Foreclosure practices and COA rulings spark debates, lawsuit threats

Home-mortgage lenders’ paperwork problems are touching off a series of conflicts, from courtroom challenges over proving who really owns a home to arguments about whether people who took out mortgage loans should suddenly enjoy payment-free shelter.

Even the North Carolina Court of Appeals appears conflicted, having issued two recent opinions on different sides in the banks-v.-borrowers dispute.

In early May, the Court of Appeals joined a number of state and federal courts by challenging the so-called robo-signer issues plaguing foreclosures. In In re: Foreclosure of Gilbert, the court ruled in favor of homeowners challenging a foreclosure on the basis that the servicer couldn’t prove it was the holder of the note.

(See “Foreclosure reversed because servicer can’t produce note” in May 9, 2011 issue of Lawyers Weekly.)

But later in May, the Court of Appeals revisited foreclosure issues in Dobson v. Substitute Trustee Services, Inc. (Lawyers Weekly No. 11-07-0499, 28 pp.), reversing a trial court’s summary judgment in favor of a homeowner who alleged that Wells Fargo could not prove it was the holder of her mortgage.

The Court of Appeals remanded Dobson to Duplin County Superior Court to give Wells Fargo the opportunity to prove it was the holder of the mortgage.

While Gilbert and Dobson appear in conflict, there was disagreement even among the judges on the Dobson panel. Judge Robert N. Hunter Jr. wrote a lengthy dissent, finding that Dobson had demonstrated “that Wells Fargo failed to present competent evidence sufficient to establish a genuine issue of material fact that it is the holder of Dobson’s promissory note, an essential element of [Wells’] claim.”

A petition for discretionary review in Gilbert is pending before the Supreme Court.

Shelby-based foreclosure-defense and bankruptcy attorney O. Max Gardner III called Gilbert “a landmark decision in North Carolina foreclosure law.”

He said the mortgage industry may be facing billions of dollars of potential liability for the kind of shoddy foreclosure practices outlined in Gilbert.

Tony Hartsoe, an attorney from Winston-Salem, said he thinks Gilbert opened “some type of floodgate in the sense that our appellate courts have joined Maine and Massachusetts in saying that the law is the law, and that the banks will be held to obey it.”

But Marie T. Reilly, associate dean for academic affairs and professor at Penn State’s Dickinson School of Law, said that while it is tempting to get swept up in an “us against them” mentality, lawyers and litigants should be careful about what they wish for, because, she said, “We are them.”

Reilly said that when a court is asked set aside a completed foreclosure, primarily at stake are the rights of a person who had nothing to do with the alleged bad behavior of a lender or
servicer.

“That’s why equitable remedies like voiding a foreclosure sale are always tough,” Reilly said.

The purchaser of the property at the foreclosure sale, she said, may have “bought the house and is living there, cutting the grass, registering their kids in school. What are we going to do with them?”

“It’s always hard to unscramble the egg,” Reilly said.

Reilly said if good-faith purchasers for value are not shielded from a disruption in the enjoyment of clear title by events that took place over which they had no notice or control, it could create a cloud on title to an untold number of properties.

“The result is that if I am a potential purchaser, I am not going to be interested in buying a property out of foreclosure, because I will feel like I am waiting for an anvil to fall on my head,” Reilly said.

The beauty of a claim for damages, Reilly said, is that those who allegedly caused the problems – lenders and servicers – would be punished for wrongdoing, while innocent third parties would be protected from the fallout of that wrongdoing.

Reilly worries that if people end up getting houses for free because of “bad bookkeeping [by lenders and servicers], what will happen to the availability of credit for our kids when they want to borrow money to buy a house? What incentive does that give to someone down the block to continue making his mortgage payment?”

Gardner dismissed Reilly’s fears. “No one is getting a free house,” he said. “That is nothing more or less than industrial-strength bank-produced propaganda.”

He said that most foreclosed homes are bank-owned, and all that homeowners challenging foreclosures are trying to secure through legal leverage is an affordable mortgage payment.

Although in Gilbert, the Court of Appeals focused on one major issue, the purported possession of the promissory note by the lender, Gardner said that “the opinion and the facts raise many other troubling issues about how the mortgage industry and their lawyers have conducted hundreds of thousands of foreclosures both in North Carolina and throughout the United States.”

Katherine S. Parker-Lowe, who represented Rex and Daniela Gilbert in the Gilbert case, told Lawyers Weekly in May that Jeffrey Stephan, identified in the Gilbert opinion as a “limited signing officer for GMAC Mortgage” – a sub-server of the Gilberts’ loan – admitting signing from 8,000 to 10,000 foreclosure affidavits per month.

In a deposition Stephan gave as part of a federal case involving the Gilberts, he said he checked affidavits for borrower names and certain numbers, but he did not check other details.

In the affidavit in Gilbert, Stephan alleged that he was “familiar with the books and records of [GMAC Mortgage], specifically payments made pursuant to the Note and Deed of Trust.”

Writing for the Court of Appeals, Judge Robert N. Hunter Jr. said he was troubled by Stephan’s averments.

Gardner said foreclosures that were done in a manner that was inconsistent with state law may be “subject to attack under Rule 60 of the North Carolina Rules of Civil Procedure.”

Hartsoe said he is considering suits in several counties to void foreclosures and seek damages under Chapter 75 of the North Carolina General Statutes. Actions under Chapter 75 are often premised on fraud and unfair and deceptive trade practices.

“This whole thing is just getting started,” he said, characterizing the damages potential as “huge.”

Despite her misgivings, Reilly doesn’t see the issue as black-and-white.

“Do I think a homeowner who took out a loan and can’t repay it should get a house for free because the lender lost its documents? No,” Reilly said. “But at the same time, it is not trivial that in the state of North Carolina the law dictates what lenders have to do in order to enforce a mortgage, and seeing attorneys and others disregarding that law is troubling at the very least.”

Even in a situation in which there is “no harm, no foul,” Reilly said, she would be very concerned about a breakdown in the rule of law.

Gardner said the law must be enforced as written, and that “all of those who said, ‘The hell with the law,’ must pay the price.”

He said some big banks have been called “too big to fail, but I always thought no one in America was too big for strict adherence to the rule of law.”