We’re Just Not Going to Fix the Foreclosure Crisis in Court
A couple of years ago (and quite a few times since then), I wrote an article saying that we were not going to win this battle to help homeowners at risk of foreclosure in the courts. I pointed out that because the foreclosure crisis was something we had never dealt with before in this country, it was not something that our existing laws dealt with very effectively.
I made the point, for example, that because judges could only enforce existing laws, and our existing laws don’t allow a judge to force a bank to modify a loan, today’s judges were limited as to how they could resolve the situation when homeowners were in court over foreclosures. Since they weren’t able to force a modification of the loan, and weren’t willing to rule such that the homeowner got a free house, there was little they could do beyond putting off what they saw as the inevitable.
Foreclosure defense attorney from Alabama, Nick Wooten said it concisely when he was my guest on a Mandelman Matters Podcast back in July of 2011:
“It really is a rule of law argument, Martin, but it’s framed in the most unusual setting. This fight is taking place in the context of someone who’s not paying their bills… and that is usually a party that the law does not favor.”
As I understood it, being in a court of equity meant you had to do good to get good. So, even if the foreclosing party had done things wrong, the homeowners had too, by not paying their mortgages, so they weren’t going to walk out with a windfall in the form of a free and clear house. And again, the judges had no power to force the compromise position that would have been to modify the loan.
Many readers didn’t like my point of view one bit, and quite a few let me know it loud and clear. Clearly, they were committed to fighting for their own homes in the courts and me saying that we weren’t going to win that way was not at all something they wanted to hear.
I understood why they felt the way they did… but it didn’t make them right. I explained that I wasn’t saying that they, or anyone else for that matter, shouldn’t fight for their homes in court, nor was I saying that they or anyone else would necessarily lose their individual cases. After all anything is possible in court, I suppose, it depends on the case, the lawyer and the judge.
What I was saying, and was still certain of, was that homeowners as a group wouldn’t ultimately win this battle in the courts as long as the laws didn’t change to better address the crisis.
We had tried to change at least one law that, even if it hadn’t solved everything, would have helped to change things to some degree. On several occasions over the last four years, tried to pass a bankruptcy reform bill that would have allowed judges in bankruptcy court to write down the balance on first mortgages… while he was a candidate for president in 2008, Obama even supported the idea… but when it came up for a vote the president was nowhere to be found, and each time it was defeated, either by vote or by some other means that prevented a vote.
What’s transpired over the last few years should have proven to my readers that I was 100 percent right in what I was saying. In all but a very small number of cases, homeowners have continued to find the courts either unwilling or incapable of dispensing what they would consider fair and just solutions, and while the federal government has remained essentially mute on the subject, various pieces of legislation at the state level have made significant changes to the number of foreclosures being filed.
Nevada’s Gamble Paid Off…
Most notably, Nevada’s new law, AB 284, which took effect in October of 2011, has seriously impacted the number of Notices of Default being filed by servicers.
The new law made it a crime to intentionally file a wrongful foreclosure, imposed a $5,000 fine for falsely claiming a bank has the right to foreclose when it doesn’t own the note, requires that all banks record any transfers of title (like when a bank sells a note to another) at the county level, and it bars any foreclosure unless county records show the lender is the owner of record of a mortgage.
Just a glance at the chart below tells that story…
In a few weeks, California’s Homeowner Bill of Rights (“HOBOR”) will take effect. It’s a series of six separate bills, lobbied for by California’s Attorney General Kamala Harris and signed into law by Governor Brown last summer, that basically codifies all of the new servicer standards found in the terms of last year’s National Mortgage Settlement.
It includes such things as a ban on dual tracking, provisions that make the recording and filing of unverified documents subject to civil penalties of up to $7500 per loan in actions brought by civil prosecutors, a mandate for single points of contact at servicers, and even a private right of action that will allow homeowners to “seek redress for material violations” of the new laws, with both pre-foreclosure injunctive relief and recovery of damages following a trustee sale available.
