By Steve Beede.
For many months, we’ve been hearing of Courts throwing out lender lawsuits for judicial foreclosure based upon falsified declarations. Now many States are jumping in and suspending certain foreclosures. Here’s the background in what is going on and what to expect in the future.
Each State has its own laws for handling defaulted home loans. For example, California allows both Judicial foreclosures (lawsuit in the courts) and non-judicial foreclosures (non-court Trustee Sale). Each method has its pros and cons for lenders, but because of the speed and lower cost of Trustee Sales, that is generally used for home foreclosures. However, in California if a lender does do a Trustee Sale, they give up any right to recover a deficiency judgment on the unpaid balance. It’s different in other States. 23 States only allow Judicial Foreclosure so their foreclosures are always Court supervised. The remaining States allow a choice of either method but only a few bar deficiency judgments after Trustee Sale. So there are two issues arising in a foreclosure: 1) loss of home; and 2) deficiency judgment risk.
The problem for lenders first arose in the judicial foreclosure States. As part of their legal filing, the lenders were required to provide a sworn statement as to the truth of the facts claimed in their lawsuit such as that they owned the loan and that the procedures for foreclosure were properly followed. However, it was discovered that attorneys for the lenders were falsifying the sworn statements and in many cases simply having someone sign the form without any actual knowledge of the facts, so called “robo-signers”. Presumably the lenders and their attorneys filing thousands of such lawsuits believed that no one would pick up on this and they hoped they could get quick results. They were wrong. Attorneys for some defendants challenged the lawsuits and the false statements and the Courts have responded by throwing out the lawsuits.
While lawsuits get challenged all the time and typically are corrected, the extent of these falsified Complaints indicated a systemic policy of lenders committing this fraud. Faced with potentially damning publicity and possible legal sanctions, lenders stated damage control. Last month, GMAC admitted that their employees had falsified foreclosure documents. Recently, Chase and BofA admitted the same. Each has stated that they are suspending foreclosures until the problem is fixed. Meanwhile, the States have started to act. on Friday, Connecticut suspended all foreclosures for 60 days. California’s attorney general has ordered Chase to stop foreclosures or prove the validity of its process. More are expected to follow as further evidence comes out showing the corruption in the foreclosure process. However, other lenders such as Wells Fargo have not made any suspension and have recently indicated its intent to increase the pace of foeclosures. This is surprising given indications that Wells Fargo has also filed lawsuits against borrowers without legal merit.
These foreclosure suspensions will give affected upside-down owners some more time but they will not result in loan foregiveness. The lenders will fix the problem and defaulted loans will eventually be foreclosed unless an alternate resolution is reached. This means that impacted lenders will likely be much more receptive to a loan modification or short sale without deficiency recourse. The one step that we do not expect to see is Congress or State legislatures coming to the rescue of homeowners. They have shown no willingness to date to do anything other than bailout lenders without recourse for the terrible lending practices that drove us into this Recession.
So, if you or your clients are upside down on a loan and facing foreclosure, this is a time to act to seek that modification or complete that short sale. If you are facing a lender lawsuit, get representation and put up a challenge. The lenders’ hope with these fraudulent lawsuits was that they would win without challenge. I’s up to you to stop them and the Courts may be willing to help.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are upside-down on your loan(s), especially if you’re facing a lender lawsuit, get competent legal advise in your State immediately so that you can determine your best options.
