Final National Bank Foreclosure Fraud Settlement

By Carolyn A. Betts, Esq.

Who Is Participating

By now you have heard that the attorneys general of all US states, save Oklahoma, have entered into a national federal/state settlement with the following five major mortgage lending institutions:

In addition to the states and banks, others that were in on or parties to the settlement are reported to be:

The following state attorneys general had held out in approving the settlement in order to make sure they did not lose rights to proceed against the banks in separate actions (some of which are reported in the links below) and to get assurances as to what portion of the settlement funds would be apportioned to their states:

A new website has been created as a repository of information on the settlement. Not being a .gov URL, some question exists as to who or what sponsors the site and how reliable it is. Nevertheless, it promises to post copies of, among other things, the final settlement document.

Terms of Settlement

The National Association of Attorneys General website [link:http://www.naag.org/state-attorneys-general-feds-reach-25-billion-settlement-with-five-largest-mortgage-servicers-on-foreclosure-wrongs.php] provides the following summary of the terms of the final settlement:

Servicers commit $3 billion to an underwater mortgage refinancing program.

Servicers pay $5 billion to the states and federal government ($4.25 billion to the states and $750 million to the federal government).

Homeowners receive comprehensive new protections from new mortgage loan servicing and foreclosure standards.

An independent monitor will ensure mortgage servicer compliance.

States can pursue civil claims outside of the agreement including securitization claims as well as criminal cases.

Borrowers and investors can pursue individual, institutional or class action cases regardless of agreement.

Questions: What do the settling banks get in exchange for $25 billion? What civil claims can states pursue, i.e., what claims other than securitization claims are “outside of the agreement”? Who is the “independent monitor” and how can any independent monitor enforce an agreement on behalf of hundreds of thousands of aggrieved borrowers? By what mechanism will homeowners receive “comprehensive new protections” in mortgage loan servicing and foreclosure standards? How will that address borrowers now in court?

Problems That Should Be Addressed in any Comprehensive Bank Settlement

Below are some of the problems I have encountered in my practice in defending Ohio homeowners in foreclosures brought by these very banks. I wonder how many of these issues will be resolved by the “increased enforcement” reported to make this settlement superior to the last ones in which banks entered into consent decrees with the Department of Justice.

Document forgeries, false notary attestations and back-dating

Difficulties for local recording offices, title examiners and courts in addressing infirmities in local land titles and increased title insurance costs to insure against resulting title defects

Negligence, safety violations, increased police and fire costs and waste in local communities as the result of failure to maintain empty properties under bank control

Inability of local taxing authorities to collect property taxes due to questions as to who holds legal title

Bank refusal to take title to undesirable properties following bankruptcy or foreclosure and removal of owners, leaving empty properties and former borrowers with liability for violation of local building codes

Questionable mortgage assignments to MERS in avoidance of local recording statutes, and assignments signed by lenders’ and lenders’ attorneys’ officers as “vice-presidents” on behalf of MERS

Fraudulent mortgage insurance claims against Fannie, Freddie, VA, Rural Housing Authority and FHA, including double recoveries (i.e., from both borrowers and insurers)

Court decrees in foreclosure where the original notes have not been produced

Truth in Lending Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act and other statutory violations

Bank trespass and slander of title when banks take possession of properties they have no right to, sometimes by mistake

Violations of the participation agreements signed by all of the settling banks with Fannie Mae on behalf of the US Government as a condition of receiving TARP funds and of having their bad loans purchased by taxpayers at above-market values (which agreements, among other things, prohibit the banks from foreclosing before evaluating defaulting borrowers for HAMP loan modifications)

Violations of the banks’ consent orders with the US Department of Justice

Instances of loss mitigation department personnel misleading borrower/defendants in foreclosure actions as to the consequences of the borrowers’ not appearing in court to defend themselves while loan modification negotiations are taking place, resulting in their waiving their rights to prevent sheriff’s sales

Instances of loss mitigation department personnel making false claims to financially-strapped borrowers that they must default on their mortgages in order to qualify for loan modification assistance

Violation of FHA, Fannie Mae, Freddie Mac and other applicable mandatory servicing standards, including:

      A) fraudulent and exorbitant charges for force-placed insurance carried by bank affiliates
      B) legal fees and title abstract and inspection fees in excess of permitted amounts
      C) refusal of banks to honor FHA regulations that require lenders to conduct face-to-face meetings with defaulted borrowers before       filing foreclosure actions

Defrauding the Hardest Hit Fund through excessive legal, title and other fees

Complexity of Foreclosure

The law of foreclosure varies widely from state to state and in all states involves highly complex legal issues and procedures. A foreclosure, at least in judicial foreclosure states, is a multi-step process that, if sloppily and hastily conducted (which most residential foreclosure cases these days are), is very difficult and expensive to unwind. In non-judicial foreclosure states, a foreclosure can be completed in a matter of a few months without any court action, forcing the delinquent borrower to file an affirmative action in court in order to prevent a speedy sheriff’s sale.