Many would no doubt say that HOBOR doesn’t go far enough, but making the servicer standards part of state law does at least mean that the new standards will apply to all mortgage servicers and lenders statewide, as opposed to only the five largest servicers bound by the terms of the national settlement. It also means that the new standards are now permanent in the state, as opposed to them having some sort of sunset date, after which things can return to the way they’ve been in the past.
In Georgia, House Bill 237 passed both the House and Senate, was signed by Gov. Nathan Deal on May 1, 2012, and according to the Press Advisory issued by the Georgia Department of Law, the new legislation will, “make foreclosure fraud a crime in Georgia.”
“Georgia’s current mortgage fraud statute is insufficient and must be revised to criminalize fraud throughout the entire lending process, including foreclosure,” said Georgia’s Attorney General, Sam Olens.
Under provisions of the bill, which took effect on July 1st this past year, the definition of the mortgage lending process is amended to include “the execution of deeds under power of sale that are required to be recorded…,” as well as “the execution of assignments that are required to be recorded…” Another section of the law was also amended to give the Attorney General and District Attorneys more enforcement power to fight mortgage fraud.
Nick Timiraos, writing for the Wall Street Journal last summer reported that according to the National Conference of State Legislatures, this past year 25 states had bills that would change the foreclosure process in some way.
Hawaii No Ka Oi…
Back in May of 2011, Hawaii was the first state to pass a really tough foreclosure statute, SB 651, which also created a mandatory mediation program as part of the state’s non-judicial foreclosure process. It looked so promising, but I was so much younger then and much more naive. I was involved in the whole thing in some ways, so I went over there to meet with Rep. Bob Herkes after it passed, thinking that the new law would actually be followed by someone… it seems like such a silly idea today.
A few days after I met with about 25 members and staffers from the state’s legislature, Fannie and Freddie announced that from now on they would be foreclosing only judicially. I sat in my hotel room thinking, “I didn’t know they could do that… how can they do that?” I met with a couple of other members of the House of Representatives, one of whom said they’d just get the judges to push everyone back into mediation, an idea I didn’t think had any merit whatsoever… and sure enough it didn’t. And so nothing changed…
In 2012, however, Hawaii came back to take another bite at the apple and passed HB 1875, which is supposed to implement recommendations of a mortgage task force created to recommend ways to improve how foreclosures are conducted in Hawaii. Thus far, recommendations are to establish a dispute resolution program for foreclosures, and proving that they learned something from last time around, a process to convert non-judicial foreclosures into judicial foreclosures.
This new bill, however, also requires any bank attorney filing a judicial foreclosure on residential property to affirm that he has verified the foreclosing party’s legal standing, and confirmed the accuracy of the documents submitted to the court. And that should pretty much bring Hawaii’s foreclosures to a standstill.
Oregon’s Law Gets the Run Around…
Oregon passed a new foreclosure law that homeowners and the media were all cheering about… that is until I had my “trusted attorney” for Oregon, Portland attorney Clarke Balcom as a guest on a Mandelman Matters Podcast. In under 30 minutes, he explained that the new law would only apply to non-judicial foreclosures… and because of my experience with Lucy telling me to kick the football in Hawaii the year before, I explained that Oregon would now be a judicial foreclosure state.
He agreed and we were right. I’m sure everyone else has stopped cheering by now.
Why Isn’t Everyone Talking About Massachusetts?
The Commonwealth of Massachusetts passed a bill this year they say was designed to block unnecessary foreclosures, by requiring banks to “analyze a loan before foreclosing, promoting loan modifications in lieu of foreclosures when possible.”
No kidding, now who would have ever thought of that?
The new law, which went into effect last month on November 1st, states that lenders must demonstrate to a Massachusetts court that they have made “a good faith effort” to work with delinquent borrowers, and that they took “reasonable steps” to avoid foreclosing. What kind of steps? Well, steps like considering whether the borrower can make lower, affordable monthly payments,” for one thing.
Under the new law lenders are also required to to prove to the court that they will make more foreclosing on the home and selling it in a distressed sale than from modifying the mortgage. Well, I’ll be a mathlete’s uncle. Finally, a state with a brain. (And if you wondered what the REST Report shows, that’s exactly what it shows.)
