NELSON-WHITMAN FINAL.DOC 12/20/2004 3:30 PM Duke Law Journal VOLUME 53 MARCH 2004 NUMBER 5 REFORMING FORECLOSURE: THE UNIFORM NONJUDICIAL FORECLOSURE ACT GRANT S. NELSON† DALE A. WHITMAN†† ABSTRACT The Uniform Nonjudicial Foreclosure Act is one of the few creative approaches to mortgage foreclosure to emerge in many decades. In this Article, the authors examine why uniformity in foreclosure law among the states in desirable and, accordingly, advocate foreclosure reform. They analyze the Act, promulgated in 2002, giving specific attention to the Act's new methods of foreclosure by negotiated sale and by appraisal. They also examine the Act’s numerous special protections for residential debtors and consider the effectiveness of the Act's procedures concerning subordinate leases, titles arising from foreclosures, surpluses and deficiencies resulting from foreclosures, and fairness of foreclosure prices. They conclude that the Act is fair and well balanced as between creditors and debtors and that it has the potential to make foreclosures more efficient, benefiting all affected parties. Finally, they argue that because a critical mass of state legislatures likely will not adopt the Act, Congress should consider enacting it as a federal statute. Copyright © 2004 by Grant S. Nelson and Dale A. Whitman. † Professor of Law, University of California, Los Angeles. Professor Nelson is grateful to Phillip Lerch for his excellent research assistance on this Article. †† Professor of Law, University of Missouri-Columbia. Professor Whitman is grateful to Rhiana Sharp for her excellent research assistance on this Article. NELSON-WHITMAN FINAL.DOC 12/20/2004 3:30 PM 1400 DUKE LAW JOURNAL [Vol. 53:1399 TABLE OF CONTENTS Introduction ..........................................................................................1401 I. Mortgage Foreclosure in the United States—The Absence of Uniformity...................................................................................1403 A. State Law Divergence: An Overview.......................................1403 B. The Impact of the Secondary Market for Mortgages.............1406 C. Efforts to Achieve Uniformity..................................................1407 1. The Uniform Laws Approach................................................1408 2. The Restatement Approach...................................................1409 3. Uniformity through Contract.................................................1410 4. Congressional Preemption .....................................................1411 II. The Foreclosure Sale .....................................................................1415 A. The Status Quo: The Auction Sale and Its Alternatives........1416 1. What’s Wrong with Auctions?...............................................1416 2. The Special Problems of Foreclosure Auctions...................1420 3. Empirical Evidence on the Fairness of Foreclosure Prices.........................................................................................1426 B. UNFA’s Approach to Improving Foreclosure Dispositions.................................................................................1430 1. Improving the Auction Sale Process.....................................1430 2. Alternatives to Auctions: Foreclosure by Negotiated Sale and by Appraisal.............................................................................1440 C. Summary......................................................................................1446 III. Protecting Residential Debtors...................................................1447 A. Defining “Residential Debtor”.................................................1448 B. Meeting to Object to Foreclosure.............................................1450 C. Other Protections for Residential Debtors .............................1456 1. Agreements Fixing Standards of Performance....................1456 2. Double Notices ........................................................................1457 3. Notices Unclaimed or Sent to Incorrect Addresses ............1458 4. Right to Notice of Default and Cure Period........................1462 IV. The Problem of the “Omitted Junior” .......................................1467 A. The Judicial Foreclosure Analogy............................................1468 B. Preserving Junior Leases ...........................................................1474 C. UNFA’s Flexible Approach ......................................................1476 D. Unrecorded Leases.....................................................................1478 V. Postforeclosure Measures..............................................................1482 A. The Disposition of Foreclosure Surplus ..................................1483 B. Deficiency