Revenge can be sweet. It can be even sweeter when you use your enemy’s own weapons to extract vengeance.
Six years into the worst wave of foreclosures since the Great Depression, shoddy underwriting and legal shortcuts are coming back to haunt mortgage lenders. Homeowners, sick of being pushed around by the banks, are fighting back, sometimes with David and Goliath results.
In 2008, Jewel Miser and her husband Jack began trying to get Bank of America to modify their mortgage when Jack lost his job after a local auto parts factory closed.
“We were just a month behind then,” said Jewel. “But I tried every way in the world. And they just put me off and gave me excuses.”
After more than a year of dead ends and red tape, the Sweetwater, Tenn., couple found a lawyer who successfully challenged the shaky paper trail on which the lender relied on to prove it owned the Miser's note. In the resulting settlement, the bank agreed to new loan terms that cut the Miser’s monthly payments by roughly 15 percent, paid their legal fees and stopped the foreclosure.
"I did not want to lose my home," Jewel said. "We had done so much work to it. When you find a home and know it's your home you don't want to lose it. I tried every way in the world."
The Misers and other homeowners who are fighting back in court are using the legal quagmire created by the mortgage lending industry to win loan modifications that lenders have been unwilling or unable to extend voluntarily.
When these homeowners get to court, they find a laundry list of shoddy practices that undercut lenders’ legal claim to foreclose, say consumer attorneys who have pursued these cases. Many cases are tainted by “robo-signers” who failed to properly review files, despite swearing under oath they had done so. Other title claims are undone by improper accounting, including unwarranted fees, and payments that were not credited.
Consumer attorneys also are attacking lenders’ effort to paper over missing links in the chain of documents required to prove that a bank owns a loan and has the right to foreclose. Some of those defective paper trails date to the sloppy underwriting that accompanied the frenzy of mortgage lending in the 2000s, when hundreds of now-defunct lenders churned out a blizzard of notes that were instantly offloaded to investors.
“There are more (homeowner) claims because lenders operated in flagrant disregard of the law,” said Diana Thompson, a veteran consumer attorney with the National Consumer Law Center. “You only have a claim against the lender if the lender didn't do what they were supposed to do.”
Lenders' disregard for the law is still rampant, according to consumer advocates and regulators. Last month, a survey of 260 consumer attorneys in 45 states by the NCLC found that thousands of homeowners were improperly foreclosed on in just the past year. In more than 80 percent of the cases, the lender scheduled a foreclosure sale while processing a loan modification. In four out of five cases, the attorneys reported, lenders failed to properly credit payments or wrongly claimed homeowners owed bogus fees.
An audit by the San Francisco assessor’s office last month found lenders routinely broke the law in some 400 foreclosure cases over the past three years. Last April, the nation's top two bank regulators, the Federal Reserve and the Office of the Controller of the Currency, reviewed the foreclosure and loan modification practices and found a litany of "deficiencies and weaknesses" that "represent unsafe or unsound practices and violations of applicable law."
Though 49 state attorneys general have settled a sweeping complaint covering a long list of fraudulent and deceptive foreclosure practices, a handful of states are pursuing lawsuits against the mortgage industry. New York Attorney General Eric Schneiderman, named to a federal task force to investigate mortgage fraud, has charged lenders with deceptive and fraudulent foreclosure filings based on a national mortgage electronic registry system, known as MERS. The lawsuit claims that Bank of America, J.P. Morgan Chase and Wells Fargo, “have repeatedly submitted court documents containing false and misleading information that made it appear that the foreclosing party had the authority to bring a case when in fact it may not have.”
Regulators how vowed to crack down on these practices. Lenders say they are correcting them.
"In 2010, we reviewed our processes and procedures and put in place a number of improvements and worked with our regulators," said Jumana Bauwens, a Bank of America spokeswoman. "And we continue to improve our processes and procedures."
But lenders still have more work to do, according to consumer attorneys, judges and mortgage industry professionals. Until reforms are widely adopted, it has fallen to homeowners and their attorneys to try to see that the law is enforced.
Borrowers have been taking their disputes with lenders to court for decades. The latest efforts, though, have been sparked by rising frustration with other means of trying to get a loan modified, say consumer attorneys. Early in the mortgage crisis, millions of homeowners, encouraged by the industry, tried working directly with lenders.
A succession of government-sponsored programs aimed at providing mortgage relief to millions of borrowers have fallen far short of promises.
"They (lenders) advertised all the time: 'If you want get your mortgage modified all you have to do is call,'” said Jewel Miser. "I called about 100 times. Each time they would tell me different things or that it was 'in process' - but they weren't doing anything."
