect tenants from eviction because of foreclosure on the properties they occupy. The tenant protection provisions apply in the case of any foreclosure on a “federally related mortgage loan” or on any dwelling or residential real property. Under the Act, any immediate successor in interest, including a bank, that takes title to a house upon foreclosure must assume the interest subject to the rights of any bona fide tenant and will need to comply with certain notice requirements. The Act requires that tenants must be given a notice to vacate at least 90 days in advance.
In addition, tenants must be permitted to stay in the residence until the end of their leases with two exceptions:
(1) When the property is sold after a foreclosure to a purchaser who will occupy the property as a primary residence; or
(2) When there is no lease or the lease is terminable at will.
However, under either exception, the tenants must still be given 90 days’ notice.
X. Satisfaction of Judgment and Mortgage
A. Mortgages 21 P.S. 681et seq.
PA law requires that any mortgagee having received full satisfaction and payment of all money due under the mortgage, shall, upon request of mortgagor, shall satisfy the mortgage either upon the margin of the record of the mortgage or by filing a sat piece.
If the mortgage has not been satisfied within forty-five days of the request of the mortgagor, the mortgagee, for every offence, shall forfeit and pay any sum not exceeding the mortgage money, to be recovered in any Court of Record by bill, complaint, or information. The amount of the fine is determined on a case by case basis.
A bank, savings bank, savings and loan association or other lending institution holding a residential mortgage shall send written notification by first class mail to the mortgagor when the mortgage has been fully paid. Any monies remaining in any escrow account established for the payment of taxes or insurance premiums shall be returned within 30 days to the mortgagor.
B. Judgments 42 Pa.C.S.A. 8104
General rule.–A judgment creditor who has received satisfaction of any judgment in any tribunal of this Commonwealth shall, at the written request of the judgment debtor, or of anyone interested therein, and tender of the fee for entry of satisfaction, enter satisfaction in the office of the clerk of the court where such judgment is outstanding, which satisfaction shall forever discharge the judgment.
Damages.–A judgment creditor who shall willfully or unreasonably fail without good cause or refuse for more than 90 days after written notice in the manner prescribed by general rules to comply with a request pursuant to subsection (a) shall pay to the judgment debtor as liquidated damages 1% of the original amount of the judgment for each month of delinquency beyond such 90 days, but not less than $250 nor more than $2,500. Such liquidated damages shall be recoverable pursuant to general rules, by supplementary proceedings in the matter in which the judgment was entered.
XI. Blighted Properties – Land Banks 68 Pa.C.S. 2101
A land bank is a governmental entity that focuses on the conversion of vacant, abandoned, tax-delinquent, and foreclosed properties into productive use. They focus on surplus public property, “under water” properties, abandoned properties, and tax delinquent properties. Municipalities consider creating land banks when they start to see fragmented inventories, large inventories of abandoned or vacant property with little market value, code violations, and title problems. These properties are most commonly acquired through tax sales, municipal transfers, purchases or donative transfers from financial institutes.
Land banks have the power to contract, invest and borrow money, own design develop, demolish etc., real property, and extinguish delinquent taxes on land bank property. They do not have the power of eminent domain. Land Banks dispose of the properties in accordance with local needs and priorities. This could be in the form of affordable housing, mixed-use properties, and green spaces including parks or urban garden.
The goal of a land bank is to eliminate blight, maximize short term and long term revenue, provide affordable housing or commercial space, and stabilize neighborhoods.