The following article is brought to you by Gretchen Morgenson at The New York Times.
AFTER examining their foreclosure practices for flaws in mortgage documentation and other procedures, many of the nation’s largest banks have resumed — or will soon resume — trying to evict defaulted borrowers.
Howard Rothbloom, a lawyer for borrowers, welcomes increased government scrutiny of banks’ claims of ownership.
JPMorgan Chase, for example, told investors this month that it had extensively reviewed its foreclosure controls, trained personnel in the unit and started new procedures to ensure that all legal requirements would be met when it moves to seize a property in default.
“If we find any foreclosures in error, we will fix them,” JPMorgan Chase said.
But while banks may have booted a few robo-signers and tightened up some lax procedures, one question at the heart of the foreclosure mess refuses to go away: whether institutions trying to take back a property can prove they even have the right to foreclose at all.
Some in the industry believe that questions about this issue — known as “legal standing” — are trivial. They say it’s just a gambit by borrowers’ lawyers to throw sand in the foreclosure machine. Nine times out of 10, bankers say, the right institutions are foreclosing on the right borrowers.
Maybe so. But the United States Trustee Program, the unit of the Justice Department charged with overseeing the integrity of the nation’s bankruptcy courts, is taking a different view. The unit is stepping up its scrutiny of the veracity of banks’ claims against borrowers, and its approach is evident in two cases in federal bankruptcy court in Atlanta.
In both cases, Donald F. Walton, the United States trustee for the region, has intervened, filing motions contending that the banks trying to foreclose have not shown they have the right to do so.
The matters involve borrowers operating under Chapter 13 bankruptcy plans overseen by the court in the Northern District of Georgia. In both cases, the banks have filed motions with the bankruptcy court to remove the automatic foreclosure stay that results when a court confirms a debtor’s Chapter 13 repayment plan. If the stay is removed, the banks can foreclose.
In one case, the borrower had her Chapter 13 plan confirmed by the court early last month. About two weeks later, Wells Fargo asked the court for relief from the stay so that it could foreclose.
Responding on Nov. 16, Mr. Walton asked the court to deny the bank’s request because it had failed to produce any facts showing that it was entitled to foreclose — either as the holder of the underlying note or as the agent for the holder.
The other case involves a couple who had their Chapter 13 plan confirmed by the court in March 2009. A month ago, Chase Home Finance, a unit of JPMorgan Chase, asked the court for relief from the automatic stay so that it could start foreclosure proceedings.
Again, Mr. Walton objected, asking the court to deny the request on the same grounds as argued in the Wells Fargo matter — in this case, that Chase hadn’t proved that it controlled the note on the property.
Jane Limprecht, a spokeswoman for the trustee program, confirmed that it was ratcheting up its scrutiny on banks’ foreclosure practices.
“The United States Trustee Program is engaged in an enhanced review of mortgage servicer filings in bankruptcy cases to help ensure the accuracy of the claim to repayment,” she said. She declined to comment on specific filings.
A Chase spokesman said the bank is the holder of the note in the Georgia case, giving it standing to file the motion.
A spokeswoman for Wells Fargo said that in its case, it is the trustee of a mortgage security that contains the loan, not the servicer. In its capacity as the trustee for mortgage loans serviced by others, it says it expects those servicers to abide by all required laws, processes and procedures.
Howard D. Rothbloom, a lawyer in Atlanta who represents borrowers in bankruptcy, welcomed the actions by Mr. Walton and said he believes they show a sea change in the United States trustee’s thinking on the foreclosure mess.
“Until now, what we had was homeowners complaining about a lack of due process,” Mr. Rothbloom said. “Now you have the federal government complaining about the abuse of the judicial process. That’s really what was missing before.”
The judges overseeing these matters have not yet ruled on the banks’ or the trustee’s requests. And Wells Fargo and Chase may indeed be able to persuade the trustee that their filings were proper.
But the trustee’s intervention in these matters indicates that it wants banks to show the courts that they have the right to foreclose, rather than simply telling them they do. That had been the custom, after all. Now, Mr. Walton’s motions may serve as a warning to banks that they need to be better prepared if they want to foreclose on a borrower.
“For years, the trustee would always take the creditors’ side,” Mr. Rothbloom said. “My strong opinion is the U.S. trustee’s perspective is that they exist to stop borrowers from cheating banks. Perhaps they are coming to the realization that banks can also cheat borrowers.”
FEDERAL trustees in other parts of the country have also intervened in borrower cases, but many of these actions have been related to questionable foreclosure fees or to dubious legal or documentation practices. The shift to a broader focus on the issue of standing suggests that the courts may no longer accept at face value the banks’ arguments that they have the right to foreclose or represent the institution that does.
David Shaev, a lawyer in New York who works with troubled borrowers, says the United States trustee there has also intervened in one of his cases, taking up the issue of a bank’s right to foreclose.
In his experience, Mr. Shaev said: “The attorneys who represent the banks invariably state that they will get the collateral file for us and prove that the banks had possession of the documents at the appropriate time. But then when we review the file it doesn’t show that at all.”
As many large banks renew their foreclosure efforts, Mr. Rothbloom says he hopes that the United States trustee will bring about a comprehensive change in bank practices.
“I’ve gotten resolutions for clients in individual cases, but I’m just a flea on the tail of an elephant,” he said. “Resolutions of individual cases don’t bring about systemic change.”
And systemic change is precisely what’s needed.