A federal bankruptcy judge has set a new precedent that could stop huge numbers of foreclosures nationwide. Her demand: Countrywide Home Loans — now Bank of America — must document every foreclosure claim it submits in Ohio.
The decision by Judge Marilyn Shea-Stonum, the chief judge of the U.S. bankruptcy court in northern Ohio, could easily apply in all courts and with all lenders because it gets to a core problem: Large numbers of foreclosures are based on insufficient and sometimes nonexistent paperwork. The result is that lenders are foreclosing homes where they don’t actually have a lawful claim, a process which pushes up foreclosure inventories. As the supply of distressed real estate grows, local home prices are being forced down.
Given that the loss of a home has enormous financial and psychological impact, it might seem as though great care should be used before courts allow a foreclosure to proceed. In reality, a study of 1,700 bankruptcy cases by Iowa law professor Katherine Porter found just the opposite.
“A majority of mortgage claims,” wrote Porter in the Texas Law Review, “are missing one or more of the required pieces of documentation for a bankruptcy claim. Furthermore, fees and charges on claims often are poorly identified, making it impossible to verify if such fees are legally permissible or accurate. In nearly all cases, debtors and mortgage companies disagree on the amount of outstanding mortgage debt.
“Despite these irregularities, mortgage claims in bankruptcy are contested infrequently.”
While a large number of courts are allowing foreclosures to proceed even though the lender’s paperwork is incomplete or insufficient, some judges are reviewing cases with closer scrutiny:
- Federal judge Christopher Boyko of the U.S. District Court in Ohio threw out 14 foreclosure cases at once when lenders in 2007 could not demonstrate that they actually owned the loans.
Lenders, said Boyko, “seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the Court to stop them at the gate.”
- The New York Times describes Brooklyn state Judge Arthur M. Schack as a jurist who has “taken a magnifying glass to the mortgage industry.” Judge Schack, says the Times, has dumped 46 of 102 foreclosure claims in the past two years because lenders failed to submit the right paperwork.
“If you are going to take away someone’s house, everything should be legal and correct,” Schack told the paper. “I’m a strange guy — I don’t want to put a family on the street unless it’s legitimate.” (See: A ‘Little Judge’ Who Rejects Foreclosures, Brooklyn Style, August 30, 2009)
- In Florida, the Daytona Beach News Journal reports that Circuit Judge John Doyle no longer will allow “attorneys representing banks from across the state the option to ‘appear’ by telephone” because many would not even bother to answer his calls. The paper says the new rule applies to 3,000 pending foreclosure cases scheduled with Judge Doyle. According to the paper, 80 percent of those facing foreclosure do not fight lender claims in court.
The Ohio Form
The Countrywide decision grew out of a convoluted chain of events which eventually lead to a foreclosure action against an Ohio homeowner, Marilyn R. O’Neal. When the court reviewed the case it discovered that the O’Neal loan had actually been paid off through a short sale but that payment requests to the borrower had continued.
“A reasonable investigation of Countrywide’s records would have shown that Countrywide had no factual basis for asserting a claim in Ms. O’Neal’s bankruptcy case or objecting to confirmation of her chapter 13 plan. Countrywide’s conduct was not reasonable, was reckless and is sanctionable,” said Judge Shea-Stonum.
After reviewing the O’Neal situation, the judge created a form which Countrywide, now the Bank of America, must use when seeking Ohio foreclosures.
The form itself is simple and that’s the point: It sets out in one place virtually everything that both lender and borrower need to know, such lender and servicer contact information and the date the last payment was received. It also requires the lender to list loan expenses such as costs for broker price opinions, late fees, insurance, taxes, and other costs. Not only must Countrywide list such fees, it must also include the actual invoices. Lastly, the lender must provide a complete history of loan payments since the mortgage was first originated.
Countrywide is required to supply the Ohio form not only for all future foreclosures but for all pending foreclosures. And if the information is not submitted or is incorrect, defendants will be able to seek damages.
The Broader Case
The Ohio form will help clarify what’s owed or not owed to lenders. The form will force Countrywide to justify every expense it claims while providing defense attorneys with new ammunition to stop foreclosures.
That said, the Ohio form is seriously deficient in four ways:
First, it does not apply to all lenders. If a “majority of mortgage claims” are inflated, as Professor Porter found, then surely it would make sense to protect all borrowers regardless which lender is involved. Lenders with valid claims might actually welcome such a form as it sets out a clear set of standardized requirements.
Second, the Ohio form does not ask for the location of the mortgage note or for its physical production in court. This is essential because without the note there can’t be a foreclosure.
Third, the Ohio form applies only to, well, Ohio. Why wouldn’t such a form have value in every state and in every case involving foreclosures?
Fourth, the form is used by courts and lawyers, but why not a use the very same form to summarize a loan situation when foreclosure notices are first sent out?
We have created a foreclosure system which is exceedingly good at extracting borrowers from their properties but which too frequently does not enforce homeowner protections. The essential test of the foreclosure system should not be how many cases a court can handle in a day, instead the test should be whether both lenders and homeowners get a fair shake. If it takes more time and effort to get a just result, then more time and effort should be required before any family needlessly loses their home or any lender rights are unfairly denied.
In the same way that the Boyko decision started off as an oddity and has now spread across the country, the same sequence of events is likely to happen with Judge Shea-Stonum’s form. This is important because it will set off a chain of events: Fewer foreclosures will mean smaller distressed home inventories and less inventory will reduce the pressure to lower local home prices. In the end, everyone will win.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.