Bank Bail-Out II, the Sequel: How the Banks Got a Mulligan in the Wrongful Foreclosure Crisis

For the majority of the foreclosure crisis, as consumer trial lawyers we have been representing borrowers in wrongful foreclosures and other bank and servicer screw-ups, such as foreclosing on the wrong home, seizing and emptying the contents of the wrong home prior to any foreclosure, foreclosing on mortgages where the borrower is current on their payments, collecting and attempting to foreclose on paid-off loans and re-seizing and re-winterizing homes the bank just sold to the new owner in a short sale.  Yes, all these things actually happened and the details are lot worse than I could write here.  The damage to the families involved has been tremendous.

These are unprecedented times in our country where a corporate bank or servicer can literally seize a home without notice or resort to any judicial process. Many of the folks we represent were not even in foreclosure.  Do not think for a second that this cannot happen to you.  All that needs to happen is that you have to be forty five days late on a mortgage payment because you were changing jobs or paying an emergency medical bill.  Then go away from your home for a long weekend to visit relatives.  While you are away, your loan servicer will send an untrained and often unsupervised “inspector” to your house who, in under ten minutes, will determine that your home is “vacant,” which is obvious because you are not there.  A second order will then issue to change the locks on your home and make an internal inspection of your home.  This is a widespread practice throughout the country.

All of this without notice to you or any court order.  If you happen to be away for a week, you may come back and find your home looted and the possessions in your home gone, carted off to the nearest pawn shop, dumpster or landfill.  Or how about when the servicer sends the contractors to the wrong address resulting in a lock out and trash out of the wrong home.  And when the servicer and its contractors illegally throw out a homeowner’s personal possessions, the typical reaction is “Its just the cost of doing business, give us a list of what you lost.”  “Hey Mr. Bank, our life that you threw in the dumpster cannot be replaced.  Where do I buy back the pictures of our kids in their crib, my wedding dress, grandma’s heirloom wedding ring that I was saving to give to my daughter that your contractors stole when they looted my house, the family piano passed down from generation to generation that was carted off to the a landfill or my son’s piggy bank that was stolen off the shelf in his room?”

The announced terms of the settlement the Attorney Generals are about to reach with the major banks and their servicers is, in a word, “pathetic.”  The fact that the Obama Administration is pushing for approval of this anemic settlement shows that nobody, except for a few astute state Attorney Generals, is listening.  No person, agency or politician – Democrat or Republican -- has the guts to stand up to the banks and servicers to fix an obviously broken loan servicing industry. 

What they have all failed to address is that there has been a fundamental shift in lending.  There are no more “banks” in the traditional sense.  A borrower’s loan is bundled into an asset backed security owned by some investor.  The borrower cannot call up the investor and complain because the borrower cannot even find out who “owns” his loan.  If they could it would not matter. The servicers field all calls for the investors anyway.

The truth is that a borrower has no market power since loan securitization.  The borrower cannot shop for a new investor to hold their loan.  Likewise, if the borrower refinances, the borrower’s loan will be assigned and the borrower will end up back at the feet and mercy of one of the major servicers.  The borrower has clearly lost all leverage in the marketplace.  Nothing in the Attorney Generals’ proposed settlement changes that disparity in market power.  The system is in shambles and is failing borrowers on a daily basis.  There is no solution in sight.

The loan servicers are in absolute control.  So what type of legal relationship do borrowers have with servicers? None to speak of as a borrower has no contract with a loan servicer.  Loan servicers are simply a vendor contracted to handle a loan from A to Z, from billing to foreclosure to the post-foreclosure sale.  Borrowers are not the servicers’ customers.  If you ask a servicer who their customer is, the reply is “the investor.”  Who is the “investor”?  This quickly becomes a “Who’s on first?” routine.  Many times the servicers do not even know who the investor is on a particular loan. 

The solution to the problem created by loan securitization is not regulation but rather legislation.  Federal laws need to be drafted and passed that level the playing field and give borrowers leverage in the marketplace.  Borrowers need a federal statute that provides them a direct cause of action to sue loan servicers.  Right now servicers are not even subject to most fair debt collection laws and there is no law on the books directly addressing servicer misdeeds and errors. Traditional common law claims like negligence and misrepresentation are met with skepticism by courts.  Most state consumer protection statutes do not reach the conduct of servicers.  Some states do not even have consumer protection statutes. There is a massive hole in the law books which the servicers are exploiting.

The hub of the wrongful foreclosure wheel has always been the major servicers who are all owned by the major banks.  Servicers and their vendors routinely disregarded state foreclosure processes and procedures, created false affidavits, back-dated assignments and many times failed to verify whether a debt was even owed before filing for foreclosure.  Servicers are also in large part responsible for the illegal lock-outs and trash-outs of American homes.  To my knowledge, neither the state Attorney Generals, nor the Department of Justice, have launched a real, full scale investigation into these practices.  Have subpoenas been issued?  Have witnesses been deposed?  Has any executive been called to sit in a chair and be grilled for days under oath about these practices?  How can the case against the banks and servicers be settled before all the facts are known?  Maybe because, as they say in the movies, “you can’t handle the truth.”  

Where is the accounting for the untold amount of taxpayer dollars used to administer the thousands of federal and state lawsuits these sloppy bank practices created?  The already overburdened and underfunded state and federal court systems have been deluged with foreclosure and shoddy servicing related lawsuits.  The amount of public resources and taxpayer funds that have been spent on this banking industry created foreclosure crisis is staggering and will not be recouped as part of any settlement.  Has it even been factored into the equation?

There also has been no report of the incredible damage the banking industry has done to what was once a very orderly public system of tracking real estate transactions.  To sell and resell toxic mortgages the banking industry securitized those mortgages and sold them as fast as they could bundle them up.  There was a little problem though.  State property record laws require that documents pertaining to land transactions, such as mortgage assignments, be recorded in the public land records.  No problem for the banks. They just decided to take an end-run around those pesky requirements by creating their own internal, secret electronic filing system called the Mortgage Electronic Registration System, widely referred to by its acronym MERS.  In essence, a huge behind the scenes database supposedly tracking all these transfers of mortgages and loans. 

The problem is nobody was policing this secret property registry and, oftentimes, the proper paperwork was not being executed before loans were sold or foreclosures were filed.  Well, that little problem was fixed by the robo-signers.  For the first time since land records were maintained, you cannot go down to your local county recorder’s office or registry of deeds and research who owns a particular property.  This property recording mess will cause yet another waive of title defect claims and failed real estate sales, disputes which will again end up in court and strap the federal and state court systems.

The reported relief to be offered to homeowners under the Attorney Generals’ settlement is simply a pay-off to the federal government and the states for giving the banks and servicers a Mulligan on this whole wrongful foreclosure issue.  It is “Bank Bail-Out II, the Sequel”.  It will be, in all likelihood, a bigger bail out than the first one.  How about the offer of the worthless relief of $20,000 in mortgage principle reduction when sloppy bank practices of securitizing and selling toxic loans caused home values to drop by as much as two thirds in some states?  How about offering $1,800 dollars to a family who was wrongfully foreclosed on and evicted from their home?  Does $1,800 for your home being stolen from you sound like a good deal?  How is that any kind of economic justice? 

The cherry on top of this sweet tasting ice cream sundae for the banks and their servicers will be found in the wording of the “release” giving banks and their servicers immunity from past and future claims.  Corporations always want releases to be “global,” thereby releasing all past and future claims.  I read in one web article that the servicers are going to be released from all wrongdoing.  It looks like the state Attorney Generals are now going to let the banks and their servicers “play through” after giving them a Mulligan.