Chicago Foreclosure Defense Blog

The foreclosure fraud settlement absolves the 5 major banks from liability for robosigning and other practices. The breadth of this waiver of liability has yet to be conclusively established. In addition to the monetary penalties assessed, the banks have agreed to reform their loan servicing standards. We won't truly know all of the details until they are released. Given that documents like this press release have already leaked out, it would appear that the terms are not 100% in writing yet. 

Many of these reforms are basically, "We will follow the law," but some are good steps forward. The "we will follow the law" reforms are still a net positive, but the banks agreeing to do what they should already be doing doesn't seem as emergent as some of the other reforms. 

Here are some of the "follow the law" reforms:

• Affidavits must be personally reviewed and based on competent evidence.
• Banks must implement procedures to ensure accuracy of accounts and default fees. These procedures must include regular audits, detailed monthly billing statements, and enhanced billing dispute rights. 
• Banks must adopt procedures to oversee the attorneys that they hire, their trustees, and other agents. 
• Banks must maintain adequate levels of trained staaff to handle the demand for loss mitigation. 

These reforms are ones that are already required by law (e.g. truthful and accurate affidavits) or ones that banks should already be doing. 

Here are some of the reforms that I find to be a bit more progressive and thus worthy of more praise:

• Banks must disclose the identity of the actual holder of their loan (the entity with legal standing to foreclose) to the borrower. This ownership must be documented.
• Banks cannot proceed to foreclosure without first evaluating the borrower for all available loss mitigation options. 
• Banks can no longer "dual track," which is the process of pursuing foreclosure while also considering the borrower for a loan modification. 
• If a loan modification is denied, the denial must be automatically reviewed, and borrowers must be able to appeal the decision. 
• Banks must send homeowners a pre-foreclosure notice that describes the available loss mitigation options, an account summary, a description of facts that supports the lender's standing to foreclose, and a notice that the homeowner may request a copy of the loan note and the identity of the investor that holds the loan. 
• Banks must develop web portals where borrowers can check, at no cost, the status of their loan modifications.
• Banks must publically disclose the application and qualification information for any proprietary (in-house) loan modifications.
• Banks must assign a single individual point of contact for every borrower seeking a loan modification. This goes beyond being a specific phone number -- banks must designate a specific employee as the point of contact. 

These measures, if followed, may actually reduce the number of homes entering foreclosure. It remains uncertain how the settlement will combat the financial incentive for a servicer to foreclose. It is also uncertain at this time how the appeals process for a denied loan modification will be handled. On the whole, however, these are some practices that should have been required by law. 

Unfortunately, if your loan is not held or serviced by Bank of America, JP Morgan Chase, Wells Fargo, CitiGroup, or Ally/GMAC, then these settlement terms do not apply. 

The settlement does provide for an independent monitor to oversee the bank's compliance with the settlement. Who that monitor will be has yet to be announced. 

Prior to January 13, 2012, the answer to that question would have been, "No." However, a new provision of the Illinois Mortgage Foreclosure Law changes that answer. 

On January 13, 2012, Governor Quinn signed Illinois Senate Bill 1259 into law. The bill requires that lenders respond to a short sale offer within 90 days. Although the bill does not stay the foreclosure case while the offer is pending, it states that lenders "must" respond within 90 days. Presumably, if a lender does not respond within those 90 days, the borrower could bring a motion before the judge hearing the foreclosure case in order to compel a response. 

While this is not an earth-shattering development, it does provide some certainty for homeowners attempting a short sale in Illinois. This new law is not the only legal protection for homeowners seeking a short sale. Under the federal Making Home Affordable program, some homeowners can seek a short sale as part of the Home Affordable Foreclosure Alternatives (HAFA) program. 

Under HAFA, lenders are already required to respond within 90 days to a valid short sale offer. HAFA also offers more protection than a conventional short sale. In a conventional short sale, the homeowner remains liable for the difference between the loan balance and the sale price. In a HAFA short sale, once the sale is completed, the now-former homeowner is completely absolved of any further liability to the lender. HAFA also provides for deeds in lieu of foreclosure. This means that a borrower who attempts a HAFA short sale may be able to convert to a deed in lieu if the sale falls through. 

