For Mortgage Lenders, Refusal to Follow the New Jersey Fair Foreclosure Act Began on Day One

By Adam Deutsch

In the nearly five months since the state Supreme Court effectively allowed six of the country’s biggest banks to begin filing foreclosures again, attorneys and court officials have been expecting a flood of new filings to hit the courts.

Except it hasn’t happened. Foreclosure filings are down 83 percent as of October this year, compared with the same time period last year, according to court figures, and there are at least 100,000 cases either pending in the system or waiting to be submitted.

Attorneys involved in the work in New Jersey point to at least one reason for the significant delay: a court case that has reached the state Supreme Court, with oral arguments on Wednesday.

The case, US Bank National Association v. Guillaume, is important because the court is asked to determine who must be named as a point of contact on the document that initiates the foreclosure process, known as the Notice of Intent to Foreclose. The state Fair Foreclosure Act requires identifying the lender and its contact information. But because the original lender has often bundled and sold the loans to investors, the current lender lists the servicer, a third party that collects monthly payments and dispurses it to the mortgage holder. In this situation, the lender’s attorney argued it was unnecessary to name his client on the notice because the servicer had been assigned the mortgage rights.

Attorneys for the homeowners, Maryse and Emilio Guillaume, said listing the servicer is not sufficient, should the homeowner want to work out a solution and stay in the house, and any foreclosure judgment without the lender having been named should be voided.

The Fair Foreclosure Act defines the lender as “any person, corporation or other entity which makes or holds a residential mortgage and any person, corporation or other entity to which such residential mortgage is assigned.”

Should the court side with the homeowners and determine what remedy must be made, it could affect pending or completed foreclosures and possibly change the process going forward, said Linda Fisher, a Seton Hall Law School professor who works closely with foreclosure cases at the school’s Center for Social Justice.

“The most immediate reason it’s such a big deal right now in New Jersey,” Fisher said, “is that there are over 100,000 foreclosures either pending or waiting to be filed, and since this Notice of Intent has to be met in every single case, what has to be included in that notice is fundamentally important to the status of foreclosure actions in the state.”

The Guillaumes are still in their East Orange home pending the outcome, despite a judge signing off on the foreclosure in 2009. That decision should be dismissed because the original notice directed the Guillaumes to their servicer, America’s Servicing Co., not the trust that now holds the mortgage, US Bank National Association, said Rebecca Schore, the Guillaumes’ attorney.

“It’s becoming increasingly important to borrowers to know who the lender is who actually holds their mortgage — who is the man behind the curtain, pulling the strings,” Schore, of Legal Services of New Jersey, told the justices.

“Keeping it opaque serves no purpose,” she added. “Making it transparent gives people an opportunity to do something about it.”

Mark Melodia, who represents US Bank National Association, argued that listing the servicer was adequate because it follows the statute, as it had been assigned the mortgage rights of the lender.

“We believe it literally complied — that is, that America’s Servicing Co., the mortgage servicer, is a lender for purposes of the Fair Foreclosure Act because it is the sole holder and sole assignee of all the mortgage rights relevant to the foreclosure process and the notice of intent,” he said. “It’s the only party that is empowered to act.”

The appellate and trial courts have ruled in favor of the trust, deciding it was appropriate to list the servicer.

But in August, a separate appellate panel determined in a ruling known as “the Laks decision” that the statute requires the financial institution to name the actual mortgage holder, and if it does not, the foreclosure complaint should be dismissed. With its Guillaume decision, the Supreme Court is in effect resolving the conflict between the two appellate rulings.

The Guillaume case was expedited through the courts, but there is no deadline for a decision.

And in the meantime, foreclosure filings to the court have all but ground to a halt. There are an estimated 60,000 cases pending in the courts, according to bank figures, and more in the pipeline.

“There are tens of thousands (of complaints) that haven’t been filed, that should have been filed over the past year, that are awaiting a process that can work, because we don’t have one right now,” Melodia said.

He added, “we believe the foreclosure system is in many ways broken, and this case in this court provides an opportunity that we can fix some of these issues.”