And that, ladies and gentlemen is the end of foreclosures in Massachusetts. Oh boy, I can just hear the teeth gnashing among members of the banking crowd from the cape to the Berkshires.
Our first winner of the “I’m an Aggravated Asshat Award,” goes to… Anthony Randazzo, director of economic research (and that term is obviously used lightly) at the oh-so-ironically named, “Reason Foundation.” (That just cracks me up.) Writing about the need for the bank to to prove that it makes more money foreclosing than modifying, my man Tony Razzledazzle writes the following…
At first glance, this provision seems redundant. Presumably a bank would modify a mortgage if they thought they would take fewer losses relative to a foreclosure, even without the government telling them to do so. But the point of the law isn’t to encourage banks to figure out how to profit the most from delinquent homeowners, it is to empower judges to tell banks that their estimates on value are wrong.
And though judges will soon have that power, they will be far less qualified to determine value than the banks. For instance, implicit in any assessment of whether a foreclosure will be more valuable than a mortgage modification is an estimate of how much selling the home as a bank-owned property would generate. Banks then compare that to the value of a mortgage modification. Not only will a bank and the court likely have different estimations, but from bank to bank there is rarely a concurrence of opinion on housing market futures. This is just the tip of the iceberg in terms of complicating factors for judges and regulators getting into the mortgage value assessment game.
There are still more problematic hoops in the Massachusetts law, such as the requirement that lenders sell homes to special non-profits in short sales, and the extension of the period–from 90 days to 150–that lenders must wait before they can foreclose on a deadbeat borrower.
(Ooooh, no you didn’t. “A deadbeat borrower?” See… now there’s a real life member of the “Hold America Down Through Ignorance,” team. Bravo, my Dago Dazzler friend. You saved me some time explaining what a moron you truly are.)
What Tony just said is, of course, nonsense. The Treasury Department came up with the infamous “NPV Test” to address this very issue. And you know what… there’e software for this, so you can compare the inputs and the metrics and the outcome of comparative tests to determine which way the bank makes more money, and if there are variances, they can be identified. It might occur to you that banks do this sort of calculation all the time… it’s called “loan disposition analysis.” And thanks for cluing me in… I’m on the phone to Massachusetts in the morning in case they don’t know.
It’s a simple game. Sometimes you win, sometimes you lose… and sometimes it rains.
What I’m hoping to have gotten across is NOT that I don’t think you should fight for your home in court, nor is it that I think you will lose in court. I have no idea whether you should or shouldn’t fight in court, nor do I have any idea whether you’ll win or lose in court. Got it?
What I’m trying to show you is that the political process does work, albeit slower than most of us would like, but it does work. Just think back to 2008 or 2009 or 2010… our state didn’t have any of the new laws you just read about… nothing close. So, here we are just a couple years later and state legislatures are at least trying to change something about the foreclosures that are bankrupting state coffers from coast to coast.
If you remember what I said last year about 2013 and 2014… that those would be the years that our state budget deficits would not be able to close their gaps… that those years would see states forced to make even deeper cuts and raise taxes. Well, foreclosures erode tax bases at the local level… they reduce consumer spending which reduces sales tax receipts… and that leads to unemployment which takes state income tax down a few notches.
The combined impact has already pushed eight California cities and several others around the country either into bankruptcy or to the brink of bankruptcy. And as you may have noticed, the federal government is in a reduce spending mode… the states aren’t going to be able to rely on Washington to make up the shortfalls as they’ve been doing since 2009.
Now is the time to become politically active and speak out at every opportunity. And here’s your first one by the way… Homeowners Start Your Emails, Speak Out for $50 Billion in Principal Reductions.
Another point I’m trying to make is that sometimes it works better than others. Hawaii failed the first time they tried to pass a bill to help homeowners, but it looks like they nailed it the second time. That wouldn’t have happened without homeowners speaking out, and not giving up.
