In Defense of Free Houses
In Defense of Free Houses
By John P. Fazzio, Esq.
March 29, 2016
In Defense of Free Houses
A group of Yale Law School students participating in the Yale Mortgage Foreclosure Litigation Clinic recently published a student Comment challenging the commonly held judicial maxim that, “No one gets a free house.”[i]
The authors state that the judicial “aversion” for awarding “free houses,” seems to arise from a “reflexive belief that such an outcome would be unjust.” A case in point is Singleton v. Greyman Assocs., 882 So. 2d 1004, 1007-09 (Fla. 2004), in which the Court opined that a bar to future foreclosures would leave the homeowner with “no incentive to make future timely payments on the note.”
I challenge this premise. Is it really true that victorious foreclosure defendants who have defeated a bank’s foreclosure case will live out the remainder of their days mortgage-free, ignoring the bank’s lien and thumbing their nose at Wall Street? Or is it more likely they will negotiate to either modify their loan or buy out the bank’s note, with fair adjustments to the principal balance appropriate to the circumstances? And why is it that the judiciary accepts it as equitable that private interests are now buying up delinquent mortgages at steep discounts (in recognition of lower housing prices and declining market interest rates), but finds it inequitable for the mortgagors who took out those loans to receive any discount off the original face value of their notes for the same reasons?
Having won many such victories on behalf of my clients, I have yet to see any homeowner who had even the slightest interest in becoming a perpetual squatter. Though my sample size is too small to make the case scientifically, I believe it is representative of homeowners’ attitudes in general. More often than not, homeowners in foreclosure do not object to paying a fair mortgage, but they view the mortgages they received leading up to the financial crisis and the inflated fees and interest tacked on to those mortgages over the course of the Great Recession as unfair.
They ask questions like, “Should I pay back an $800,000 loan with 8% interest, plus fees, even though the home is only worth $450,000 now, and even when I lost my job because of the subprime crisis brought on by the banks and their misdeeds? Should I have to pay the LSVI Pass Through Certificate Trust people all this money when they bought my loan for 20 cents on the dollar? I lost everything, and I didn’t receive a bailout, and they want to be paid in full? What more do they want, a pound of flesh?”
Homeowners facing foreclosure view the dilatory tactics of profit-seeking vulture lenders as the most reprehensible consumer abuse scheme yet devised. These private equity concerns have an inherently predatory business model. They swoop in, buying up pools of delinquent mortgages for a fraction of the loan values, foreclose and evict, and then re-sell the homes to the highest bidder for a substantial Return on Investment (ROI) which frequently exceeds 100%. Talk about a windfall! Homeowners fail to see how asking for a reduction in their principal is tantamount to receiving a “free home” or to being awarded a “windfall” while practices such as these are ratified by the courts and allowed to continue unchecked. Homeowners facing foreclosure are appalled that the current system does not force all lenders to provide fair opportunities to keep homeowners in their homes. They look on in disbelief that the same judges who refuse to enforce checks and balances against lender abuses (i.e., predatory lending, robo-signing, modification fraud, reverse red-lining, and servicer fraud) are all too willing to let lenders profit from their misfortune.
The foreclosure defendant brings his case to Court not to get a “free house,” but to get a “fair house.” Private lenders often categorically refuse to offer loss mitigation relief citing to absurd rationales like “investor restrictions.” No, the real and obvious reason for their behavior is that it is more profitable to foreclose and evict. Faced with a Hobson’s Choice between being kicked out on the street or offering up a pound of their own flesh, for all too many homeowners, the only choice is to fight back, regardless of the long odds.
In Defense of Free Houses (hereinafter “Free Houses”) asks the question: “What happens when a bank brings a foreclosure suit and loses?”
What happens when a bank brings a foreclosure suit and loses? What should happen?
In most states, when a bank brings a foreclosure suit and loses, the bank can re-file literally the next day, and take successive bites at the apple ad infinitum. Nowhere else in the law are the concepts of res judicata, collateral estoppel, and issue preclusion so disregarded and abused as in foreclosure litigation.
According to Free Houses, courts should issue final judgments in favor of homeowners in cases where banks fail to prove the elements required for foreclosure. They argue further that these judgments should have res judicata effect, giving homeowners “free houses.” They argue that this approach will provide market-correcting incentives, will cut down on repetitive and successive foreclosure proceedings which clog the courts, and will promote greater responsibility by foreclosing lenders.
Free Houses states that, “Securitization gave rise to widespread errors in the documentation of mortgage ownership.” As loans were “securitized” into pools, owned by disparate investors, a new market participant – the Loan Servicer – emerged to act as an agent to receive payments on behalf of the pool and to take enforcement action against homeowners upon default, including handling foreclosure litigation and eviction actions. These “securities” were fungible and tradeable, as were the lucrative Servicing Contracts which were predominantly handled by other large commercial banks and their subsidiaries, such that both the Lender and Servicer on a given loan might change multiple times, in a haphazard game of musical chairs.