Regardless of whether you attempt a conventional or HAFA-based short sale, it is always important to consult with an attorney before attempting it on your own. 

According to Reuters, your previous mortgage may not have been extinguished by your refinance loan. In a normal world, when you refinance a mortgage loan, the previous loan is paid off as part of the refinance transaction. However, given the volume of mortgages being issued during the housing boom, it is no wonder that many slipped through the cracks. 

As the housing crisis deepens, stories about banks foreclosing on homes purchased with cash and on homes with a paid-off mortgage become more common. This is simply because lenders are not set up to handle the number of mortgages in their systems. A Chapter 13 bankruptcy filing can cause a lender's computer system to glitch, resulting in misapplied payments and a headache for the borrower who is dutifuly making Chapter 13 plan payments. 

Banks will file a satisfaction of mortgage with the county recorder of deeds only to revoke the satisfaction when a computer error flags the loan file. Some lenders claim that these errors are inadvertent and try to downplay the damage that an improper foreclosure filing can do to a person's credit score and overall well-being. Being served with a summons is stressful. Facing foreclosure, even when you have done everything right, is even worse. 

If you are facing a foreclosure due to a "bank error," you should consider seeking qualified counsel to assist you. 

Anyone who has attempted to get a loan modification from their mortgage servicer has probably asked, "Why is it so hard to get a loan modification?" Trying to get a servicer to modify a loan can be a full-time job. In fact, Sulaiman Law Group, Ltd. has a full-time loss mitigation staff. 

A typical loan modification can involve submitting financial documents and then re-submitting them when the servicer claims it never received them. It is not unusual to spend hours on the phone, mostly on hold, waiting to speak to someone who likely knows very little about the loan file. Once a trial loan modification is approved, some borrowers discover that one trial becomes multiple trial modifications. More often than not, servicers inform borrowers that the investor won't approve a loan modification. 

The investor story is a lie. 

For the vast majority of American mortgages, the investor has little to no involvement with the loan modification process. In fact, most mortgage loans have been pooled into trusts. The trusts then issue bonds that are sold to investors. No individual investor owns any one particular loan. The investors merely own what is called a "beneficial interest" in the performance of all of the loans in the pool. Quite simply, when the loans are paid on time, investors see profits based on the type of bonds they have purchased. Most investors are seeking stable, long-term gains; loans that are paid on time are in their best interest. 

Why do servicers deny loan modifications and proceed to foreclosure? 

Profit. Servicers make more money when homeowners are in default on their mortgages. When a property is sold via the foreclosure process, servicers realize immediate financial gains. More often than not, what is profitable for a servicer is not in the investor's best interest. 

Why don't more loan modifications involve principal reductions?

Profit. Servicers get paid a fee for servicing a loan. That fee is based on the loan balance. A $500,000 mortgage loan is worth more to the servicer than a $350,000 mortgage loan. Don't forget that servicers make more money when a loan is in default. Lowering the principal balance on a loan hits the servicer's profit margins on multiple levels. The servicing fee is reduced and the servicer cannot collect its default servicing fees. 

Is there a way to make obtaining a loan modification easier?

Nobody can guarantee success in an environment where the system gives servicers strong incentives to deny loan modifications. However, making loss mitigation a part of a larger consumer defense strategy can provide home owners with some much-needed leverage. 

Whether the stragegy involves fighting a foreclosure lawsuit in state court, seeking protection under the U.S. Bankruptcy Code, or filing a lawsuit against a servicer or lender in federal court will depend on several factors. A good strategy will take the value of the home into account and will always seek to provide the most predictable result possible. 

The system is designed to benefit servicers, not borrowers. Borrowers need to exercise their rights in a purposeful and strategic manner. 

This post is based on information gathered from Diane E. Thompson's article in the Washingon Law Review. For Westlaw and Lexis users, the cite is: Thompson, Diane E., "Foreclosing Modifications: How Servicer Incentives Discoruage Loan Modifications," 86 WashLRev 0755 (2011).

For more in-depth analysis of the article, visit our consumer defense blog.