In its review, the OCC also cited widespread failings of lenders’ "voluntary" mortgage relief efforts. The government’s highly-touted Home Affordable Modification Program (HAMP) has badly underperformed expectations, according to housing advocates and counselors working with homeowners, largely because the decision to modify a loan still rests entirely with the lender.
Bauwens, the Bank of America spokeswoman, said that since the Misers applied for their loan modification, the process has been streamlined and reviews and decisions are now made much more quickly.
"We are in a very much better position to be able to respond to customers modifications in a much more timely manner," she said.
But consumer attorneys said that, in some cases, homeowners are being denied modifications that should have been made under government guidelines.
“Because of the government’s failure to enforce HAMP and failure to hold (lenders) accountable, in many cases in order to get a HAMP modification for which they are complete qualified, homeowners have to hire an attorney and sue their lender,” said Thompson of the NCLC.
That often means a trip to bankruptcy court for a Chapter 13 proceeding, which allows people with a regular income to adjust their debt. Once in court, a foreclosure is typically halted automatically, placing the burden on the lender to have the process re-instated. That forces the lender to prove it owns the mortgage and to account fully for any disputed back payments. When the lender is unable to do so, consumer lawyers say, it is more likely to agree to settle by modifying the loan terms, often by simply lowering the interest charged to current market rates.
Lenders rarely forgive principal, even on homes that are deep underwater, say consumer attorneys. But while bankruptcy law prevents a judge from writing down the primary mortgage on residential property, other loans don’t enjoy that protection.
That means judges often are able to force lenders to take deep losses on second and third mortgages, said Raffi Tal, who advises homeowners facing foreclosure at Los Angeles-based Peak Corporate Network. “That by itself is a great advantage to borrowers who can afford to make the first mortgage payment - just by canceling the second (mortgage).”
Some bankruptcy courts, including the Southern District of New York, have established special procedures to speed loan modification negotiations between homeowners and lenders.
But it hasn’t been easy.
Consumer attorneys often are outgunned by big banks. Though more than six million households are either delinquent or in foreclosure, there are fewer than 500 consumer attorneys nationwide who specialize in suing to stop foreclosures, according to the NCLC’s Thompson. As demand for legal help has risen, more lawyers have shifted the focus of their practice to fighting foreclosures. That can include attending seminars focused on the legal arguments used to successfully challenge lenders in court.
For the past six year, Max Gardner has been running "boot camps" out of his Shelby, N.C., farmhouse, training consumer attorneys from across the country in the finer points of turning the mortgage mess to their clients’ advantage. More recently, Gardner has been taking these seminars on the road.
On a recent visit to New York, Gardner summoned several dozen lawyers, mortgage industry veterans and a handful of reporters to an intensive weekend crash course in a grab bag of legal strategies. It included a tour deep into the weeds of the Uniform Commercial Code, a subject that has been known to put law students to sleep. Once trained, the more than 200 boot camp alumni in 39 states communicate via listserv, swapping tips and sharing legal opinions that help them build arguments to stop the next foreclosure.
Though they’ve won case-by-case victories for individual homeowners, consumer attorneys such as Gardner say regulators continue to turn a blind eye to improper and illegal foreclosures. The industry has been able to keep regulators at bay, he said, by effectively managing public opinion about its role in the foreclosure crisis.
“I think they've done pretty good job - on the other side - of getting across the message that these are just a bunch of deadbeats trying to get a free home,” he said. “And that these (wrongful foreclosures) are just the result of technical problems.”
“So let’s just forget about the system of justice, due process and the rules of evidence and everything else. They’re just glitches. They don't mean much,” he said sarcastically.
For borrowers, those glitches can mean the difference between homelessness and holding onto their house. For lenders, the process of fixing those errors can prove costly. Once challenged in court, some lenders decide it's cheaper to settle the case and move on to the next foreclosure waiting in the pipeline.
“I have quite a few cases where the banks just walked away from the foreclosure litigation and either dismissed the action formally or just abandoned the litigation,” said April Charney, a staff attorney with Jacksonville Area Legal Aid, who has defended hundreds of Florida homeowners facing foreclosure since the market crashed in 2006.
Homeowner victories in court go largely unreported, however. In some cases, lenders demand borrowers keep quiet as a condition of stopping the foreclosure and settling the case. Other borrowers feel intimidated, say consumer lawyers, fearing the lender could find a reason to restart the foreclosure process again.
“Unless the loan is paid off, there’s always the risk of further fighting,” said Thompson. “And you just don't want to have the (lender) have a reason to be looking over your client’s payment records with a fine tooth comb.”