The Foreclosure Scandal: Stop, Re-Start...Stumble
Sunday, January 9, 2011 at 7:07PM Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
Based on their track record, it is difficult to take anything lenders say at face value. We were told there was no bubble. There was. We were told that it was a sub-prime mortgage problem. It wasn't. Countrywide (now Bank of America) assured us that they didn't have any of the "toxic" mortgages. They did. We were told that they would work with borrowers to keep them in their homes. They don't. We were told that they properly foreclosed their mortgages. They didn't.
Now many of the lenders are telling us that they have reviewed their foreclosures and either didn't find any problems or have fixed them up. All in about 2 weeks time.
Bank of America, who has re-started their foreclosures in the 23 judicial foreclosure states, has assured us that it had performed a thorough review of 102,000 foreclosures and found nothing wrong1. Really? The first question that comes to mind, is how was Bank of America able to review 102,000 foreclosure files in such a short time period? RoboReviewer? And what is the likelihood that there were no errors in the 102,000 foreclosure files?
In an industry with a better track record, these questions would fall on deaf ears and quickly fade away. In this case, there are few defenders of the large lenders and great skepticism about anything they say.
That skepticism was reinforced when, on Sunday October 24th, Bank of America acknowledged that had found errors in its filings and would only resume foreclosures in a "deliberate manner as new and corrected paperwork was submitted to the courts."
First they tell us everything is okay, then they suspend foreclosures in all 50 states, next they tell us that they have no problems in the 23 judicial foreclosure states and are resuming their foreclosures and now they say that there may be some problems but we are still going forward with the foreclosures any way. I'm sure everyone now feels much better about their foreclosure process.
What This Means to You and Your Clients
Remember not too long ago when everyone thought they had a "bad" mortgage? Well, today everyone thinks they are being subject to a defective foreclosure. Many also believe that all foreclosures have been suspended and some believe that the government suspended the foreclosures.
The fact is that neither the federal government nor the State of Minnesota has suspended foreclosures. The foreclosure suspensions were voluntary on the part of the lender. This means that each lender can apply the suspension in any way they see fit and can resume the foreclosure at any time. For example, Bank of America voluntarily suspended all of their foreclosures in all 50 states. Does that mean they immediately postponed Sheriff Sales in Minnesota? No. Does that mean they sent out letters to borrowers saying that the period of redemption would be extended? No. Does that mean that if another company is servicing a Bank of America loan, that the BOA suspension would apply? No.
As far as being subject to a "bad" foreclosure, the difficulty is that it is expensive to sue and fight a lender, especially a national lender. This type of lawsuit would end up in federal court. There are many theories of what could stop a foreclosure. Whether your lender properly verified the facts on which the foreclosure is based can only be determined by discovery in litigation. The good news is that litigation allows the borrower to force the lender to produce documents and people to answer questions under oath. The bad news is that this is an expensive process and you may be looking for something that does not exist in your case. Another theory is that your lender may not be able to prove ownership of the mortgage which they are attempting to foreclose on. This almost always is an issue where MERS was used to transfer mortgage back loans to lenders and investors. The problem with this theory is that there has not been a definitive answer. Some courts have held in favor of the lender while others have held in favor of the borrower. This theory is more attractive in that if the borrower wins, the lender may never be able to foreclose the mortgage, while under the "procedural errors" theories, the lender may be able to remedy the problem by starting the foreclosure over. However, the problem with this theory is the same as the other - the cost of the fight.
So what is a borrower to do? The borrower has to assume that the foreclosure is still moving forward until they receive something in writing indicating that it has been suspended. Even if suspended, the borrower has to assume that the foreclosure could resume at any time. A borrower cannot rely on what a lender says to the media or what the loss mitigation department says, the borrower can only rely on what they receive in writing. Hope for the best, expect the worst.
If a foreclosure action is being started, the borrower can send a letter to the law firm foreclosing the mortgage to provide proof that the foreclosing lender owns the mortgage that they are foreclosing. The borrower could hire an attorney to challenge the foreclosure. Most likely, the current controversy will encourage more people to sue the lenders despite the costs and, if someone is successful, other borrowers can ride on their coattails. The other option that may become available would be to join a class action lawsuit.
