The issue at the center of the foreclosure scandal isn’t the use of robo-signers and shortcuts in paperwork: It’s whether the banks’ mistakes and lack of due diligence caused people to face wrongful foreclosures.
Banks have denied that this has happened, saying, “We are confident that processing errors did not result in any inappropriate foreclosures.” Foreclosure defense attorneys, however, say that wrongful foreclosures not only happen, they’re widespread. This disagreement comes down to what constitutes a wrongful foreclosure.
Here’s our attempt to break through the rhetoric and lay out the arguments:
1) Homeowners were not in default but faced foreclosure.
Most everyone agrees it’s wrong for banks to foreclose on someone who isn’t behind on a mortgage or has even paid off a mortgage. Homeowners in both these scenarios have faced foreclosure actions due to processing errors—often involving miscommunication between lenders, servicers, title insurers, foreclosure law firms and other bank contractors. In many of these cases, banks have apologized for such errors.
2) Homeowners who were told that to be eligible for a loan modification, they needed to fall behind on their mortgage—and subsequently found themselves on the path to foreclosure.
It’s not uncommon for banks to give this kind of advice to homeowners who were at the time current on their mortgage but were seeking a modification. In a survey we conducted in August, nearly half of the 373 homeowners who responded told us that their mortgage servicer incorrectly told them that they had to stop making mortgage payments in order to qualify for a loan modification.
This has led some homeowners across the country down a path to foreclosure. Several have lost their homes—or come very close—because the bank instructed them to default and then foreclosed, according to reports by Courthouse News Service.
One Colorado Springs, Colo., family, seeing a drop in business income, sought a loan modification and was told by GMAC Mortgage that to qualify they had to miss two mortgage payments, reported the Denver Post. When they took that advice and were rejected for the modification, they tried to catch up on what they owed in order to avoid foreclosure, but by that time their debt had increased because of additional fees.
3) Homeowners were behind on their mortgage but could have caught up if not for additional fees.
In a speech this month, Federal Reserve Governor Sarah Bloom Raskin criticized the mortgage servicing industry for using a “Pandora’s Box of predatory tactics” including “the padding of fees, such as late fees, broker-price opinions, inspection fees, attorney’s fees, and other fees.” (The Federal Trade Commission has a consumer fact sheet on its website that urges homeowners to “read your billing statements carefully to make sure that any fees the servicer charges are legitimate” and to ask for itemizations and explanations when needed.)
Raskin also mentioned servicers’ practice of taking out overpriced forced-place insurance policies and the “strategic misapplication of payments”—whereby homeowners’ payments for the mortgage principal and interest were first applied to pay fees and insurance premiums, triggering default or precipitating foreclosure on the mortgage principal.
In light of these problems, some state judges presiding over foreclosure cases have begun asking banks and the law firms they hire to justify the thousand-dollar fees they’ve charged to homeowners. From a piece in the Tampa Tribune:
"Routinely, routinely, I'm seeing charges of $1,600, $1,800, $1,000, $800, any of those are ridiculous, and there had better be a good reason for it," [Pasco County Circuit Judge Susan] Gardner said, noting that these fees should typically be $45 to a couple hundred bucks.
Banks deny that they maximize profits by capitalizing on fees, but legal services attorney Diane Thompson of the National Consumer Law Center told lawmakers last week that the fees are responsible for triggering foreclosure in about half the cases she’s seen.
4) Mistaken foreclosures due to dual track of foreclosure and loan modification processing.
Banks aren’t supposed to foreclose on homeowners until they’ve exhausted all available loss mitigation options. But foreclosures and loan modifications being processed simultaneously by different divisions within the bank can cause many struggling homeowners awaiting approval for a loan modification to be foreclosed on first.
Here’s what we reported in May about one homeowner who was waiting to hear back about her application for a loan modification:
She was still waiting in March when a realtor, representing the new owner of her home, showed up. Her house had sold at auction — for less than half of what Gomez owed. “They don’t give you an opportunity,” she said. “They just go and do it with no warning.”
It’s not supposed to work that way. Under the federal program, which requires servicers to follow a set of guidelines for modifications, servicers must give borrowers a written denial before foreclosing.
When Gomez called Bank of America about the sale, she said she was told there was a mistake but nothing could be done. She did get a denial notice— some three weeks after the house was sold and just days before she was evicted.
In October, the Wall Street Journal told the story of a couple who had been granted a loan modification by their servicer, JPMorgan Chase, only to receive notice that Chase had foreclosed anyway. The bank said it had made a mistake.
In a hearing last week, lawmakers, legal experts and banks all agreed that in cases in which loan modifications can both help homeowners and produce higher returns for investors, they should be granted. Failure to do so, said Alan White, an associate law professor at Valparaiso University School of Law, is just as wrong as foreclosing on someone who isn’t behind on the mortgage.
5) Foreclosures in which the bank can’t prove it has standing to foreclose.
Even in cases in which homeowners are clearly in default for reasons unrelated to servicer actions, legal experts have argued that it doesn’t mean just anyone can swoop in and take away the defaulted homeowners’ property—it has to be the person to whom the debt is owed or someone acting on behalf of the mortgage owner. And when a loan has changed hands numerous times in the securitization process, banks have had a hard time proving standing and producing the documents necessary to enforce a foreclosure.
In a 2007 analysis of bankruptcy mortgage claims, University of Iowa law professor Katherine Porter found that about 40 percent of the time, banks didn’t provide the proper paperwork—specifically, the note—to enforce a mortgage claim and collect the debt. She wrote that the statistic was “troubling” and a threat to the “integrity of the bankruptcy system.”
Many foreclosure defense attorneys argue similarly about banks’ failure to produce the same paperwork when enforcing foreclosures. To this point, an official from the Florida Bankers Association told the Jacksonville Business Journal that foreclosure defense attorneys are taking advantage of legal technicalities, and delinquent homeowners shouldn’t escape consequences simply because there were mistakes in the transfer of mortgage paperwork.
Despite the debates elsewhere, many legal experts seem to agree: The so-called technicalities go to the heart of the American system of law and property rights. To argue otherwise, testified Georgetown University associate law professor Adam Levitin, would be to “claim that rule of law should yield to banks’ convenience [PDF].”
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