The legal fees paid to foreclosure mill law firms are severely limited by both federal regulations (in the case of government insured and Fannie/Freddie -owned and- insured loans) and the terms of their contracts with major bank lenders. Generally, such attorneys (if, indeed, any attorney actually touches these cases) are not paid for or authorized to engage in loan modification negotiations and assume foreclosure is merely pro forma because everyone knows defaulting borrowers have no defenses. The result is that attorneys and judges tend to dispense with legal formalities (like requiring service of process on the borrower before taking his or her home) in foreclosure cases. They would never be so cavalier in other civil actions. A colleague of mine says of these cases, “ Ma nishtana?” [Hebrew: how is this case different from every other case?] I agree: why should defendants in foreclosure actions have fewer rights than defendants in any other action? But the fact remains, unless borrowers have meaningful representation, their rights will not be protected.

MERS and Title Problems

In January 2011, John O’Brien, Register of the Essex County Southern District Registry of Deeds in Massachusetts commissioned McDonnell Property Analytics, Inc. to conduct an audit to test the integrity of deeds in the district. Marie McDonnell, CFE, used the information obtained under this contract to produce this friend of the court brief filed in the case of Eaton v. Fannie Mae. The brief explains that one of its purposes was to educate the 50 states’ attorneys general as they negotiated the national foreclosure settlement.

Wouldn’t it be great if all of the county recorders read this brief, which, among other matters, outlines rampant title problems in this registry system due to fraudulent foreclosure practices, and took appropriate action to safeguard land and mortgage titles in their jurisdictions?

My Own Preliminary Predictions about this Settlement

If, as reported, some $2,000 will be paid to each homeowner who lost a home through foreclosure by a settling bank, that will not begin to make up for the costs of moving, security deposits, community disgrace, having bad credit, legal expenses and heartache suffered by families whose lives will be forever changed from the experience of a foreclosure. In some states (like Ohio), a deficiency judgment far greater than $2,000 will hound a foreclosed borrower for years following a foreclosure.

If there is no provision for payment of defense attorneys to represent borrowers whose rights are being trampled, there will be no meaningful or timely enforcement. This has been promised before, folks. At mediation, the banks will continue to say “you have no standing to enforce any agreement with the government” and judges will continue to render default judgments when unaided borrowers present no defenses.

Throwing money at robo-signing abuses will not clean up any land title uncertainties in local recording offices. All property owners will pay the price of title problems well into the future.

Unless there is some mechanism for judges to recognize terms of consent orders or other lender agreements not to foreclose on any homeowner before offering a meaningful and fair loan modification, banks will continue to foreclose first and ask questions later.

Thousands of borrowers’ cases are in local courts right now. It will be months before any national settlement can be implemented. That is too late for borrowers now in foreclosure.

Any national settlement that does not abrogate existing contracts will have no effect on the ability of these bank servicers to gain the required approval from MBS mortgage trust trustees to enter into loan modifications, particularly those that involve write-off of principal or write-down of interest.

Write-down of principal on underwater loans will not restore the residential real estate markets to health when middle class homeowners have ruined credit and job instability.

A Proposal

If the national/state foreclosure settlement were to provide that every settling bank would pay reasonable attorneys’ fees and damages to any borrower who could establish that the bank had engaged in fraudulent and illegal foreclosure activities, little government intervention would be necessary to achieve justice. I also would propose an agreement by settling banks, as a condition to each foreclosure action, to produce the original note and mortgage in court and provide an opinion of counsel that the bank is the real party in interest and holds valid title to the note and mortgage being foreclosed upon. Provisions that would mandate streamlined procedures for (a) local recording offices to recover costs of restoring order as the result of recording issues of the type described in the Suffolk County amicus brief and (2) local taxing and building code enforcement authorities to recover their costs of dealing with properties abandoned by settling banks likewise would go a long way toward restoring community real estate health.

Solari Report Blog Commentaries

It’s Time to Bring Our Mortgages Home – Your Municipality and Community Venture Fund is the Ideal Investor for Fannie, Freddie & FHA Defaulted Mortgages
(31 Aug 11)

Relevant Reading:

Pimco: $25 Billion Foreclosure Deal to Hit Pensions Harder Than Banks
Moneynews (10 Feb 12)

The Top Twelve Reasons Why You Should Hate the Mortgage Settlement
Naked Capitalism (9 Feb 12)

Settlement Breakdown by State Plus Other Official Propaganda
Naked Capitalism (9 Feb 12)

The NY Attorney General’s Press Conference On The Mortgage Deal Has Been ‘Postponed Indefinitely’
Business Insider (7 Feb 12)

NY Attorney General Launches Major Mortgage Fraud Suit Against Bank Of America, JPMorgan And Wells Fargo
Business Insider (3 Feb 12)

Attorneys General, Frustrated With National Foreclosure Settlement, Consider Alternate Course
The Huffington Post (12 Jan 12)

New York District Court, on an Issue of First Impression, Determines that Borrower Is Not a Third Party Beneficiary to a Home Affordable Modification Program Servicer Participation Agreement
LexisNexis Communities (26 April 11)

California Not Among States That OK Bank Settlement
Los Angeles Times (7 Feb 12)

Why State Attorneys General Shouldn’t Settle on Robo-Signing
TruthOut (4 Feb 12)