Wednesday, January 30, 2013

Illegal Foreclosures by Banks in FHA Mortgage Loan Cases?

Are Lenders Improperly Foreclosing in FHA Mortgage Loan Cases?

A must read for anyone with an FHA mortgage loan who is facing foreclosure.


A court recently found that Countrywide Home Loans and Recon Trust Company violated Federal Housing Administration (FHA) regulations when it foreclosed but failed to follow FHA rules in doing so. The FHA is part of the United States Department of Housing and Urban Development (HUD). The court stopped the lenders from foreclosing due to their violation of HUD regulations, which were incorporated by reference in the deed of trust. Wells Fargo also appears to have been a party to the case and may have participated in the foreclosure.

The case is Pfeifer et al. vs. Countrywide Home Loans, et al., Ct. App., CA (2012). The opinion is 37 pages, and there was no dissent (in other words, all 3 appellate judges who heard the case agreed). The most important ruling in this case is that Countrywide cannot be allowed to proceed with its foreclosure attempt because it failed in its legal obligation to follow the FHA/HUD requirement that a face-to-face meeting with the borrowers take place (or that the lender at least make good faith efforts to set such a meeting) to discuss foreclosure alternatives before any foreclosure can even be initiated. In the law, the HUD/FHA requirement to meet with the borrowers before proceeding with a foreclosure action is called a "condition precedent".

Countrywide Home Loans, of course, was absorbed by Bank of America (BOA). 

Another important ruling in this case to be mindful of is that this California Appeals Court was consistent with the overwhelming majority of other decisions over the years in that it stated the borrowers did not have a right to monetary damages because the lender violated HUD/FHA regulations. Of course, had the foreclosure already taken place and the borrowers lost their home, that ruling may have been different. However, borrowers must understand that violation of government rules, regulations, and guidelines (as opposed to certain violations of federal codes and statute statutes/codes) typically do not allow borrowers to recover money damages or even attorneys' fees - one huge reason that it's difficult for borrowers to obtain quality legal representation. I frequently have this discussion with clients and potential clients who have been subjected to violations of the Making Home Affordable (MHA) program / Home Affordable Modification Program (HAMP) and the National Mortgage (DOJ) Settlement.

Please also understand that there is no guarantee that a court in North Carolina, for example, would reach the same conclusion, and a court in South Carolina, for example, is not bound by this California decision. However, the HUD/FHA regulations at issue here should apply in every state in the USA, and the argument made by these borrowers should at least be treated as credible one in every case in which it is relevant, regardless of the state.

This case involved  a non-judicial foreclosure, which is a short-cut procedure which allows a lender / holder of a loan note to foreclose without any formal court case, and without the approval of any court or judge. Tennessee and Georgia are other states in which residential foreclosures are generally non-judicial. In non-judicial foreclosures, the onus is typically on the borrowers to file their own court action to prevent a foreclosure; this gives foreclosing lenders a huge advantage, as most distressed homeowners are not in a position to file (and fund) such lawsuits. Thankfully, the Pfeifers in this California case were able to file their own lawsuit, seeking a halt to the foreclosure process and a dismissal of the case.

In other states, like Florida, Ohio, and South Carolina, residential foreclosures usually require a full lawsuit. This means that the lender / holder of the mortgage loan note must properly prove its right to foreclose in a court of law. As importantly, because a lawsuit must be filed and litigated in order to foreclose, the borrower already has an existing forum in which to make his/her arguments and present defenses; the borrower generally does not need to file his/her own legal action.

In North Carolina (where McGrath & Spielberger is headquartered), there is a curious "quasi-judicial" process in place for attempts at residential foreclosure. While a full lawsuit need not be filed, a hearing before the Clerk of Court must take place and the Clerk must grant approval before a foreclosure sale can take place. The Clerk of Court is granted certain powers in these instances, powers a clerk of court could not normally have. However, the issues the Clerk of Court can address are very limited, the burden of proof the lender / loan note holder faces is fairly low, and the borrower must file his/her own lawsuit in order to attempt to stop the sale and protest the Clerk of Court's decision.

Regardless of the legal process for foreclosures in your state, whether you're in Atlanta, Charleston, Charlotte, Nashville, Raleigh-Durham-Chapel Hill, or West Palm Beach, this case is potentially very meaningful.