Georgia homeowner Melissa Wood had never missed a payment on her mortgage, but when her loan servicer offered her a lower rate, she accepted it. She provided the requested information, was approved, and made the payments as planned.
Several months later, she received a letter saying she had missed a payment—although she hadn’t—and was behind on her mortgage. She found herself steered into the Home Affordable Modification Program (HAMP), which provides loan modifications for homeowners struggling to make their mortgage payments. Because she thought HAMP was the only way to avoid foreclosure, she submitted the requested information, only to hear that she was ineligible for the modification and faced foreclosure.
In trying to communicate with the people servicing her loan, she encountered “one obstacle after another,” said Nathan Williams of Brunswick, Georgia, who represents Wood. She was repeatedly assigned to new agents and told her paperwork hadn’t been received.
Finally, Wood filed a class action against Bank of America and its servicing subsidiary BAC Home Loans Servicing, alleging that they breached their duties under HAMP. She alleged that the defendants routinely neglected to meet their obligations to homeowners by “failing to retain, employ, and supervise adequately trained staff; instituting and/or continuing with foreclosure proceedings against borrowers in a trial program; failing to provide written notices required by HAMP; and by deliberately acting to delay and otherwise frustrate loan modification processes [and] routinely demanding information already in its files. . . . ” (Wood v. Bank of Am., N.A., No. CV 210 145 (S.D. Ga. filed Sept. 27, 2010).)
Because HAMP is supported by Troubled Asset Relief Program (TARP) funds, “it’s a simple instance of taking TARP money without having to fulfill their obligations,” said C. Dorian Britt of Savannah, Georgia, who also represents Wood. “It’s been open season on all these borrowers.”
As the mortgage industry has changed dramatically in recent years, many consumer advocates say the foreclosure system has come unhinged. Part of the problem has been so-called robosigning—the rapid-fire approval of thousands of foreclosure documents at a time without the signers verifying their contents. But critics say the system is rife with other, less publicized abuses.
The process of mortgage securitization—where lenders sell loans and bundle them into securities—and the expanding role of mortgage servicing companies have both played a role in the foreclosure crisis. Most large banks have their own servicing subsidiaries, which are responsible for a range of tasks, from processing the mortgage at the front end to initiating foreclosure proceedings.
Nearly 2.9 million properties were the subject of a foreclosure filing in 2010, according to the real estate Web site RealtyTrac. Attorneys general in all 50 states have been investigating lenders’ and servicers’ foreclosure practices.
The federally funded HAMP, part of the Obama administration’s Making Home Affordable plan, was intended to stem the tide of foreclosures and help homeowners stay in their homes. The program pays servicers to make struggling homeowners’ monthly payments more affordable. The homeowner works out a three-month trial modification plan, and if he or she makes the payments and meets all the requirements, the servicer offers a permanent modification.
But that’s not how the process has worked in many cases. Some homeowners who signed up for the program and did everything they were supposed to do never received a permanent modification and were pushed into foreclosure instead. They say the servicers they communicated with about the loans gave them the runaround, lost their paperwork and asked them to resubmit it repeatedly, and delayed the process until foreclosure was imminent.
The problem, homeowners’ attorneys say, is that the servicers may be purposely exploiting the process because they benefit more from initiating a foreclosure than modifying a loan.
Servicers used to be responsible mainly for sending out statements and collecting payments, but their role has expanded to servicing securitized loans, dealing with delinquent loans, and conducting property preservation services and lock-outs, said Carlin Phillips of Dartmouth, Massachusetts, who represents homeowners faced with foreclosure.
Servicers’ roles “expanded so rapidly that the system and procedures in place are defective—so that one department discussing loan modification is not communicating with the department proceeding with the foreclosure,” he said.
Several class actions have alleged that lenders and servicers mismanaged HAMP loan modifications. The National Consumer Law Center (NCLC), based in Boston, is involved in five of them.
One represents a class of Massachusetts homeowners whose loans were serviced by BAC and who complied with their obligations under HAMP but never received permanent modifications.
“The servicers routinely fail to take any action for months on end, which leaves homeowners in a stressful state of uncertainty while they fall further and further behind in the payments due under their original loan,” said Charles Delbaum, an NCLC staff attorney who represents the plaintiffs. “This ruins their credit and makes it harder for them to find alternatives, such as a short sale, if the modification is ultimately denied.”
“[W]hen a large financial institution promises to modify an eligible loan to prevent foreclosure, homeowners who live up to their end of the bargain expect that promise to be kept,” the plaintiffs said in their complaint. Their allegations include breach of contract, breach of the implied covenant of good faith and fair dealing, and promissory estoppel. (Johnson v. BAC Home Loans Servicing, No. 1:10-cv-10316 (D. Mass. filed Apr. 30, 2010).)
The servicers are supposed to conduct a “net present value” test, which compares the value of loan modification with the value of foreclosure to investors, Delbaum said. “In making that determination, servicers often get it wrong and pursue foreclosure even though a loan modification would provide a greater benefit to investors, either because the servicer is understaffed or its staff is poorly trained to work out modifications, or because the servicer perceives its own financial interest as better served by a foreclosure,” he said.
Delbaum noted that servicers “were not set up to handle modifications and didn’t gear up quickly enough”—by hiring adequate staff, for example—to handle their new tasks. Two of NCLC’s cases have survived motions to dismiss.