Here’s a statistic I want you to know… only 5 percent of homeowners facing foreclosure are being represented by attorneys. And yes, the vast majority of those cases do lose. It shouldn’t surprise you… suing giant financial institutions has always been hard for regular middle class Americans… we don’t have the resources they do and that’s always been a factor in our justice system.
If O.J. Simpson were just some African American male straight out of the CPT (ask someone to translate that if needed) his trial would have lasted all morning and he’d have been serving life sentences by dinner time. Of course, he wasn’t… so he wasn’t. Instead he had a year-long television show on every network and a team of lawyers called “The Dream Team.” That’s not fair, but it is the USA and always has been.
The simple fact is, homeowners in court aren’t going to change our laws. In court we are not united, we are only individuals, and as individuals we can’t hope to be heard over the giants of Wall Street and Washington. But our Democracy does work… the state laws prove that. Nothing will change overnight, but change will come as long as we all do things to be heard together.
Last here’s Colorado… you won’t believe how badly they FAILED in this state… I had some fun with it, so if you like me funny, this should be worth a few laughs… as it pisses you off until you’re ready to scream. But as long as the people of Colorado don’t give up, they’ll be fine.
Colorado’s legislature, on the other hand, failed to pass HB-1156, a bill introduced by Rep. Beth McCann (D-Denver), that would have stopped a practice that started six-years ago that allows lawyers representing banks seeking to foreclose to simply file a document stating that their client has the right to foreclose.
Known as the “statement of qualified holder,” it doesn’t require a lawyer to look at anything that shows the bank holds the original mortgage, but even more stunning is that it also provides lawyers with complete absolution from any wrongdoing or penalty should it later be found that the statement signed was wrong.
In light of the crimes we’ve seen committed by foreclosure mills over the last two years, this bill not passing in Colorado is pretty stunning. Consider David Stern’s law firm, which was sued by investors who admitted publicly that the firm was forging mortgage assignments, faking signatures, and falsifying notarizations all used in the foreclosure process… after he pocketed I don’t know how many tens of millions. His employees testified that the firm was routinely foreclosing on people without verifying their identities, how much they owed, and who owned their loans.
And who could ever forget the unbelievably tasteless Halloween Party at the New York law firm of Steven J. Baum, where they all dressed up as homeless people after foreclosure. The firm shuttered its doors in November of 2011, after cutting a deal to pay a wrist-slapping $4 million fine with the U.S. Attorney’s Office in Manhattan for in general robo-signing whatever was needed whenever it was needed. According to a story in the New York Times, a state court judge in Brooklyn called one particular foreclosure filing from the Baum firm “incredible, outrageous, ludicrous and disingenuous.”
The law in colorado allowing lawyers to foreclose basically on a wink and a nod has only been around since 2006. If you live in Colorado and pay close attention to what the legislature is doing, it’s perfectly understandable if this one slipped by you, because it was literally slipped into a 67-page bill by the Colorado Public Trustee Association. In large part, it was written by… wait for it… the most prolific foreclosure attorneys in the state.
And if that’s not shocking enough…
The Colorado bill was killed by a 13 member legislative committee in a 8-5 vote that went almost along totally partisan lines with all seven Republicans voting against. Yes, one lone Democrat, Rep. John Soper (D-Thornton) voted with the Republicans.
So, why did Rep. Soper break ranks and vote against the bill? Well, are you sitting down? According to the Denver Post, Soper was concerned that having to actually produce documents would slow the foreclosure process and allow homeowners to live RENT FREE. (Don’t look at me like that, I’m not making it up… that’s what the man said.)
Coincidentally perhaps, Mr. Soper was the former Chairman of the Board at Electrical Federal Credit Union in Denver, but that’s not even the best part. He said that all the work needed for banks to locate the original loan papers… especially after they’ve been bundled and re-sold countless times… could make it “a real challenge.”
“‘What they had done (selling mortgages) put many institutions at a disadvantage and it’s a real challenge to come up with (original documents) and that could extend the time it takes to complete a foreclosure,” Soper said. “This could mean someone stays in the home for a long time without having to pay rent or the mortgage.”
