PERSON OF THE WEEK: In the wake of historically high distressed-loan volumes and a string of black eyes for the servicing industry, overwhelmed courts, procedural defenses to foreclosure and lengthy process delays have all become part of the business of being a mortgage servicer. But need they be?
This week, MortgageOrb picked the brain of David Dunn to get his views on servicing hot topics such as backlogged courts, regulatory foreclosure reviews and judicial standing. Dunn, a partner in Hogan Lovells' New York office, represents banks and other financial institutions in a variety of litigation matters, including contested foreclosure actions.
Q: The federal consent orders issued in April require reviews of loan files belonging to borrowers who believe they were the victims of an improper foreclosure. How significant a population do victims of wrongful foreclosures represent?
David Dunn: I believe that the number of borrowers who have been the victims of wrongful foreclosures will be very small. The issues that have been raised in reviews by federal regulators and others have led to a number of changes in foreclosure processing by banks, by attorneys and by courts. But there has been no indication, that I am aware of, of any significant number of borrowers being subjected to foreclosure who were not in default on their loans, and, in most cases, seriously in default.
There have been issues occasionally concerning the amounts overdue, but not the fact of a significant default, which is the core basis for foreclosure actions. There also has not been any evidence developed that borrowers subject to foreclosure actions are not fully aware of their defaults, and being given notice and opportunity to cure delinquency, if they are able to do so.Â
Q: Considering the numerous allegations of abuse pointed at servicers – ranging from robo-signed affidavits to violations of the Servicemembers Civil Relief Act – where should regulators be focusing their attention?
Dunn: We now have a massive number of defaulted loans in foreclosure, which is overwhelming servicers and clogging courts. In all – or virtually all – such cases, the borrowers are, in fact, in default and, in many cases, have been in default for a very long time.
Defaulting borrowers often cease paying taxes, carrying insurance on their properties, maintaining the properties, or even occupying them. This harms taxpayers generally, and decreases the value of the property in foreclosure, as well as the properties surrounding it. Because of this, it is important that regulators balance the need for procedural safeguards with the need for an efficient and effective foreclosure process. This is not to say that submitting information in sworn form that hasn't been verified, or failing to recognize obligations to borrowers on active service, aren't serious issues that need to be addressed.
But regulators have a difficult balancing act to perform. They need to develop rules that facilitate the fair and efficient processing of foreclosures in the very large number of cases where it is warranted. The delays that are occurring are taxing the resources of servicers, courts and local municipalities, and are imposing significantly increased costs on systems already under serious stress from other forces.
It may well be that until this huge bottleneck of foreclosures is moved through the court system, the housing market cannot fully and effectively recover. So regulators should be focused on implementing streamlined, effective and fair foreclosure processes to facilitate a full recovery of the housing market.
Q: Anecdotal evidence suggests borrowers are increasingly leveraging procedural defenses to foreclosure. What is the impact of contested foreclosures on the court system?
Dunn: As just noted, the impact is to cause substantial delays in processing foreclosures – particularly in judicial foreclosure states. Court systems – already under stress from state budget pressure – are severely stressed. Obviously, the costs of legal fees – and increased demand on servicers' internal resources – to defend contested foreclosures are serious. But the most significant factor is very significant delay.
That delay is not only affecting foreclosure dockets, but clogging court dockets generally and slowing the judicial process. Many state courts are already under enormous pressure because of budget cuts. The effect has been to create enormous backlogs that will take years to work through. In vigorously contested cases, in New York, where I practice, it is not uncommon to see cases taking three, four or more years to wind through the system.
Q: The issue of ‘standing’ has become a major sticking point in the servicing industry, and the recent Bevilacqua v. Rodriguez decision from the Massachusetts Supreme Judicial Court underscores the point that foreclosing entities must have the authority to initiate foreclosure proceedings. Do you believe disputes around standing are doing more harm than good? Who's actually harmed by sloppy loan transfers?
Dunn: First, Massachusetts is a nonjudicial foreclosure state. Second, Bevilacqua deals with the rights of the subsequent purchaser from a foreclosure in a nonjudicial state where the foreclosing party apparently lacked standing. In New York that I know of, and in other judicial foreclosure states, standing defenses are generally held to be waived if not asserted in the foreclosure proceeding. The deed awarded as a result of a judicial foreclosure should, therefore, be valid as against a subsequent collateral standing attack.Â
More generally, standing issues are, to at least some extent, the ultimate triumph of form over substance. Clearly, the investors in the trusts – and other investment vehicles that are supposed to be the transferees – are the most immediately and significantly the injured parties.
But, this is a good example of issues that are clogging the judicial system and causing delays and expense, without the injury, the end or the benefit being clearly defined. I am not aware of any cases in which borrowers have claimed any real injury from sloppy loan transfers. We have not seen or heard of borrowers receiving competing demands for loan payments, or being subject to foreclosure by competing claimants to the mortgage.
In practical terms, borrowers are seeking to seize upon sloppy record keeping in loan transfers to forestall otherwise valid foreclosures. As a technical matter, the foreclosing entity needs to have standing – it needs to prove its ownership of the loan, if challenged.Â
But if the claimed transferor does not dispute the transferee's ownership – and if the foreclosing lender has possession of the note, which is the absolute evidence of the debt on which foreclosure is based – that should be sufficient. It is also noteworthy that under the Uniform Commercial Code, bona fide holder status of the debt is sufficient to provide a basis for foreclosure on the mortgage securing the debt.