Judgments and Personal Liability .........................1489 1. The Safe Harbor for Residential Debtors............................1489 NELSON-WHITMAN FINAL.DOC 12/20/2004 3:30 PM 2004] REFORMING FORECLOSURE 1401 2. The “Fair Value” Limitation on Deficiencies......................1491 3. Fitting UNFA into Existing State Law .................................1493 C. Nonjudicial Foreclosure Titles: The Quest for Finality .........1498 D. Obtaining Possession after Foreclosure...................................1507 VI. Should UNFA Be Enacted by Congress?...................................1509 Conclusion.............................................................................................1513 INTRODUCTION “Uniform” is hardly a word that one would use to describe the current law of real estate finance. Mortgage law varies enormously from state to state and represents an often perplexing amalgam of English legal history, common law, and legislation. This disparity remains the reality despite numerous attempts during the past century to achieve greater uniformity, and despite the importance of the American mortgage market to the national economy. In 2002, following four years of drafting, the National Conference of Commissioners on Uniform State Laws (Conference) promulgated the Uniform Nonjudicial Foreclosure Act (UNFA).1 UNFA reflects the contributions of some of the nation’s leading real estate finance practitioners and scholars.2 It is designed to make American foreclosure law uniform by providing for the prompt and efficient nonjudicial liquidation of real estate collateral while affording substantial safeguards for defaulting borrowers. Residential borrowers receive special protection under UNFA.3 UNFA represents a major innovation in the foreclosure process. Not only does it provide for conventional foreclosure by public auction sale,4 it also authorizes foreclosure by appraisal,5 a procedure under which the secured creditor can appraise the property, take title to it, and credit the borrower and junior lienors with a price acceptable to all parties. Importantly, it endorses foreclosure by negotiated sale, a process designed to emulate the sale of real estate 1. UNIF. NONJUDICIAL FORECLOSURE ACT (UNFA) (2002), available at http://www.law.upenn.edu/bll/ulc/UFBPOSA/2002final.pdf. 2. The drafting committee consisted of Carl H. Lisman, Chair; John H. Burton; Lani Liu Ewart; Dale G. Higer; Reed L. Martineau; Robert L. McCurley, Jr.; Lisa Kelly Morgan; Willis E. Sullivan (who regrettably died before completion of the Act); and Dale Whitman, Reporter. Ira Waldman served as the American Bar Association Advisor and Grant Nelson as a representative from the American College of Real Estate Lawyers. 3. See infra Part III. 4. UNFA art. 2, §§ 201–210. 5. UNFA art. 5, §§ 501–505. NELSON-WHITMAN FINAL.DOC 12/20/2004 3:30 PM 1402 DUKE LAW JOURNAL [Vol. 53:1399 outside the foreclosure setting.6 “Such a sale will be consummated in much the same way as other real property sales; the property may be listed with a real estate broker and advertised extensively.”7 The negotiated sale, which land finance scholars have long advocated as an alternative to conventional foreclosure, is designed to produce a higher foreclosure price than the usual auction sale—a result that would benefit both the borrower and junior lienholders. This Article provides a comprehensive examination of UNFA. First, we focus on the absence of uniformity in substantial areas of American real estate finance law.8 In so doing, we describe a hodgepodge of divergent state substantive and procedural rules governing real estate mortgages and their foreclosure. We then examine and evaluate foreclosure by auction sale, currently the pervasive method of foreclosure in this country.9 Next, we provide an overview of UNFA and its major innovation, foreclosure by negotiated sale.10 We then comprehensively analyze UNFA’s major provisions and the extent to which they are consistent with or diverge from the dominant themes of current state law.11 We give special emphasis to UNFA’s protection for residential debtors.12 Finally, the Article endorses UNFA and assesses its likely impact,13 concluding that there is only a remote likelihood that it will be adopted by a substantial number of states.14 Consequently, we advocate the Act’s ultimate adoption by Congress, a position that we defend as consistent with the values of federalism and the Conference.15 6. UNFA art. 4, §§ 401–405. 7. UNFA prefatory note at 2–3. 8. See infra Part I.A. 9. See infra Part II.A. 10. See infra Part II.B. 11. See infra Parts II–V. 12. See infra Part III. 13. See infra Part VI. 14. See infra Part VI. 15. See infra Part VI. NELSON-WHITMAN FINAL.DOC 12/20/2004 3:30 PM 2004] REFORMING FORECLOSURE 1403 I.