The institutions will be at a disadvantage? Really? You mean to say that pitted against people that couldn’t even keep up with their mortgage payments, the largest financial institutions in the world will be at a disadvantage because they actually have to produce documents that prove they own a home before they throw someone out of it?
How much of a disadvantage, would you say?
I mean, are we talking about forgetting your golf shoes and having to play a round of golf in your sneakers, or are we talking about some Little League team from Punxsutawney, PA playing nine innings against the Boston Red Sox in front of 40,000 at Fenway?
Damn it… I’m so tired of this. Don’t bankers know how ridiculous this stuff sounds? Finding documents that prove we own the home that we say we’re sure we own presents a “real challenge?” That’s their “final answer?”
Well, I want to know exactly how much of a challenge it is to come up with this illusive paperwork, because not doing so sure is causing some significant problems in this country.
In the Spring of 1947, Bedouin goat herders, while searching for a lost goat, stumbled upon a cave that we now call the Qumran Cave and by 1956, archaeologists had found 10 additional caves and the Dead Sea Scrolls. I’m sure that finding those puppies was a “real challenge.” So, how much of a challenge is finding something that says you own my loan?
Putting things into perspective…
The world’s largest commercial aircraft, Boeing’s 777, is the first fly-by-wire aircraft, it has the largest turbofan engines of any aircraft, six wheels on each main landing gear, it can carry 550 passengers more than half-way around the globe without refueling or requiring a pilot, and to build it, Boeing had to spend $1.5 billion to double the size of its factory in Everett, Washington. They can build you one from start to finish, including 20 days of flight testing… in 83 days.
In Colorado, it takes about 125 days to foreclose. According to USA Today…
“In New York, foreclosure lawyers now must affirm that they reviewed documents and asked lenders to verify their accuracy, too. Since that rule took hold last fall, foreclosure filings have dropped to about 750 a month from 3,500, says Paul Lewis, chief of staff to the state’s chief administrative judge.”
They say foreclosing in New York or New Jersey now takes about 900 days. I want to know how long it takes a bank to come up with papers showing the bank owns the damn home, is that really so much to ask? Because, I’m sorry, but I’m having a hard time wrapping my brain around why it could possibly take roughly 10 times longer than it takes to build a Boeing 777? I’m not trying to be difficult about this, but surely people in financial institutions can understand why homeowners are having trouble understanding what’s going on, right?
Scary banking bedtime stories…
The legislative committee hearing that debated HB-1156, went on for five hours, and most of the testimony was in support of the bill’s passage. But, in an entirely predictable move, the Colorado Bankers Association showed up to deliver the financial industry’s favorite scary bedtime story: Dare to change anything and there will never be loans in this state again… then where will you be? (Insert evil laugh – BWHAHAHAHA.)
I’m paraphrasing, of course, what they really said was that, “Requiring banks to prove they are the right party to foreclose on a property will ultimately affect homeowners trying to get a loan.
I’ve seen this in real life. I was involved in promoting a bill in Arizona a year or so ago, sponsored by Sen. Michelle Reagan, and I watched it go through the state legislature’s Senate Banking Committee. One by one the banking industry’s representatives, including the guy who always shows up for MERS, William Hultman, came to the podium to parrot the industry mantra… “don’t do anything or no more loans for you.”
Rep. Larry Liston (R-Colorado Springs) bought into the scare tactics hook, line, sinker, rod, reel, boat, trailer and trailer hitch. Explaining why he voted against the bill, he said in an email…
“I was concerned the bill would put a severe cloud over banks’ willingness to open up to the mortgage market, and … banks less willing to lend. It would cost consumers even more for a mortgage by driving up costs to them.”
Okay, so first of all, someone should take a moment and explain to Rep. Liston that banks aren’t doing any lending and it has NOTHING to do with the cost of finding paperwork or how long it takes to foreclose. Only the government is lending, either through Fannie, Freddie, FHA, VA, or the USDA. That’s because, among other things, the securitization market is broken because no one trusts the ratings on mortgage-backed securities.
