Erroneous Foreclosures

At this week’s hearings on mortgage servicing and robosigning, featuring the able testimony of Credit Slips’ Adam Levitin, members of Congress asked the usual unimaginative question, “aren’t all these borrowers delinquent, so that foreclosure is inevitable?”  The answer to this question comes in two parts: 
1) No. 
2) Even homeowners who are indeed delinquent should not be foreclosed in the current housing market if any reasonable workout is possible. 

Erroneous foreclosures thus come in two flavors.  Foreclosing someone who is not actually behind, or whose default was precipitated by junk fees, unnecessary or overpriced forced-place insurance, or payment application errors (common in bankruptcy cases) is obviously wrong.  Equally wrong, however, are foreclosures of homeowners who have sufficient income to fund a modified loan that will produce significantly higher investor returns than a distressed foreclosure sale.  Contrary to the pronouncements of servicers and Treasury officials, modification and workout consideration is not happening before foreclosure starts, it runs on a parallel track with foreclosure processes.  Frequently, the foreclosure train wins the race.

There is no way to count the number of foreclosures involving homeowners who are current or have bona fide payment disputes.  It is reasonable, however, to look at servicer performance and error rates in other areas where data are available to make some inferences.

The clearest evidence of widespread errors and poor performance in mortgage servicing comes from data on HAMP and other modification programs.   The modification and robosigning issues intersect most clearly in the frequent cases (now the subject of several class actions) where borrowers making payments under temporary or permanent HAMP mods are foreclosed.   In those cases, affidavits of default are necessarily false.
 
A February 2010 HAMP Call Center report of complaints lists more than 36,000 complaints of lost documents, inability to get a servicer response to an application, inappropriate requests for modification fees, and similar problems.  An October 2010 ProPublica survey of HAMP applicants found that the average length of time homeowners had been seeking a HAMP modification was 14 months.  Treasury guidelines call for a response within 30 days.  Given those delays, it is highly likely there are affidavits of default being filed that allege default while the servicer is considering pending trial modification of mortgage terms.  In cases where payments are being made on a temporary modification agreement, there are good contracts-based arguments that there is no default.
 
We can also infer high error rates from the fact that by any reasonable measure some banks and servicers are doing far more than others, given their numbers of defaulted mortgages, to work out and modify mortgages.  In other words, some servicers are likely engaging in unnecessary foreclosures, and have NOT exhausted all alternatives before proceeding.  For example, conversion rates from temporary mods to permanent mods vary from 60% to 24% (BankofAmerica).  The percentage of 3-month trial mods more than four months old is as high as 50% (BankofAmerica).
 
 Similar disparities are reported by Treasury in the rate at which servicers offer alternative workouts to homeowners rejected or bounced out of HAMP.  If servicers were doing the triage between inevitable and preventable foreclosures properly, there would not be such huge variances from one servicer to another, even accounting for differences in the underlying loans and borrowers.

The most compelling evidence of erroneous foreclosures comes from early reports on court-based foreclosure mediation programs.  These programs vary in their success at getting homeowners to show up, but the best programs are able to turn up more than half of all foreclosure defendants at meetings or telephone conferences.    Programs in Connecticut, New York, Philadelphia, and my own state of Indiana consistently report that they are able to prevent 50% or more of foreclosures for homeowners who show up.  In other words, when servicers and their lawyers are compelled to focus on a case, and cannot foreclose without fully considering alternatives, they are able to find alternatives in as many as half of the cases that would otherwise have gone to foreclosure.  This necessarily means that in counties and states without mediation programs, or with lower response rates (which vary based on the form of mediation notice and the opt-in or opt-out design), preventable foreclosures are happening in large numbers. 

Comments

[Mike Dillon]

With all due respect, Professor, at what point do we stop labeling these foreclosures "erroneous" and start calling them Fraudulent? These entities, most often times servicers, KNOW or SHOULD know that they are back dating assignments of mortgage. They KNOW or SHOULD know that the individuals signing off on them don't actually work for the corporations for whom they claim to work. The language used in them is specific in that it only conveys the MORTGAGE and note the promissory note. And yes, there are AOMs out there that do convey both the mortgage together with any and all promissory notes and/or other securities.

I'm watching one case whereby the individual who signed the AOM as a VP of the company turned around in interrogatories and testified that they had NEVER worked for the company for whom they signed the AOM.

How many thousand or hundred thousand foreclosures does one label "erroneous" before it no longer can be described as a mistake but as pattern and practice and, thusly, fraud?

[Transor Z]

The Philly Fed issued a white paper in 2009 supporting the theme that borrowers receiving loan mods re-default within 6 months 50+% of the time. At the time, I was critical of the analysis and assumptions that went into it. Nevertheless, this meme has traction and is a strong headwind against your point #2 gaining any kind of general acceptance.

[Alan White]

Transor - you are correct that modifications done in 2007 and 2008 failed at high rates. On the other hand, OCC/OTS mortgage metrics reports show that 2009 and 2010 modifications, and especially HAMP modifications, are performing much better, and seem on track to have redefaults in the 25% to 30% range, rather than 60% we saw previously. This is mostly because more recent mods are more likely to reduce borrower payments significantly. The case for modifications is complex, but the economics tend to favor modifications more and more as the crisis prolongs.

[Adam Levitin]

If you're going to read my testimony, use the House version. I had another two days to work on it, and it is more polished and expanded. Here it is: http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf.

I would also point out that often the fraudulent affidavit is the affidavit of indebtedness, so the only evidence that the borrowers are in fact in default is the fraudulent affidavit. Surely that cannot be conclusive evidence.

