MYTH #1: Lender & Servicer Abuse Only Occurs in “Judicial Foreclosure States”

Much attention has been paid, of late, to the many stories of lender and servicer abuses in judicial foreclosure states.  To explain, a “judicial foreclosure state” is one in which the foreclosure process requires that the instrument (i.e. a mortgage or trust deed) securing the borrower’s promissory note, must be foreclosed by filing legal documents in court.  Conversely, if a homeowner wanted to defend against such a foreclosure, they too, would have to file papers in court.  When a legal process requires court action, it necessarily means that lawyers are involved, and a judge must decide the outcome.  It also means that the documents filed in court are accessible to the public.  Lastly, and perhaps most important, in judicial foreclosure states, if a homeowner resists the foreclosure, he or she has a legal right to demand that the lender or servicer produce their documentation for review – this is known as the “discovery process.”

Florida, where many of the initial reports of lender and servicer abuse first began appearing, is a “judicial foreclosure state.” Accordingly, when Florida homeowners, foreclosure defense attorneys, consumer advocates, blogs, and others, began pointing out the many outrageous practices some lenders and servicers were engaged in, it was only a matter of time before the courts would sit up and take notice – which they eventually did.

Many of these abuses are almost inconceivable by modern day American legal, business, and ethical standards.  By way of example only, these abuses include the following:

But, riddle me this…

If the banks and their servicers are committing these abuses on such a widespread basis in judicial foreclosure states, why would anyone think the very same activities are not also occurring in non-judicial foreclosure states?  It is nonsensical to believe that the industry that brought us “liar loans” which were packaged and sold to investors as AAA rated bonds, would confine its malfeasance to just one segment of the marketplace.

The sad fact is that these abuses of the legal process are actually easier to commit in non-judicial foreclosure states.   In these states, nothing must be filed in court.  Of the 50 states, almost half of them of them, including Oregon, Washington and California, foreclosures rarely sees the inside of a courtroom.  In these states, besides lender and borrower, there is a new player in the foreclosure process, the “Trustee,” whose is given two important legal powers:

(1)  If the borrower pays the promissory note off, the Trustee executes and records a “Deed of Reconveyance” which is functionally the same as a Satisfaction of Mortgage in judicial foreclosure states.

(2)  If the borrower defaults under the promissory note, the Trust Deed provides that the Trustee has “the power of sale,” i.e. to conduct the foreclosure non-judicially.

The foreclosure process in states such as Oregon, is formally commenced when the Trustee records a “Notice of Default” (or “NOD”) in the county records, sends the borrower a Notice of Sale, and periodically advertises the date, time and place of the foreclosure sale “in a newspaper of general circulation.”  After completing the recording and publication requirements, the Trustee is authorized to publicly sell the property via auction, in the same manner as a mortgage foreclosure sale.  This usually occurs at the front of the courthouse located in the county seat (e.g. Portland for Multnomah County and Bend for Deschutes County), at the scheduled date and time.

So in non-judicial foreclosure states, no judge or even borrower, gets to see the supporting documents leading up to the public sale.   In fact, whenever a defaulting borrower receives their first formal notification of foreclosure, the Notice of Sale, the identity of the latest lender behind that foreclosure is not even identified.  The only name that appears is the foreclosing Trustee – who is rarely, if ever, the same Trustee named in the borrower’s original Trust Deed.  The Trustee named in the Notice of Sale, called the “Successor Trustee,” is now charged with conducting the actual foreclosure –  and it may likely be related directly or indirectly with a bank or servicer.

[This is because lenders have realized for some time that there is profit in foreclosing people out of their homes.  And as a result, some large banks have “vertically integrated” foreclosure companies into their own business model.  So not only may a lender profit by making home loans, it may also profit in taking those homes back when the loan goes bad.  But this is not a zero-sum game.  The bank is not really getting a home back to defray the losses incurred when the loan went bad.  Why?  Because the vast majority of big bank loans that were made during the credit and housing boom, were securitized.  That is, they were packaged, pooled and sold to investors shortly after the loan was made.  Thus, those banks that securitized their loans have already been repaid via investor money.  Their foreclosure subsidiary is just the other end of the business cycle.  Sort of like hospitals investing in funeral homes.   But I digress….  PCQ]

These Successor Trustees are usually much lesser known companies, who normally maintain a low public profile outside of the lending and servicing industries – probably for the same reason executioners wear hoods.

Successor Trustees are willing enablers of the banks’ and servicers’ sharp practices.  But these practices are virtually the same as those reported in judicial foreclosure states.  There are many of the very same robo-signers and notaries signing documents for non-judicial foreclosures, as signing judicial foreclosure documents.  And they sign using the same bogus official capacities, such as “Vice-President” and “Assistant Secretary.”  Here is a sampling of the non-judicial foreclosure activity I have personally observed in Oregon:

  • Robo-signers, in their zeal to see how many documents they can falsify in a day – have accidentally identified themselves as working for the wrong bank – that is the robo-signer executes a document as an officer of ABC Bank, but the notary swears that the signer is acting as an officer for XYZ Bank;
  • The lender for whom the foreclosure is being conducted (called the “Beneficiary”), may not even currently own the loan, as it was packaged, pooled, and ostensibly sold to investors years before;
  • Even though Oregon law expressly requires that all of the assignments of the Trust Deed be recorded prior to commencement a foreclosure, the Successor Trustee records only the last one, intentionally omitting the recordation of the intervening assignments for the past two or three years (and we know that intervening assignments occured);

What is particularly distressing, is that many of these patently incorrect and inaccurate legal documents are nevertheless used by lenders, servicers, and their Successor Trustees, to effect a foreclosure on someone’s home.  One would like to believe that the severity of the consequences of the residential foreclosure process requires honesty and precision.  But that would be wishful thinking.  This process occurs without any court oversight – outside the courtroom and the watchful eyes of judges and foreclosure defense attorneys.

The only way for a homeowner to contest the legality of this bogus documentation in a non-judicial foreclosure state, is to know what to look for, know what it means, and know how to use it.  But, alas, most defaulting homeowners have other things to worry about than becoming amateur sleuths, ferreting out the legitimate documents from the fraudulent ones.  But knowledge of these lender and servicer abuses can be a powerful tool – even in non-judicial foreclosure states.

To put a sharp point on the issue:  Armed with the fraudulent documents and information being relied upon by banks, servicers and their successor trustees (often dating back to the original loan three, four or five years ago), can be a useful tool in facilitating lender “cooperation” in stalled loan modifications and short sales.  In other words, sometimes the best defense is a good offense.