Johnson and seven other putative class actions against Bank of America were transferred to a multidistrict litigation (MDL) in the District of Massachusetts last October, and several tag-along actions have been added since then. The Wood case is also part of the MDL. Bank of America agreed not to move forward with foreclosures against Wood and the other plaintiffs named in the pending class actions, Williams said.
Sorry, wrong house
Sometimes, the homeowners suddenly facing foreclosure aren’t even the right people, and the house isn’t the right house. Homeowners who have worked out loan modifications—and even some who have no mortgage at all—have come home to find their houses broken into and seized by banks, and their belongings nowhere to be found.
Charlie and Maria Cardoso owned a second home in Florida, which they rented out part of the time. They owned the home outright and did not have a mortgage. In June 2009, the Cardosos learned through their tenant that a work crew had shown up at the house to foreclose on it for Bank of America. Charlie told one of the workers that they had the wrong house, and the worker said he would check with his boss.
Still, several months later, the bank moved forward with the foreclosure, breaking in, changing the locks, and throwing out the Cardosos’ belongings. The tenant had moved out because she was intimidated by the foreclosure proceedings.
The Cardosos sued the bank, BAC Home Loan Servicing, and BAC Field Services Corp., which inspects and preserves property. Their allegations included trespass, libel, negligence, negligent and intentional infliction of emotional distress, and invasion of privacy. Massachusetts attorney Phillips, who represents the couple, said the parties recently took depositions. (Cardoso v. Bank of Am., No. 1:10 CV 10075 (D. Mass. second amended complaint filed Oct. 21, 2010).)
Why would servicers seize a house even if they were told there had been an error? Because they have contracts with the lenders, and they get paid only if they perform services, such as changing locks and removing possessions, Phillips explained.
“It’s a ‘shoot first, ask questions later’ kind of attitude,” he said. “The homeowners are collateral damage.”
Phillips represents several home-owners whose homes were seized—called lock-outs or trash-outs. One client, who was working with a bank to assume loans in her deceased husband’s name, found her house broken into and emptied of its contents. Other clients include a woman whose father’s house was broken into and ransacked while he was dying in the hospital, and a woman whose bank tried to foreclose on her house even after she had sold it on a short sale. In two other cases involving houses that had been foreclosed, the banks sold the houses to new buyers but then changed the locks and took the new buyers’ possessions. Phillips said some of his lock-out cases have been settled with banks and their servicers and contractors.
“The whole relationship between consumers and banks doesn’t exist anymore,” he said. “The system is broken, and consumers have no say anymore in how loans are processed or who the loans are with.”
No clear trail
The lack of a clear paper trail in securitization has proved difficult for lenders as well. In January, the Massachusetts Supreme Judicial Court held that two foreclosures were invalid because the companies hadn’t proved they had the right to take possession of the properties. In affirming a lower court’s decision, the Massachusetts high court said the lenders needed to show that they owned the mortgage note, and securitization documents did not suffice. (U.S. Bank Natl. Assn. v. Ibanez, 941 N.E.2d 40 (Mass. 2011).)
The decision is reportedly the first of its kind from a state high court, and the court declined to make its ruling prospective only. Observers have said that it may open the door for more foreclosures to be overturned.
The decision allowed one Massachusetts class action against lenders to proceed. The plaintiff homeowners, who defaulted on their mortgages, alleged that their foreclosures were brought by the wrong party. They sued GMAC Mortgage and other lenders, as well as two foreclosure law firms. The case had been delayed until Ibanez was decided.
Lawyers elsewhere who file fore¬closure documents have also come under fire for operating “foreclosure mills” that robosign documents. Courts in Florida and New York have begun requiring lawyers to affirm that they reviewed these documents and confirmed their accuracy.
Robosigning allegations have led to some foreclosures being frozen. Facing potential class actions, GMAC and Wells Fargo said in January they would dismiss and restart foreclosures in Maryland. Two separate homeowners defending against foreclosure set out to file class actions involving documents signed by two specific employees of these companies. One admitted she processed as many as 500 affidavits in two hours without completely checking their accuracy.
At a Senate Judiciary Committee hearing February 1, NCLC Attorney John Rao outlined how some bankruptcy courts have stepped in and formed their own “loss mitigation programs” to help avoid unnecessary foreclosures by facilitating communication between servicers and homeowners. He also noted that other state and local courts have implemented conference and mediation programs for foreclosure cases.
At that hearing, Sen. Sheldon Whitehouse (D-R.I.) said that HAMP “has not succeeded in producing anywhere near enough modifications to stem the tide of foreclosures.”
“These foreclosures are often unnecessary, indeed not even in the mortgage holder’s best interests, but they are driven forward by a conflict-ridden bureaucratic machinery that lacks the most basic American failsafe: the chance to talk to a responsible human being who can make an actual decision,” Whitehouse said.
Homeowners’ attorneys expect the abuses to continue. “I don’t think we’ve seen the end of these practices, because the servicing industry is a booming industry right now,” Phillips said.
Litigation against these companies “has the potential for saving tens of thousands of people’s homes that will otherwise be lost,” Delbaum said.
Allison Torres Burtka is senior editor of Trial. She can be reached at firstname.lastname@example.org.