Will Anti-Lender Rulings Spur More Foreclosure Walk-Aways?

Foreclosure ProceedingsTwo different trends that are on the upswing in the foreclosure process nationwide could prolong, or even intensify, the unabated crisis in months to come.
In one trend, more judges are ruling against lenders and even wiping away mortgage debt, or invalidating foreclosure sales, because mortgage companies fail to produce the proper paperwork. In some cases, the lenders are deemed to have wronged borrowers by other means.
In the other trend, prime borrowers finding themselves in “underwater” mortgages, or negative equity, are increasingly walking away from their properties.
Good credit or not, more borrowers are looking at potential court victories as greater impetus to walk away and join the fray of foreclosure proceedings. And they may do so now with at least a hint of hope of keeping their homes.
When the financial crisis erupted fully last year — triggered by high-risk, sub-prime lending practices — foreclosure filings by lenders were still being rubber-stamped by judges, sending borrowers into a virtual countdown to eviction.
But earlier this year, judges in California, New York, Ohio, Massachusetts and other states began to question practices of lenders, and started demanding proof that they actually own the mortgage and have the right to foreclose,  according to a report in The Wall Street  Journal this week.
Lawyers for the borrowers also picked up on the practice of lenders filing foreclosure notices without producing the proof.  And “produce the note” became a more frequently heard request from the homeowner’s table in court.
Raymond Brescia, an assistant professor at Albany Law School, has written about the legality of actions by sub-prime lenders against borrowers, and the continuing legal issues in foreclosure proceedings. “I don’t think that’s a crazy idea,” Brescia told the Wall Street Journal. “To expect plaintiffs to prove their case is what the judicial system is founded on.”
On Oct. 9 in federal bankruptcy court in the Southern District of New York, a judge ruled the lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains. Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property.
Also in October, a Massachusetts Land Court justice affirmed his own ruling from March that may shed some doubt on the ownership of thousands of foreclosed properties in that state. Justice Keith C. Long affirmed his own decision that invalidated foreclosure proceedings of two Springfield homeowners because the lenders did not hold clear titles to the properties at the time of sale.
In his reconsideration of the ruling, Long described a messy process that is at the heart of many cases nationwide. The Judge explained ownership of the mortgages changed multiple times without being properly recorded. He said the problems lenders now face are “entirely of their own making.”
“The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s,” Long said in a 27-page decision. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts Legislature.”
The Mortgage Bankers Association recently reported that fixed-rate loans to prime borrowers continued to represent the largest share of “foreclosures started and the biggest driver of the increase.”
About 33 percent of foreclosures started in the third quarter of this year were on prime fixed-rate loans. And those represented 44 percent of the quarterly increase in foreclosures.
“The foreclosure numbers for prime fixed-rate loans will get worse…,” the MBA said.

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