[bankruptcy]

Can this all be a result of the servicers not doing their job properly and basically use the Robo service to process all these loans?

[mt]

"Equally wrong, however, are foreclosures of homeowners who have sufficient income to fund a modified loan that will produce significantly higher investor returns than a distressed foreclosure sale."

I don't think this is wrong but it's certainly not "equally" wrong compared to the prior examples - misapplied payments etc. One is a breach by the lender seeking to exercise remedies in contradiction to the contract, and one a breach by the borrower that the contract specifically says justifies the exercise of remedies. The only way they can be "equally wrong" is if you consider contract irrelevant to the question of "right" and "wrong". But the entire relationship is contractual to begin with. That makes no sense to me.

Also, independent of the foregoing, consider this example. Suppose you make $100,000 a year. Your employer comes to you and says, "I am firing you unless you take $75,000 a year". Is it "wrong" for the employee to turn that down? It's a modified payment deal and it's better than going unemployed. But who would say it's "wrong" to tell the employer no? I've just turned the payment flow around from the mortgage scenario, from little guy in the mortgage scenario and to little guy in the employment scenario. Both are modifications where the modified flow is better than no flow. But you'd have to be an extreme populist to say one is "right" and one is "wrong".

In every contractual breach setting, you can take an act utilitarianism or rule utilitarianism approach. But Anglo American contract law is strongly premised on rule utilitarianism.

[Alessandro Machi]

Let us not forget that one key question asked during the Senate hearing is HOW MANY cases of mistaken foreclosures are there.

Even though the answer is nebulous at best, THEY (congress) WANT A NUMBER, especially the republicans. I would suggest at the very least trying to come up with a percentage, even if the percentage is broken down into unfair fees and penalties leading to the foreclosure.

[Alessandro Machi]

Additionally, can any foreclosure be fair if the homeowner gets no credit back for their original down payment? Whose right is it to take the down payment, which I consider to be a "trust" that the homeowner will pay the rest off over time, when down payment loss becomes a MOTIVATION TO FORECLOSURE.

When a foreclosure happens, not only is the original down payment forfeited, but the note holder / bank gets to collect a new down payment from the next person to purchase the home.

Factor in any built up equity in the home and the desire to find any reason at all to foreclose, escalates.

http://www.swarmthebanks.com
http://www.parallelforeclosure.com

[deb]

mt - Most employment situations are at will so your example is flawed. If the employee is at will then the employer is not wrong to offer a reduced salary, and is arguably right if the alternative is to let some employees go to achieve the same compensation savings. Likewise the employee is more "right" to accept a reduced salary (particularly if reduced hours or other alternatives are proposed in compensation for the foregone salary) even if the alternative is to be retained only to have colleagues let go. If on the other hand you assume a contractual employment relationship (which is typically the case only at the executive or other highly compensated ranks), it would be a rare employee indeed who would accept reduced salary in order to save jobs elsewhere in the organization (and the rare company that would actually propose it), but I think it would be preferable for executives to occasionally forgo their inflated incomes in order to save jobs at the rank and file level.

alessandro machi - Please can you clarify your last post? The mortgage holder does not get to keep the down payment made on the purchase, that went to the seller. Do you mean that after foreclosure the mortgage owner becomes the seller and if a sale can be achieved will then get a down payment from a new purchaser?

[John Dunn]

My recent study on wrongful foreclosures are based upon the foreclosure itself at the courthouse where the property is called out by an auctioneer or at a sheriff's sale.

The Note is used instead of cash or certified funds. However, I have yet to see the Note and have been threatened to be removed. Where is the Note.

If the Note is used to purchase the property then the Note has been satisfied and there is no Satisfaction of Mortgage filed and the Note is to be returned to the Note Signer....

[Alessandro Machi]

"Contrary to the pronouncements of servicers and Treasury officials, modification and workout consideration is not happening before foreclosure starts, it runs on a parallel track with foreclosure processes. Frequently, the foreclosure train wins the race."

This is called Parallel Foreclosure. I first heard of Parallel Foreclosure over a year ago from a phoenix story by Sarah Buduson, who was quoting a Chase Bank rep.

Since, then, I have found very very infrequent mentions of "parallel foreclosure". I don't think even one other reporter has since stumbled upon the phrase Parallel Foreclosure. The term Parallel Foreclosure was also used during the Tuesday Senate hearings in written testimony by Bank of America.

Why is it important to use the phrase "Parallel Foreclosure"? Because it is the term used behind banking closed doors and most succinctly explains the huge controversy to come.

Anybody who lost their home because of parallel foreclosure may have a claim of fraud to make against the banks.

[Alessandro Machi]

deb, when a homeowner loses a home because of foreclosure, they lose any chance they may have had of selling the home and keeping the difference between the sale price of the house and what they had already paid into the house. The down payment can be a significant portion of the difference.

Even though a quarter of all houses are underwater, and another 25% have zero built up equity, that also means that approximately 45- 50% of all homes have some equity to full equity. These homes are also in danger of being lost if the homeowner took out a modest home equity line of credit, lost their job, and then is denied a reasonable increase in the home equity line of credit to tie them over between jobs.

Homeowners could literally lose their homes even if they have hundreds of thousands of dollars of built up home equity just by losing their job. This could be another secret motivation by the banks to foreclose on homeowners who have equity to lose. http://swarmthebanks.blogspot.com/2010/11/could-paid-in-full-homes-that-had-helo.html

And the unemployment version of HAMP also requires http://www.parallelforeclosure.com to occur before the unemployed homeowner can apply for that program as well.