Is it important who forecloses?
Sunday, March 18, 2012
Does slipshod paperwork provide legal grounds to overturn a foreclosure?
In Massachusetts, courts have said “yes” in two landmark cases upheld last year by the state’s highest tribunal, the Supreme Judicial Court. Judges in other states have ruled likewise.
But California courts have consistently refused to void foreclosures even when banks botched the process.
Now a case argued in an appeals court in San Francisco last week might get the California Supreme Court to weigh in. The case hinges on a single word in a civil statute written over a century ago.
If the court does follow Massachusetts’ lead – and that’s a big “if” – it could open the door to thousands of Californians who believe that their homes were illegally repossessed by parties with no right to do so.
Who owns the note?
Why does it matter who forecloses?
After all, banks argue, if homeowners clearly can’t make mortgage payments, they will lose the house no matter who owns the note.
But lawyers said it is crucial to avoid turning property rights into the Wild West – and to help some borrowers hang onto their houses.
“It’s important to the legal system that only the right parties can throw you out of your house, especially in states like California and Massachusetts where there is no judicial foreclosure,” said Elizabeth Renuart, an assistant professor of law at Albany (N.Y.) Law School. “If homeowners who are in default know who owns their loan, they may be able to work out a loan modification with that lender so they can … stay in the house.”
The robosigning scandal and February’s audit of San Francisco foreclosures by Assessor-Recorder Phil Ting bolstered arguments that resale of mortgages on Wall Street clouds the chain of title so no one can tell who really owns them, and that banks recklessly churned out foreclosure documents without verifying them. Many homeowners also assert that foreclosures by the Mortgage Electronic Registration System – the massive database banks use for rapid-fire buying and selling of mortgages – should be invalidated because MERS doesn’t record loan transfers.
Similar arguments convinced Massachusetts judges that lenders must prove they own the mortgage before they can foreclose, and that buyers cannot purchase improperly foreclosed properties and then try to clear the title. Those were the rulings in U.S. Bank vs. Ibanez and Bevilacqua vs. Rodriquez, the two cases upheld by the commonwealth’s high court last year.
Otherwise, any fraudster could record a deed to the Brooklyn Bridge, file a suit to clear title, “hope that the true owners ignored the suit or … could not be readily located and (would thus) be defaulted,” and get a court judgment saying they own the bridge, wrote a judge in the Massachusetts lower court decision.
“They basically said the emperor has no clothes, and if the emperor has no clothes, it cannot foreclose,” said Renuart, who wrote a paper called “The Ibanez Time Bomb,” looking at how that decision might apply in other states that, like Massachusetts, conduct foreclosures without court intervention. California is such a state.
A third case, Eaton vs. Fannie Mae, which the high court may rule on any day, looks at whether lenders must own both the note and the mortgage (the document that pledges real estate to secure that loan).
Massachusetts saw a slow-down in foreclosures during most of 2011 as banks fixed their paperwork – but for the past few months, foreclosures there have resumed at high rates, according to the Warren Group, a data service.
California courts have taken an opposite tack.
“Judges here will say somebody’s owed a debt and this is the only creditor in this room asking to foreclose on the property, and we’ll give it to them,” said attorney Tiffany Norman of TRN Law Associates, a San Francisco firm specializing in wrongful-foreclosure cases.
Kent Qian, staff attorney with the National Housing Law Project in San Francisco, said such cases often get thrown out before they even get a hearing.
“California courts have not been receptive to cases that allege the wrong party foreclosed, the party who fore-closed did not have authority to foreclose, there was fraud in different assignments (transfers of the mortgage) or (bank employees) didn’t have any idea what they were signing,” he said.
Courts used a number of arguments to rebuff such cases.
In Gomes vs. Countrywide, “they said you cannot (sue) to contest whether the right person has initiated the foreclosure sale until after the foreclosure.” Gomes, whose case also hinged on MERS’ right to foreclose, appealed to the California Supreme Court; in October, it declined to hear the appeal.
Another common judicial reasoning is “the tender argument.” Courts often say a former homeowner “must tender the full amount of the loan to even assert their claim after the foreclosure sale,” Qian said.
Obviously, a foreclosed-upon person could hardly muster up, say, $300,000 plus legal fees, just for the right to sue.
But even homeowners who make it past these barriers have found little judicial support.
“Courts essentially say, ‘What’s the harm, you owe the loan (and fell behind on payments), what’s the difference to you who does the foreclosing?’ ” Qian said.
Most California lawsuits challenging foreclosures get dismissed before they even make it to a decision, he said.
In the few cases that courts agree to let proceed, lenders generally offer a deal to the homeowner, who then drops the suit, so there is no legal precedent of them prevailing in court, Qian said. In such cases, banks may rescind the foreclosure sale and reinstate the loan under more-affordable terms.
One argument that has persuaded some California judges to let cases proceed is backdating of records – banks that sent a notice of default to kick off a foreclosure and only afterward filed backdated documents purporting to show they had the right to do so.
Deed of trust
One of the biggest barriers for homeowners in foreclosure lawsuits turns out to be the definition of “mortgage.”
California Civil Code 2932.5, enacted in 1874, says lenders must record their ownership of a mortgage before foreclosing or selling a property.
That sounds crystal clear.
But nowadays, almost no home in California is secured with a mortgage. Instead the state uses a slightly different instrument called “deed of trust.”
A recent case in California’s Second District Court of Appeal, Calvo vs. HSBC Bank, held that the Civil Code requiring lenders to record the transfer of a mortgage before they can foreclose does not apply to deeds of trust.
“Calvo is an unrealistic interpretation that views (home loans) through the outdated lens of over a century ago,” said Elizabeth Letcher, director of litigation at Oakland’s Housing and Economic Rights Advocates, which helps struggling homeowners. “Now that home loans are secured with deeds of trust, (the Civil Code) should apply to those as well as to mortgages. Assignment of ownership interests – whether through mortgage or deeds of trust – should be recorded. There should be a public record of who has the power to sell property at a foreclosure sale.”
Last week in San Francisco, the First District Court of Appeal heard arguments in Haynes vs. EMC Mortgage, in which the homeowner asserted EMC should have recorded the deed of trust under the Civil Code. The lower court ruled for the bank. But if the appeals court rules in Haynes’ favor, putting it in opposition to the Calvo decision, then the California Supreme Court may take up the issue to resolve the conflict.
There is also a legislative remedy on the horizon. The “Homeowner Bill of Rights” slate of laws proposed last month by Attorney General Kamala Harris and Democratic legislators would require lenders to record the deed of trust before foreclosing and to show proof that they have the right to foreclose. Similar bills failed to pass in recent years, but backers are hopeful that today’s climate will be more hospitable.
Meanwhile, there is one part of California’s legal landscape that is receptive to homeowners’ arguments that they deserve to know if a foreclosing party has the right to act.
“In bankruptcy courts, it’s almost a completely different playing field,” Qian said. “Bankruptcy courts require lenders to show that they hold the note and are authorized to foreclose.” Often the net result is just a few months’ pause before a foreclosure continues.
But sometimes the lenders can’t produce the right paperwork. “If the deed of trust came from a defunct lender like New Century, and if the lender didn’t already get an assignment from New Century, sometimes they can’t prove they have the authority to foreclose,” Qian said. In such cases, the lender might offer the homeowner a settlement, such as more-affordable payments – or the court could approve a plan for the homeowner to pay the existing lender at a rate they can afford over five or so years, after which the loan would be discharged.
Carolyn Said is a San Francisco Chronicle staff writer. firstname.lastname@example.org