Lenders should be wary of a bill passed last year by the Connecticut legislature to help speed up the foreclosure process, as much remains ambiguous about how the new foreclosure procedure created by the bill will work in practice, warned industry experts at a meeting held by the Connecticut Mortgage Bankers Association.

The new type of foreclosure, called a "foreclosure by market sale," was intended to help smooth the path for short sales, enabling lenders and homeowners to force junior lien holders to come to the table and prevent them from blocking a short sale, said Richard Leibert, a partner at Hunt Leibert Jacobson who has studied the law.

But much remains unclear about how to properly execute the new form of foreclosure and what its consequences will be. Whether or not a lender must attempt a foreclosure by market sale if the property is underwater is somewhat unclear, said Leibert, as are technical issues such as whether a lender can rely on a broker’s price opinion to determine the value of the home or if he or she must use a formal appraisal. 

On the other hand, the law has the potential to speed up some kinds of foreclosure, Leibert says. Connecticut, with its strict foreclosure and foreclosure mediation requirements, has one of the lengthiest foreclosure timelines in the country.

"Now where it takes us an average of 300 days [in Connecticut] to complete a foreclosure, the idea is with this [foreclosure by market sale] is to complete the foreclosure pretty quickly," with the bank and the borrower required to agree to the sale within 30 days after the purchase and sale agreement has been accepted and any contingencies are dealt with, Leibert said. A judge must review and approve the terms of the sale, and the junior lien holder has 30 days to make a bid on the property in order to redeem its own debt, or see that debt wiped out.  

While on paper that could speed up the process considerably, many practical questions remain. For example, while the buyer of the new property would generally receive the deed to the property at the closing, shortly after the judge approves the sale, the bank and other parties may not receive payment for some considerable time.

"Our experience is, it can take five months before the clerk of court gets around to signing the checks and releasing those funds," said Leibert.

This may result in the new borrower attempting to occupy the property before their payment is actually received.

Most importantly, borrowers are issued the notice letting them know about the possibility of doing the foreclosure by market sales at the very start of the foreclosure process-well before they’ve had the chance to explore other options for staying in their home, Leibert says. He fears that many may be confused by the terms of the foreclosure by market sale and reluctant to participate without fully exploring their options, resulting in long delays that may make the foreclosure by market sale impractical.

On the other hand, if lenders simply issue a notice informing the borrower about the new type of foreclosure, but themselves decline to use the new form if the borrower tries to pursue it, they may be accused of not acting in good faith, potentially drawing regulator’s scrutiny, Leibert said.