It’s also because interest rates are so low no one could make money or stand to take the risk. Who besides the federal government would want to lend money for 30 years at 3.34 percent on an asset that will likely drop in value by another 20 percent over the next few years to someone who may lose his or her job?
(Is any of this ringing any bells for you, Larry? If not, maybe someone reading this would like to send him a link or two to anything I’ve written over the last four years.)
Another Republican, Rep. David Balmer (R-Centennial), who also voted against the bill called it “burdensome regulation,” and had no trouble understanding the connection between the finding of paperwork with mortgage costs.
“Lenders are set up here consistent with Colorado law. If they have to keep a great deal of paper records that they don’t have to keep accessible, then have to pull them out and make it accessible, that just drives up the cost of mortgages for everyone.”
Okay, I can’t be sure, but I think my mortgage cost me about $9,000 in commissions and fees. So, how much more would it have cost if the bank had to come up with paperwork that shows they own it before foreclosing? I’m not asking for exact figures, and I won’t hold anyone to it… just ballpark it for me. I might be okay with paying the difference.
I’ve had my account at Union Bank of California for something like 10 years, and I can’t cash a check for $5 without two forms of identification, my signature and a fingerprint. To buy my last car took like 45 minutes sitting in front of the finance manager signing and initialing at least half the time. And signing my mortgage documents took so long that, as I recall, I had to use the rest room twice.
Look, I’m no mortgage expert, but help me here… where does the paper all go that it’s so damn hard to find? And please… wherever that is… stop putting it there.
And I can’t help but ask the obvious question: If it takes that long to find it, what is it that they’re looking at that makes them so sure they own it? Whatever that is, why not bring that in when you have to foreclose?
According to LPS Applied Analytics, as reported by The New York Times in June of 2011, a company that collects data on 40 million mortgage loans, in New York state, thanks to the new rules imposed last fall, it will take lenders more than 62 years at their current pace to clear pipelines of homes that are today seriously delinquent or already in the foreclosure process.
And last year, when there were only 2.1 million mortgages seriously delinquent or in foreclosure, LPS said it would take more than eight years to clear the inventory. Today, there are 3.3 million mortgages in foreclosure or seriously delinquent… or 5.3 million if you account for those over 30 days delinquent.
That same article in the Times reports that in Colorado it will take only two years to clear the inventory. So, it seems like adding a little bit of time to that would still have Colorado way under the rest of the nation, no?
Colorado’s legislators who voted against the bill because they said they’re tired of laws reforming the state’s foreclosure process. They say they’ve passed 15 bills to change the foreclosure process since 2005, and apparently that’s too many already. They say changing things a 16th time isn’t the answer to anything.
But, Rep. Swalm, one of the Republicans voting against the bill, even admitted that it wasn’t totally without merit. He called the state’s foreclosure process as “a mess.”
I don’t live in Colorado, so I have no idea how much of a mess it is, or isn’t. What I want to know is what in the world was addressed in the 15 prior bills that was more important than a law allowing bank lawyers to foreclose on the basis of a text message?
Alright, I’m sorry if this sounds out of line, but I can’t help but recall that you Coloradans just legalized grass during the last election. Is anyone seeing any connection here? No? Okay, fine… I’m just saying…
Rep. Balmer also explained his voting no on the Colorado bill as follows… “I’ve not been convinced that the scale of the problem is large enough to warrant such a Draconian solution.”
Ahhh… now that does explain a lot. Now I understand why he’d vote against it. Hear that, people of Colorado? Lucy, you’ve got some ‘splainin to do.
Well, I’d prescribe one email a day, maybe one letter mailed each week, along with copies of all applicable reports and articles that are published… and how about one face-to-face every quarter and at least two demonstrations in front of his office 90 days before election day. That should do it.
If our politicians don’t get it… it’s our fault. We need to ‘splain it to them. That’s where our power lies, let’s take it back and start driving this bus. We’ve got work to do.
Remember, politicians don’t see the light… until they feel the heat.