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OCC Findings: Illegal Foreclosures, Critical Deficiencies

posted by Alan White

At today's Senate Banking Committee hearing on Dodd-Frank implementation, Comptroller John Walsh's testimony gave a preview of some findings from the federal agencies' investigation of mortgage servicing and the robosigning scandal:

"In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole."

More specifically, federal examiners looked at 2800 foreclosure files, and found "a small number" of plainly illegal, completed foreclosure sales, that violated a bankruptcy stay, the Servicemembers Civil Relief Act, or a temporary modification agreement.  The Wall Street Journal reports that the OCC plans to impose fines; the affected homeowners are probably hoping for more remedial measures.  In the meantime, the state attorneys general investigation is proceeding.  It will be interesting to see whether in the post-Dodd/Frank era, the OCC is more willing to play nice with the state AGs. 


Alan-- Do you think there is legal precedent to reverse the completed foreclosures? I tend to think fines--especially if paid to regulators and not given to the affected homeowners--are too weak of a remedy in the case of wrongful foreclosure. But the finality of foreclosure sales is traditionally extremely strong. What kinds of violations do you think might justify voiding the foreclosure sale? (I know there is state law on this and that the grounds vary some by jurisdiction). What about making sure the foreclosure does not appear on the credit score of people who were wrongfully foreclosed on? Does that have appeal as a partial remedy?

Katie - a summary of state law on setting aside foreclosure sales, with a stab at synthesizing some principles balancing justice and finality, would be an excellent research project. In general it is easier in nonjudicial foreclosure states, as the Ibanez decision in Massachusetts illustrates. Setting aside a judicial sale raises issues of the finality of court judgments, and is trickier. A sale that violates a bankruptcy stay is obviously void in any state. As for questions of improper plaintiffs (or substitute trustees in deed of trust states) or absence of a default, the result would tend to vary more among states. Victims of wrongful foreclosure might be entitled to some compensation for relocation, and as you suggest, credit report remediation. These are all questions I imagine the state attorney generals' task force is pondering.

Professor Porter, if nothing else http://masscases.com/cases/land/2010/2010-10-427157-MEMO.html Bevilaqua v Rodriquez may answer that Q as it is the next shoe to potentially fall from MA SJC. Protecting the borrower's credit rating is absolutely one piece of the puzzle. Of course, that correction can already happen. http://www.getdshirtz.com/innoviscrl2006.html Unfortunately, it may provide too little assistance in and of itself, but, much like building a case for Mortgage Servicing Fraud, FIXING the damage inflicted by it will most likely take many, many pieces to re-build the puzzle that ultimately reflects a MSF victim made "whole".

Separately, the fact that the OCC found ANY "plainly illegal, completed foreclosure sales, that violated a bankruptcy stay, the Servicemembers Civil Relief Act, or a temporary modification agreement" should be highly disturbing - to a LOT of people.

"Despite these deficiencies, the examination of specific cases and a review of servicers’ custodial activities found that loans were seriously delinquent, and that servicers maintained documentation of ownership and had a perfected interest in the mortgage to support their legal standing to foreclose." - Comptroller Walsh p.15 graph 2

Personally, I find this statement both suspect and disturbing. As we have all seen in USA/Curry, EMC/Bear, C-Wide/BACHLS and a host of other cases, servicer loan level data simply cannot be relied upon independently. On-time payments are held until past due. Force place insurance is assessed when homeowner policies are in place. Fees are generated that simply should not be generated. All it takes is for ONE of these fees to stick one time and the entire loan history is thrown off and payments start being "suspensed".

Per history, I'm not sure that the OCC is going to be of any "assistance" in the "foreclosure crisis" solution. At least not to borrowers. They simply won the long standing turf war between them and OTS through legislatively mandated "borg-like" assimilation.

At the risk of further annoying students of George Santayana, those in power who deliberately ignore the past are condemning themselves, and more importantly, their constituents (borrowers) to repeat it.

More succinctly - fix the damned problem PROPERLY once and for all, make everyone play by the same rule book and sufficiently punish those who refuse to play by the rules both civilly and criminally as the laws of the land so apply.

Res judicata and collateral estoppel doctrines are predicated on a "full and fair hearing" -- conducted in good faith of the issues. The really tricky part is that you can only attack the original foreclosure judgment on the basis of EXTRINSIC -- as opposed to INTRINSIC -- fraud that prevented a full and fair hearing. Fraudulent testimony that goes to the essence of the issues litigated DOES NOT provide a basis for defeating res judicata. It's a tough rule of law.

However, evidence of fraud upon the court by an attorney, whether extrinsic or intrinsic, is a different story. Here in Mass., our Rule of Civil Procedure 60 covers motions to vacate on the basis of misconduct by opposing party at trial, which includes cases of fraud on the court that destroyed the opportunity for "full and fair hearing."

So if a lender produced fraudulent mortgage docs that induced a defendant to not bother showing up, resulting in a foreclosure default judgment, that could be reopened. But the final hurdle to overcome is statute of limitations to reopen, which is generally one year in Mass. But that can be tolled depending on when the borrower should have been reasonably aware of the lender's fraud.

I wonder if that "small number" of improper sales was 3? It would also be interesting to know if even one improper sale occurred because of the robosigning violations.

Wrongful foreclosure hurts those who are some of the most financially and emotionally vulnerable. Whatever the solution or remedy to these violations, that needs to be taken into account.

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