Foreclosing Manufactured Homes in Kentucky

Lenders in Kentucky must be extra vigilant when their loans are secured by mortgages on land that includes manufactured homes (MH). An MH is personal property and not automatically a fixture like a house with a foundation or a modular home. Because of that, lenders that haven’t taken proper steps might find their loans secured only by the land and not by the homes. This can have consequences in a foreclosure action or bankruptcy proceeding.

In Kentucky, manufactured homes can be secured to a mortgage loan in two ways:

• Listing its lien on the MH certificate of title (MH COT)
• Converting the MH to real estate by a statutory process involving recording an affidavit of conversion to real estate

It’s also possible to file a foreclosure with the court requesting an "equitable lien" on the MH, but courts can reject this and rule that lenders can sell only the land through the foreclosure. In addition, even if the court entered a judgment and order of sale that grant an equitable lien, a bankruptcy trustee can still sell the MH as a "preference" or under the "strong-arm" clause of the Bankruptcy Code.

Mortgage servicers and lenders will improve their chances of success by providing the loan origination files and any other relevant documents to their counsel when notified that the title exam doesn’t show the MH as securing the mortgage. Once the MH vehicle identification number (VIN) is confirmed, counsel can request a printout of the owner/lienholder status for that structure from the Kentucky Transportation Cabinet (KYTC). The printout will also state whether the MH COT has been surrendered, or whether one exists for that VIN.

Armed with the information provided by the KYTC printout, counsel will file a complaint to have the MH converted to real estate or at least to have a duplicate MH COT issued so the MH can be sold with the land at the judicial sale. Best practice is to convert the MH to real estate before the judicial sale, but Kentucky requires an inspection by the county's fire marshal in advance. That official can require repairs so the structure meets code standards before the MH COT is issued. Thus, lenders must weigh the costs of this process with proceeding to judgment and a judicial sale without a perfected lien interest on the MH.

As this illustrates, there’s more than one way to handle mortgage loans where an MH was intended as security but not properly perfected. Servicers and lenders need to balance cost and time issues when reviewing options that can vary depending on the documents, judge, borrowers, and counsel.

*Please note that John Cummins is an MDK alumni member.