In this video press release, Assembly Speaker Pro Tempore Jerry Green (D-Union) delivers remarks on his legislation (A-2168) to encourage purchasing of foreclosed properties at a State House news conference. Green’s “New Jersey Residential Foreclosure Transformation Act” would promote the purchasing of foreclosed residential properties from banks and other institutional lenders and allow the purchased properties to count towards a town’s affordable housing requirement.

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New Jersey borrowers will receive about $660 million in benefits from loan modifications and other direct relief. New Jersey borrowers who lost their homes to foreclosure between Jan. 1, 2008 and Dec. 31, 2011, and suffered servicing abuse can qualify.

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U.S. Senator Frank R. Lautenberg (D-NJ) announced that his office will hold a public Mortgage Foreclosure Prevention Forum on Wednesday, February 15, in Cherry Hill to provide people in New Jersey with resources on foreclosure prevention, foreclosure mediation, and mortgage scams.

At a news conference at the Statehouse yesterday , 2/14/12, Senator Raymond J. Lesniak announced the introduction of legislation sponsored by himself and Senator Barbara Buono which would begin to address the foreclosure and affordable housing crises facing New Jersey.

The bill, S-1566, would establish a central agency under the New Jersey Housing and Mortgage Finance Agency (HMFA) to use funds from the State Affordable Housing Trust Fund to purchase and deed-restrict foreclosed properties to be used as affordable housing. The bill would also create incentives for municipalities to transition foreclosed properties to affordable housing, giving them a 2-to-1 match against their affordable housing obligation for affordable units created from foreclosed properties. Lesniak said the bill could result in 10,000 new affordable units and 10,000 less unoccupied, boarded-up properties.

At a news conference at the Statehouse today, Senator Raymond J. Lesniak announced the introduction of legislation sponsored by himself and Senator Barbara Buono which would begin to address the foreclosure and affordable housing crises facing New Jersey.

Robert Menendez (D), seen here in this file photograph, hosted a congressional field hearing to study how the foreclosure crisis is affecting New Jersey homeowners. A landmark $25 billion national mortgage foreclosure settlement was reached Thursday, but details are still being worked out.

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New Jersey must work through a backlog of 50000 to 100000 unprocessed foreclosures because of delays caused by an investigation into how lenders handled the filings, said Richard Constable, acting commissioner of the state Community Affairs Department.

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National Public Radio’s “Morning Edition” on WNYC aired a story this morning about how the federal agency, Freddie Mac actually makes more money by not giving a refinance loan to struggling homeowners.

Freddie Mac, a taxpayer-owned mortgage company, is supposed to make homeownership easier. One thing that makes owning a home more affordable is getting a cheaper mortgage.

But Freddie Mac has invested billions of dollars betting that U.S. homeowners won’t be able to refinance their mortgages at today’s lower rates, according to an investigation by NPR and ProPublica, an independent, nonprofit newsroom.

These investments, while legal, raise concerns about a conflict of interest within Freddie Mac.

“We were actually shocked they did this,” says Scott Simon, who heads the mortgage-backed securities team at the giant bond trading and investment firm called PIMCO. “It seemed so out of line with their mission, out of line with what Congress wanted them to do.”

You can read and listen to the story here.

Freddie’s charter calls for the company to make home loans more accessible. Its chief executive, Charles Haldeman Jr., recently told Congress that his company is “helping financially strapped families reduce their mortgage costs through refinancing their mortgages.”

According to an article in New Jersey newspaper The Record , on January 12, 2012, written by staff writer Kathleen Lynn :

“Foreclosure activity plunged by 73 percent in New Jersey, and about a third nationwide, in 2011, as questions about legal documentation held up lenders’ efforts to take back the homes of borrowers in trouble, RealtyTrac said Wednesday.”

The reason for the decrease is not due to fewer people falling behind , she explains further:

New Jersey lenders have held off on foreclosures because they are awaiting a state Supreme Court decision on a case, U.S. Bank vs. Guillaume, that involves a foreclosure challenged by a homeowner who said the lender violated the state Fair Foreclosure Act because it didn’t properly identify itself.

