Money Law Blog

The take-away lesson from the recent disclosure of fraudulent lender documents and the subsequent suspension of foreclosures throughout the country is this: Yes, lender mortgage documents are defective and faulty, and it's been that way for some time.

The big news last month was the revelation that hundreds of thousands of phony affidavits had been signed by an employee of GMAC Mortgage (a unit of Ally Financial) and then submitted to courts throughout the country to support foreclosures. That admission in turn prompted the company to voluntarily suspend foreclosures in 23 states, as well as prompting demands by state attorneys general in Connecticut, Colorado and California to stop foreclosures in those states.

Recently joining the list of lenders suspending foreclosures are Bank of America, JP Morgan Chase and PNC.

In Maryland, Governor Martin O'Malley last week called on lenders to freeze foreclosures and evictions, re-examine procedures and then report back to the state what steps they are taking to address the problem. "In light of recent events, it seems reasonable to question whether the manner in which affidavits are prepared, reviewed and signed, and the sufficiency of the process employed to verify elements of default leading to foreclosure may be in violation of Maryland law," the governor wrote in a letter to lenders.

Foreclosure law in Maryland requires affidavits from mortgage lenders swearing to:

1. The default and, if applicable, that a notice of intent to foreclose was sent to the homeowner
2. Amount due and payable
3. Ownership of the debt
4. That the homeowner is not in the armed services, and
5. That the homeowner has been evaluated for "loss mitigation" alternatives (such as loan modification, deed in lieu of foreclosure, etc.) as required by Maryland's new foreclosure mediation law.

At our bankruptcy and foreclosure defense law firm, we have used documentation errors by lenders to the advantage of homeowners. More than a few times in Virginia we have been able to remove second mortgages from property because - in a hurry to get as many loans done as possible - lenders failed to get the signatures of both husband and wife, when both were on the title of the home, on the contract putting the house up as collateral for the loan. That meant the loan was not guaranteed by the house and it was an unsecured loan that could be discharged in bankruptcy, or that its unsecured status could be used as leverage to obtain a settlement with the lender.

In another case, the lender sought permission from the bankruptcy court to proceed on a foreclosure of our client's house alleging a failure to keep up with mortgage payments after the filing. The homeowner contested the amount and the lender backed off and dismissed its motion after itself coming up documentation for two different arrearage amounts.

Will you get a free house? No. And for many, eventually they may have to give up the home particularly if they cannot pay and have a substantial arrearage anyway. But in the meantime the sloppy documentation can present some opportunity to delay the foreclosure, or obtain leverage to extract economic benefits from the lender.

Bank of American Stops US Foreclosures for Review, Associated Press, October 8, 2010

Government Had Been Warned For Months About Trouble in Mortgage Servicer Industry, Washington Post, October 10, 2010

If the legal and financial technicalities of the foreclosure mess have you bewildered, you are not alone. (After all, even Wall Street got the documentation wrong, which is why we're seeing the recent suspension of foreclosures.) This is a short video by Rep. Alan Grayson of Florida who does a very good job of explaining it to a lay audience.

Ah, country witticisms. I love 'em. They're funny, and true.

So it is with the current debate surrounding the appointment of Harvard Law professor and consumer bankruptcy expert, Elizabeth Warren, to head the new Bureau of Consumer Financial Protection.

For consumers, who have been beaten up by the financial system in this country, the agency is one of the best things to come out the recent financial reform act.

"It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house," she wrote in a now-famous 2007 article in the journal Democracy proposing such an agency. "But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street."

It was Warren who dreamt up the idea and has been its champion. To think that anyone else would be considered as its first director is unfathomable. It's a bit like telling the Wright brothers: Thanks, Wilbur. Thanks, Orville. Now hand us the keys. You're not flying it.

Obviously Wall Street and its allies in the Senate are trying to torpedo her nomination. It makes perfect sense: When you can't defeat the legislation creating the agency, then water down its effectiveness by getting a stooge for a regulator.

The lobbyists know Warren is a plain-spoken consumer advocate who's not afraid to "tell it like it is," such as taking the financial industry to task for the reams of fine print in contracts. She's popular with plain folks and even been the inspiration for a recent rap video.

As a Washington, DC-area bankruptcy attorney, I have seen exploding adjustable rate mortgages that even I, with a law degree, training in finance, and former holder of a stockbroker's license, have trouble understanding.

The agency's first director is critical. The initial head will set the course for the agency and determining whether it will be an effective advocate for consumers, or a patsy for the financial industry.

Welcome! Today is Inauguration Day for the nation. This also happens to be the inaugural post for this blog. And like the new president's inaugural address, this is an opportunity for this author to lay out what he intends to do with this blog.

For the past three years, this bankruptcy and foreclosure defense law firm has been seen first-hand the financial storm that has wracked the country, from our vantage-point helping persons in financial distress in Virginia, Maryland and the District of Columbia. Starting in 2005, we saw a spike in the number of clients coming into the office with housing-related debt problems. That was at the height of the easy-mortgage boom and frankly it was shocking to see the type of predatory lending being done -- housekeepers or laborers who were put into homes they could never really afford. The real estate and loan brokers took fees at the table, and the borrower exhausted his or her personal savings and defaulted after one or two payments.

Next up were the sub-prime mortgage re-sets in 2006 and 2007 -- borrowers who had gotten mortgages with very low interest-only or negative amortization loans that had re-set and spiked to monthly payments beyond what they could afford. In those years, the market had started to level off and drop, so now refinancing and sale became impossible unless the homeowner could bring thousands of dollars to the table. (Compounding the problem were typical prepayment penalty clauses making refinance even more expensive.)

In 2007, with major banks failing and foreclosures spreading nationwide, the first loan modification programs were announced by the lenders and the government. There was a lot of fanfare and publicity, but -- as we all know now -- they have not worked and the problem is as grave as ever. One of the main problems has been that ALL the mortgage modification programs to date have been completely voluntary on the part of lenders. It's clear they have not performed as advertised -- foreclosures are still high, the housing inventory is climbing, and home values are still dropping, particularly in the suburbs further out from Washington, DC.

Solutions to address the situation have also evolved. In the beginning, little could be done except put the homeowners in Chapter 7, stop the foreclosure to give them extra time in the home before surrendering, while getting rid of personal liability on the debt. Other tactics have included suing the lenders, where applicable, under predatory lending law (Truth In Lending, Real Estate Settlement Procedures Act, fraud, etc.) and enjoining the foreclosure, although this is cumbersome and expensive, and there is no guarantee the client could afford the loan after it was done. Some attorneys have been able to tie up foreclosures by challenging the lender's legal standing, particularly when the loan has been converted to a bond for investors and has been sold and re-sold so many times the documentation is incomplete. Realtors have touted the "short sale," but again, since they require the lender's voluntary approval, it is not as successful as it is made to appear. (Estimates are that only 3-5% get to closing.) More voluntary modifications are taking place, but almost all are temporary and do not involve principal reductions.

As the new administration comes into office, hopes are high that we may see real change when it comes to government steps to address the foreclosure crisis. Among the measures under consideration is a bill to force modifications on lenders in Chapter 13 bankruptcy. Let's hope. Keep an eye on this blog as we track the evolving solutions and comment on them to help home owners save the dream they have.