Another option may be that the voluntary suspensions will be replaced by government imposed suspensions. All 50 states have opened investigations of the lenders' foreclosure practices. Congressional hearings have been called for. As more and more problems come to light, the greater the anger and the increased likelihood that there will be a government response. Unfortunately, all a borrower can do is talk to their legislators and hope that if the government does something it is in time for them to take advantage of it.
Class Action Lawsuit
A class action lawsuit allows many plaintiffs to act together in one lawsuit against a common defendant. This makes the case more economical to bring and, normally, the plaintiffs do not have to pay to be a part of the class action. What most people do not realize is that just because you have a lot of potential plaintiffs against a common defendant does not mean that a class action lawsuit will be allowed. The court determines whether the class action lawsuit will be allowed and will look at factors such as whether all of the plaintiffs have the same claim against the same defendants based on the same of similar facts. It is also not a given that a law firm will be willing to bring a class action lawsuit. These lawsuits are expensive and the law firm is gambling that they are going to win. The law firm will therefor look at the likelihood that the court will allow the class action law suit, the likelihood that they will win, and whether the potential money won justifies the risk to be taken by the law firm.
Given the amount of controversy, anger, and money that is at stake, I would not be surprised if lawsuits were started seeking a class action certification. When such an action would be started and whether successful, only time will tell. Most likely such an action will come out of one of the states that has been hit the hardest by foreclosures - Florida, Ohio, California, etc.
Government Action
As discussed above, we are hearing more and more cries for government intervention. Every time a lender is caught in another lie or is caught ignoring the rules, the more the anger will increase. The people being hit the hardest today is middle America. These are the people who can decided elections. These are the people who are going to fuel any economic recovery. Ultimately, for politicians that want to ride the wave of anger, the foreclosure problems are an easy target. The same lenders who almost brought down our economy and who received TARP money are now the lenders who refuse to follow the rules to protect borrowers rights? Doesn't seem like a tough sell.
Before you bet all of your money that the government is going to intervene, you have to be aware that there are strong reasons why the government, especially the federal government, does not want to intervene.
First, we are reluctant to want government interfere with contracts and normally prefer that the courts deal with parties who break laws and refuse to follow rules.
Second, suspensions of foreclosures cost lenders a great deal of money. If foreclosures are determined to be invalid, there will be massive losses that could threaten to bring the industry down yet again. This could result in (pinch your noses) another bailout. The other result, would be that the losses would be thrown back to the insurers of the loans - AIG, Fannie Mae and Freddie Mac. Of course, we own them so those losses would be added to the taxpayers tab.
Third, what investor will want to invest in mortgages if the system is in shambles? Who is going to be able to get a new loan if there are no investors?
Conclusion
The RoboSigning issue could be easily dealt with by simply doing the foreclosure properly - review the information to verify that it is correct. This will cost more time and money for the lenders but would cure the procedural problems they are facing. The underlying issue that scares everyone is whether the lenders are capable of verifying the foreclosure information.
The lenders are huge bureaucracies that seem incapable of dealing with the massive numbers of foreclosures they are faced with. Because of their size and the fact that the mortgages and/or notes were assigned numerous times, it is not surprise that the lenders are struggling with verifying information. These are companies that routinely lose documents that are sent to them. Are they really able to find the promissory note or the assignments? Who would look for them? Where would they look. What happens when the lender that was supposed to have them went under? The easy way to deal with the problem is to simply rely on what the computer screen says. It must be right. Right? Wrong. Can they actually obtain the documentation to verify the foreclosure facts? Nobody knows. The documents may exist but they are just too big to find them or the proper documents may never have been created or preserved.
Today, the lenders have looked at their own foreclosures and are reassuring us that there is no problem but that is kind of like me reviewing my taxes and saying that I don't see a problem. With other eyes looking at their foreclosure processes through lawsuits and government investigations, we may not have heard the end of these issues.
1As we all know, Bank of America surprised us by voluntarily suspending its foreclosures in all 50 states. We were given no clue as to how long the suspension would last but, given the volume of foreclosures in the 23 judicial foreclosure states, a mere week and a half later.
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