“What happens if they take someone’s house, and it turns out they didn’t have the legal basis to do that?” asked Joshua Denbeaux, a Westwood lawyer who represents homeowners in foreclosure cases.

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“There’s going to be an enormous onslaught of foreclosure filings.”

It’s not clear when a decision will come on the Guillaume case. Denbeaux predicted that once these issues are resolved, “there’s going to be an enormous onslaught of foreclosure filings.”

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Ben Bernanke and the Federal Reserve Bank Explain that Lenders And Servicers Share Responsibility as Key Contributors to the Foreclosure Crises.

 By: Adam Deutsch, Esq.

 Last week the Federal Reserve Bank (“FED”) published its latest report looking into the foreclosure crises across America.  In part, the paper seeks to offer recommended policy changes that could be implemented to reduce the far reaching effect of the crisis.  The owners of mortgage loans and their loan servicing companies are cited as problems, and the FED offers several recommendations for how these entities can help resolve the foreclosure crises in the near future.

According to the FED, the heart of the problem is related to the loss in home values across the country.  The report states, “in the aggregate, more than $7 trillion in home equity, more than half of the aggregate home equity that existed in early 2006 has been lost.”  The drop in home prices has created a toxic environment in which more than 20% of homeowners with a mortgage owe more on their mortgage than the home’s open market value.  These properties are referred to as “underwater” in the mortgage industry.

One concern of the FED is that middle-income households have been particularly hard hit during the mortgage crises because “home equity is a larger share of their wealth in the aggregate than it is for low-income households (who are less likely to be homeowners) or upper-income households (who own other forms of wealth).  Many homeowners across all economic thresholds have been met with roadblocks when seeking to obtain mortgage modifications.  As the FED report explains, modifications may provide homeowners with an opportunity to lower the cost of monthly payments by extending the term of the loan, reducing the interest rate, or reducing the principal.  For lenders, these modifications can make sure that defaulted and struggling loans remain performing.

This latest paper by the FED points out that banks have been regularly rejecting modification requests even for well qualified homeowners who agree to pay more than market value to keep their underwater homes.  According to the FED, this unsound business practice may be caused by loan servicers rather than the actual lender-owner.  The report explains that servicers are “gatekeepers to loan modifications and other foreclosure alternatives.”

Of particular concern to the FED is the structure of servicer compensation.  According to the report “the fee structure of the servicing industry helped create perverse incentives for servicers to, for example, reduce the costs associated with working out repayments and moving quickly to foreclosure, even when a loan modification might have been in the best interest of the homeowner and investor.”  In states where the foreclosure process is streamlined, the problem is worsened by contractual requirements that force servicers to advance payments of principal and interest to lenders from the date of a homeowners default through foreclosure.  Accordingly, because the modification process can take several months, servicers stand to increase their revenue by foregoing modification talks, proceeding to foreclosure, and ridding the home from their servicing obligations.

An inferred conclusion of the FED report is that both servicers and lenders have moved to panic mode.  Their decision making ability has become paralyzed and management is less focused on maintaining and creating new performing loans than they should be.  There are two key solutions offered by the FED.  Under the first solution, servicers and lenders would continue declining to make modifications and would instead shift their business model to become landlords converting the millions of foreclosed properties into rental units.  The second more plausible solution calls on policy makers to unite with businesses to implement a new set of modification incentives.  This final proposal is an admission by the FED that the Obama administration’s Home Affordable Modification Program (“HAMP”) has failed to fulfill its potential.  HAMP’s failures are due to restrictions of eligibility for the program and a lack of incentives for creative solutions.

The start of 2012 marks more than four years since the start of the ongoing recession and foreclosure crises.  It is a problem that after so much time the lenders and servicers remain incapable of independently developing a set of solutions to solve a crisis they helped create.  Changing servicer compensation to reflect the 2012 mortgage market rather than the 2006 market will be a great help in promoting modifications and alternatives to foreclosure.  Collectively, the recent proposals and ongoing attention to the crises provided by the FED offers hope that the foreclosure crisis is at least a step closer to resolution.

The Federal Reserve report is available at: http://www.federalreserve.gov/publications/other-reports/files/housing-white-paper-20120104.pdf