This new structure disincentivized servicers and their attorneys from devoting adequate resources to loss mitigation and foreclosure. Typical annual servicing revenues on a given loan might be between $500 and $1,500 annually. Whereas, a foreclosure might cost $2,500 or more if contested. Thus, servicers could justify putting off foreclosure efforts for years, while at the same time allowing loss mitigation efforts to languish in a Sisyphean circle of never-ending “review hell.” Judge Doyne described what “review hell” looks like in Wells Fargo Bank, N.A., v. Schultz, 2013 N.J. Super. Unpub. LEXIS 406 (February 22, 2013), in which he described a scenario all too familiar to many homeowners facing foreclosure. Judge Doyne wrote:
“Incredibly, after almost a year of submitting documents and generally “getting the run-around” from plaintiff, [Ms. Schultz] finally was informed she had submitted all the necessary documents, only to be informed that the loan modifications she applied for was ‘not available at this time.’ Again, while [Ms. Schultz] may not have a legal right to the HAMP modification, she does have the equitable right to be treated with fairness. Plaintiff has apparently failed in this regard, and accordingly is not entitled at this time to strike [Ms. Schultz’s] answer as to non-loan origination claims.”
The paralegals in my office have to handle frustrating scenarios like this on a daily basis, but they have advanced training, whereas most homeowners are ill-prepared to deal with these misleading and abusive practices on their own. Free Houses notes that when foreclosures were finally commenced, foreclosure mill law firms undertook a “factory-line approach to litigation rife with abuses.”
Unlike any other litigation, foreclosure plaintiffs who barrel forward in slipshod fashion with flawed or no original paperwork, convoluted and confused chains of title ownership, and missing documents are not punished for abusing the judicial process with dismissals “with prejudice.” Instead they are rewarded. Dismissals are “without prejudice.” Servicers get to keep getting more fees. Plaintiff’s foreclosure mills get to file another foreclosure lawsuit and make more money. The bank gets to widdle away any remaining equity the homeowner may still have in the property.
And what of the successful foreclosure defendant? Does their negotiating leverage improve? Is their loan reformed? Are setoffs and credits calculated? No. But, this successful foreclosure defendant may have to defend himself multiple times, bearing the burden of the legal cost of going up against a large lending institution multiple times and being forced to advance the same proofs multiple times.
The authors of Free Houses argue that all of this is against public policy. Bending the rules of res judicata to avoid a windfall for homeowners only subsidizes banks’ counter-productive practices, encourages consumer fraud and leads to deadweight losses ultimately borne by taxpayers. The authors point out that foreclosures are like devastating tsunamis that roil families and communities in their wake. Foreclosures depress home values and tax revenues. Foreclosures have statistically significant correlations with “depression, anxiety, suicide, cardiovascular disease and emergency-care treatment.” I personally have had several clients who have made suicide attempts or threatened suicide due to a foreclosure. I have seen divorces and failed businesses. Medical events brought on by anxiety and stress are all too commonplace. Negative credit flowing from foreclosure significantly impact the lifetime buying power of a homeowner and the ability to undertake significant purchases such as buying another house, taking out a business loan, or funding their child’s education.
Given all of this, public policy strongly favors keeping homeowners in their homes. And if it even remains legal for vulture lenders to purchase defaulted loans for less than Fair Market Value (FMV) – a practice of dubious legality which is devoid of any social utility – the homeowner should, at a minimum, be given a First Right of Refusal (FROR) to purchase their own loan from the bank on the same terms.
From a practitioner’s perspective, I think that Ms. Megan Wachspress, Messrs. Jessie Agatstein and Christian Mott of Yale Law School have made a valuable contribution with their article. They no doubt have bright futures ahead of them. Until reading this article, I was unaware that Yale had a Mortgage Foreclosure Litigation Clinic -- https://www.law.yale.edu/studying-law-yale/clinical-and-experiential-learning/our-clinics/mortgage-foreclosure-litigation-clinic. The very existence of an organization like this at one of the world’s leading educational institutions speaks to the severity of the foreclosure epidemic facing our nation and the need for reform.
[i] See Washington v. Specialized Loan Servicing, LLC (In re Washington), 2014 Bankr. LEXIS 4649 (Nov. 5, 2014), reversed on appeal, In re Washington, 2:14-cv-8063-SDW, 2015 U.S. Dist. LEXIS 105794 (N.J. Dist. Ct. Aug. 11, 2015)(slip op.)