The claim has been made than the “robo-signing” fiasco has resulted in “wrongful foreclosures”. Given the speed at which many of the documents were processed, errors and irregularities and almost inevitable. Does this make the foreclosures “wrongful”? What is a “wrongful foreclosure”? There is currently no legal definition, and opinions vary widely. There are some advocates who would ban all foreclosures as “wrongful”.
Marian Wang of ProPublica recently wrote an article in which she lists situations she describes as “wrongful foreclosure”, and I find her definitions useful, and I’ve added a few notes of my own.
1. Homeowners were not in default but faced foreclosure.
This one is a no brainer. We’ve seen homeowners foreclosed on when their mortgage was current or even had no mortgage, but were foreclosed on due to error. The case where a woman’s house was ransacked and her parrot “bird-napped” by Bank of America when her mortgage was current is one case that comes to mind. Another is the man who was foreclosed on who had no mortgage. No default by the homeowner should mean no foreclosure.
2. Homeowners who were told that to be eligible for a loan mod, they needed to fall behind on their mortgage — and subsequently found themselves on the path to foreclosure.
ProPublica said that in a survey they conducted in August, 175 of 373 homeowners said that their mortgage servicer incorrectly told them they had to stop making mortgage payments in order to qualify for a loan modification. I wondered what sort of advice might be available online on the subject, so I did what I’m sure many homeowners do, I Googled “Do I need to be behind on my mortgage to qualify for a loan modification?”
Overwhelmingly the answer was “no”, so it would appear that a little research might save people some trouble. However, it is easy to see that false information provided by a lender is likely to be taken more seriously than information from the internet, even from reliable sources. One piece of online information did stick out however:
Many people have reported that they have received little to no assistance from their mortgage company, when applying for loan modification while being current on their payments. If a loan servicer can see you are 4 months behind and are about to enter into foreclosure it is easier to verify financial hardship, and the loan modification process is escalated. [FYI- this site did advise in the next paragraph for borrowers current on their mortgage to provide “suitable justification” for needing a mod and did not advise falling behind.]
There is a lot of anecdotal information out that it is difficult for borrowers to get the attention of swamped lenders if they are not behind in their mortgage, and I wonder how many have deliberately fallen behind in order to get their attention. While not as clear cut as our first “wrongful foreclosure”, certainly borrowers who fall behind at the recommendation of their lender should not be punished for following directions. [Note to borrowers here make sure you DOCUMENT EVERYTHING.]
3. Homeowners were behind on their mortgage but could have caught up if not for additional fees.
Late fees are lucrative for loan servicers, and there have been complaints of questionable fees for years. According to a 2007 New York Times article:
In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter [A law professor from the University of Iowa] found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.
In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.
Certainly these are cases that have crossed the line into “wrongful foreclosure”.
4. Mistaken foreclosures due to dual track of foreclosure and loan modification processing.
[L]oan servicers give confusing information — often what borrowers are told on the phone conflicts with the information that they receive in writing. For example, borrowers are told on the phone that while they are in review their house will not be sold, but continue receiving letters saying the lender is foreclosing. Loan servicers tell borrowers not to worry about the documents they get as “it is part of the process.” Then a few days before the sale, they unilaterally decide that the borrower has not provided a necessary document or piece of information, and proceed to the sale.
Further, servicers routinely lose borrower documents, want more, and then lose these. No person is responsible or accountable for the loan file. Instead, the division of labor is so fractured that a borrower might talk to 5 or 6 different customer service representatives in 3 or 4 different departments just trying to get an answer to a simple question such as “what documents are missing from my application?” Or “what program am I being considered for?” All of these representatives are merely consulting a computer screen that may take days to update, and will only contain information if the appropriate representatives actually input it. The result is that servicers spend disproportionate resources pushing customers from one department to another, and never actually problem-shooting to resolve the minor defects in modification applications.
No homeowner who is following the directions of their lender in a modification program should discover that the house has been foreclosed out from under them.
5. Foreclosures in which the bank can’t prove it has standing to foreclose.
This is the multi-billion dollar question here. Biggest of all is the case of MERS, a company [owned by the lenders] that tracks and transfers home mortgages. This question of standing now has thousands of homeowners demanding Show me the note! in the hopes that a lost document somewhere along the line will save them from foreclosure.
This is the messiest type of wrongful foreclosure and has no easy answer. While it sounds simple enough that no one should be able to take a home they cannot prove they are entitled to, there are two sides to this issue. A recent Seeking Alpha article does a good job of giving both sides. In support of those who say, “No note, no foreclosure”:
If it turned out that banks and mortgage originators cut corners by not passing along the notes, violating Pooling and Service Agreements and trust law, they’d have to eat the losses. If it turned out they didn’t pass along the notes, and couldn’t foreclose without “actively” seeking out those notes which would violate trust law, that’s their problem. The moral hazard of changing the rules for the banks or turning a blind eye to this activity would be deafening, and Lord have mercy on anyone who would violate the sanctity of the courts by bringing in fake documents to provide standing to foreclose. Am I right or am I right?
On the other side however is the “Ah come on- these folks aren’t paying their mortgages and shouldn’t get off because someone didn’t cross a ‘T’ somewhere”:
Whatever mistakes might have been made by lenders do not change the basic fact: most foreclosures are happening because the borrower is not paying the mortgage…Of course, in the small number of cases where a real mistake has been made and a foreclosure is moving forward against a borrower who is current on their mortgage, the courts have the ability to stop that from proceeding. In judicial foreclosure states the easiest solution to this problem is for the judge to ask the borrower, “When was the last payment you made?” If it has been awhile, say over six months, then the foreclosure should proceed, and proceed quickly… And if we ever expect or hope to see private capital come back into the mortgage market, then government needs to stop threatening to steal away that capital once it’s invested. The current efforts by states to use technical mistakes by lenders to allow borrowers to remain in homes without paying could ultimately undermine the very concept of a mortgage: that it is a loan secured by property. Instead, we risk seeing mortgages turned into another form of unsecured lending, which would raise interest rates for everyone.
I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [“hard-core pornography”]; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it, and the motion picture involved in this case is not that.
Judges in the end may have to define wrongful foreclosure as Justice Stewart defined obscenity, there are so many individual cases and situations as to make almost any generality brake down. Unfortunately, there are millions more cases of foreclosure to be decided than there are cases of obscenity. The questions of wrongful foreclosure are liable to leave the courts busy for a long, long time.