Wednesday, July 23, 2008

Debtors Win Victories Against Mortgage Servicers

(Katie Porter @ Credit Slips) In the last few weeks, several courts have issued opinions ruling that mortgage servicers' actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I've previously posted a bit on the basics of mortgage servicing and why it's an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer's misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers' actions seriously. While I'm convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

The Jones v. Wells Fargo decision from the bankruptcy court in the Eastern District of Louisiana was a landmark opinion in describing the problems with Wells Fargo's servicing of bankruptcy debtors' mortgages. On July 1, 2008, the district court ruled on Wells Fargo's voluminous appeal. The court affirmed the bankruptcy court's factual findings and legal conclusions that actions like misapplying plan payments violates the Bankruptcy Code. The district court remanded to the bankruptcy court on the remedy, ruling that while the bankruptcy court had injunctive powers to order new accounting standards, the court should first make a finding that there was "no adequate legal remedy as an alternative to monetary punitive damages." If I were Wells Fargo (and I'm grateful that I'm not), I'd be worried that the remand is an invitation to a large sanction. Wells' decision to appeal the new accounting standards is itself noteworthy. Why not embrace correct accounting? Do servicers prefer to pay monetary damages on those rare (albeit increasingly frequent) occassions when they get caught and continue to overcharge debtors in all other instances? It appears the answer may be "yes." I'll post an update when the bankruptcy court rules on the remanded issue.

The bankruptcy court in the Eastern District of Arkansas granted a preliminary injunction against a mortgage servicer, ASC, to halt its "continuing its efforts to collect payments from [the debtors] that they did not owe." While the matter will proceed to trial for final disposition, the opinion in support of the injunction finds that ASC misapplied 14 payments, sent the debtors "inaccurante, incomprehensive mortgage statements," and refused to stop collecting. The court concluded that an injunction was required, in part, because the servicer had admitted that it "could not guarantee that it would not violate" an agreement to stop collecting, even though it had put a "stop call" on the account. This latter bit caused the judge to note that "[i]n other words, ASC's counsel explained that ASC could not be responsible for its own actions." The injunctive relief here is an important remedy for

On June 5, 2008, a New York state court dismissed with prejudice a foreclosure proceeding because Wells Fargo, and its servicing agent, Litton, could not prove that Wells Fargo owned the mortgage. The note had purportedly been assigned from Argent to Ameriquest to Wells Fargo but the court found the assignments defective. It also ruled that the servicing agreement between Wells Fargo and Litton was insufficient to give Litton authority to make the required "affidavit of facts" to support the foreclosure petition. While the original mortgage between the debtor and Argent seems to remain valid, the court ordered the other mortgages removed from the real property records. This "lack of standing" decision is very similar to the relief that two federal courts in Ohio granted to plaintiffs earlier this fall. While my research study found that 40% of bankruptcy claims were not accompanied by a note, these cases reveal the existence of an even bigger problem--the companies who are foreclosing may not have any legal right to do so. That is, it's not just that some servicers are sloppy and don't bother with the note, it's that some do not have the authority to foreclose at all!

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