Maintaining Properties: Borrowers Seek Foreclosure Stops

Servicers are seeing increased cases where borrowers are trying to stall or stop foreclosures by filing “right to rescind” notices as violations of the Truth in Lending Act. Legislative Action Panelists on a mortgage litigation panel at the MBA’s National Servicing Conference in Tampa, Fla., said that debtors attorneys are claiming that the borrowers they represent were given inadequate documents at the time of closing and did not understand the loan, which judges are starting to honor. Terry Hutchens, president of the law firm of Hutchens, Senter & Britton, based in Fayetteville, N.C., said it’s worth it for servicers to work with the borrower and negotiate a settlement or loan modification with the borrower rather than take the case through expensive litigation, he said. “The atmosphere has changed. We’re not so vulnerable that we are rolling over in every case, but we have to consider doing things differently than we have in the past,” said Mr. Hutchens. Shaun Ramey, a partner with Sirote & Permutt PC in Birmingham, Ala., said servicers must decide how to handle these new cases. Cities, states and counties are putting giant roadblocks up to fight foreclosures, he said. “There are new claims and new defenses. Public nuisance lawsuits are coming up more and more because foreclosures are driving up the cost of mounting REO properties sitting around and the cost it takes to maintain them,” Mr. Ramey told conference attendees.

“In Ohio and Florida, we’re seeing more foreclosure stops. New ways of stalling foreclosures. The press, society, judges, lawyers, everyone is talking about foreclosures. There are foreclosure boot camps, websites, blogs. Debtors attorneys want to prolong the process and keep the person in the house,” said Mr. Ramey.

Federal action is being taken under the Fair Housing Act by municipalities like the city of Baltimore regarding wrongful foreclosures. It was said that claims of reverse redlining are being brought against lenders, and borrowers are bringing suitability actions. Servicers are re-underwriting these loans in order to show suitability defense and action on an individual loan basis. “If the judges feel that something isn’t right, they will stop the foreclosure,” he added.

“You must prepare for litigation — defense action and how to represent yourself. Were you acting through MERS? Or will you name yourself? Providence, Buffalo, Cleveland, the cities are getting into the business of regulating foreclosures. There will be lawsuits,” he said.

Various attorneys general are claiming that the loan wasn’t suitable for the borrower and the loan didn’t meet their needs, which is why the borrower is in foreclosure now. Often, these risky loans had 100% financing and were subprime ARMs. While there is not a statute or violation that deals with this, these claims are being brought under the Deceptive Trade Practices Act.

In Massachusetts, the highest court recently held that a lender had violated this act and ruled to stop the foreclosures. The lender had to give the attorney general 90 days notice to determine if the foreclosure is unsuitable. “Even though it didn’t violate a statute, they are saying the lender should have known. This is a serious matter. I think we’ll see this spread through the states,” Mr. Ramey said. According to Mr. Hutchens, lender attorneys are on the side of good but getting a bad rap from the courts. “We have a client, a reputable lender. The judge told me he didn’t believe anything my client said. He believes everything he sees and reads on TV. We are dealing with brainwashed judiciary.”

While working on a case in North Carolina, Mr. Hutchens said the debtor took the stand in court and said she had tried to contact her servicer 200 times by phone. “She said she got lost in the shuffle of calls and never had any contact with her servicer. The judge said to the servicer lawyer, 'What do you have to say about this?’ The lawyer said, 'The left hand doesn’t know what the right hand is doing in this business.’ So the judge ruled no foreclosure.”

Mr. Hutchens said he hopes the mortgage industry can communicate better with lawmakers to have candid conversations and address these missteps. “We are not being treated fairly. We are not given a chance.”

As the courts are consumed with the topic of foreclosure stops and anti-foreclosure legislation, lenders and asset managers are still left dealing with the tremendous amount of vacant properties across the country.

Speakers at this panel also mentioned what other panelists said earlier in the day. Lenders are more open to the idea of leasing out real estate owned assets as another tool to support the industry. The new way of thinking is that these properties can be rented out and sold as REO, especially as valuations continue to decline on a national basis. It's good for an objective third party to look at high end batches of homes, regular and aging inventory to determine which marketing strategy is best. They said staging and rental agreements are being considered more today through neighborhood outlooks.

Foreclosure moratoriums add costs to timeline management of maintaining the property. It can mean writing down loans further and pressure on property values. When the property is re-sold it helps the community and the neighborhood. Relative to where buyers are located, many do not have access to financing these days. The financing has to get kicked back on, the panelists said, and the industry needs to get back to good old-fashioned underwriting.