Foreclosure ‘Dual Track’ Snaring Home Owners

By Leslie Berkman, The Press-Enterprise, Riverside, Calif.

Jan. 31—Four years into the nation’s foreclosure crisis, consumer advocates say hundreds, if not thousands, of borrowers are losing their homes in foreclosure while negotiating to lower their mortgage payments—or even while they are making payments on more affordable terms that they believe will become permanent.

Such unexpected foreclosures are frequently chalked up to mistakes that can occur when the arm of a bank that modifies mortgages operates independently of another arm of the same bank that pushes mortgages through the foreclosure process.

“It is an absolute nightmare,” said Ginna Green, communications manager for the Oakland office of the Center for Responsible Lending.

Consumer advocates want to do away with this so-called “dual track,” but they are meeting resistance from the mortgage industry. Such a step would add to the foreclosure backlog that is weighing down the national economy, industry opponents say.

Testifying before Congress late last year, Bank of America President Barbara Desoer said “parallel foreclosure and modification processes are required by many investors and reflect an industrywide servicing practice.”

She acknowledged that the dual track process is a source of confusion for customers that should be addressed. But she did not give any specific suggestions.

Most of the confusion arises because home owners in the midst of modification negotiations continue to receive notices as their homes move ever closer to a foreclosure sale on the courthouse steps, said Bank of America spokesman Rick Simon.

Under bank policy, Simon said, Bank of America, the nation’s largest mortgage servicer, stops short of actually letting a house go to a foreclosure trustee sale as long as modification efforts are still under way.

In rare instances, he said, a mistake is made and the foreclosure sale occurs. In those cases, he said, the bank has had the sale rescinded.

Reversing course

However, consumer attorneys contend that the mistakes are not always so easily undone. The scope of the problem is difficult to measure, they say, because often it is the home owner who discovers what has happened, and many give up trying to salvage their homes.

The National Consumer Law Center, a legal resource for consumer attorneys, found that almost all of 96 consumer lawyers it surveyed in 34 states, including California, reported having clients who had lost their homes to foreclosure while they were awaiting a loan modification.

Recent attention that was drawn to other questionable practices of banks that service delinquent mortgages also increased public awareness about the shortcomings of the dual track, said Paul Leonard, California director of the Center for Responsible Lending.

Eliminating simultaneous foreclosure and modification tracks is opposed by Fannie Mae, Freddie Mac, and other investors in mortgages who are suffering from the foreclosure crisis and want to minimize their losses.

Kurt Eggert, a professor of law at Chapman University and former member of the Federal Reserve Board consumer advisory council who testified in December before the U.S. Senate Banking Committee, said the dual track enables mortgage investors and servicers to put pressure on delinquent home owners.

“Some servicers and (mortgage) owners like Fannie and Freddie think they need a dual track to hold borrowers’ feet to the fire to force them to pay or modify the loan or get out,” Eggert said.

Amy Bonitatibus, a spokeswoman for Fannie Mae, said the company’s position is that “a borrower should never be foreclosed on until all the options are exhausted including forbearance, modification, short sales, and deeds in lieu,” in which borrowers who can’t afford their mortgage give their homes to the bank in exchange for having their obligations canceled.

But she said after a home owner misses three months of payments on a mortgage, Fannie Mae wants its bank servicers to move ahead with the foreclosure process. Then, if efforts to salvage the mortgage fail, the house can be sold at a trustee sale as quickly as possible, with the proceeds going to cover as much of the delinquent mortgage as possible.

The foreclosure process starts with the recording of a notice of default, usually after three months of missed payments, which may be followed 90 days later by a notice of trustee sale. The trustee sale is an auction where the home is sold to the highest bidder.

If nobody bids on the property, the lender repossesses it and sells it on the open market. The borrower who loses ownership of the home will receive a notice to vacate. If the borrower refuses to move, he can be evicted.

Getting homes out of the hands of those who cannot afford them and into the hands of new owners able to make mortgage payments is financially beneficial not only for Fannie Mae and taxpayers—the U.S government owns a controlling interest in Fannie Mae—but for the nation’s economic recovery, she said.

But consumer advocates contend that too often the dual track system breaks down and prevents mortgage fixes that would be less costly and more compassionate than foreclosure.

‘Doing right thing’

“The problem is that sometimes borrowers think they are doing the right thing in working with a servicer to modify the loan, they have done everything the servicer tells them, and boom, they get the rug pulled out from under their feet,” Eggert said.

Julio Martinez, 64, has filed a lawsuit for breach of contract against JP Morgan Chase. Martinez said Chase approved him for a temporary trial modification provided under the federal government’s Home Affordability Mortgage Program, or HAMP, and continued to accept his mortgage payments under that program even after the bank foreclosed on his San Bernardino home.

Martinez said he fell behind on the mortgage on his three-bedroom house when the ailing economy forced him to close his auto repair shop, and in July 2009 a notice of default was recorded on the property, beginning the foreclosure process.

In November 2009, Chase offered Martinez a trial modification that required him to make three consecutive monthly payments of $1,064 each, he said. He was able to make the trial payments with income from his new job at a wrecking yard and Social Security, he said.

Awaited application

Chase told him that he would get a formal application to participate in HAMP, but the promised documents never arrived in the mail, Martinez said.

Three days after he made his first trial modification payment, a Chase representative informed him that because of a bank error his house had been sold in foreclosure. He said Chase instructed him nonetheless to continue making his scheduled trial modification payments.

The bank said, “We made a mistake selling the house, but we will give the house back to you,” he recalled.

Not long afterward, he said, a neighbor called him at work to ask whether he was having his locks changed.

Subsequently, he learned that investors who bought his house at the foreclosure sale wanted him to move. But he said Chase told him to stay put.

Martinez contends that on further advice from a Chase representative, he made the last of three trial mortgage modification payments. From then on, he said, the Chase representative he had been dealing with did not return his calls.

Dennis Moore, a Riverside attorney representing Martinez, said a judge sided with the investors in a court action to evict Martinez but allowed Martinez to stay on as a renter until the eviction case is heard on appeal.

Moore said he has filed a separate lawsuit on his client’s behalf to reverse the foreclosure.

Chase spokesman Gary Kishner said it was against the bank’s policy to comment on Martinez’s lawsuit because it is pending litigation.

Another case

Another of Moore’s clients, Alan Carriaga, 43, said Wachovia sent him a letter in April 2009, saying that a mortgage modification proposal had been prepared for him pending verification of his income, which Carriaga contends he already had provided.

Carriaga became distraught when a month later he received notice that his Grand Terrace home would be sold in foreclosure. He said a Wachovia representative told him not to worry and that the company would fix the problem right away.

But Carriaga’s home was sold in foreclosure, and now he is a tenant of Wachovia’s successor, Wells Fargo, paying rent of $1,825 a month while he pursues a lawsuit in hope of getting the house back.

A musical instrument technician with his own business, Carriaga said he fell behind on his mortgage payments when his adjustable rate mortgage soared about the same time that he was laid up by a car accident and coping with deaths in his family. He said now he is on his feet, his business is doing better and he could afford to make a reasonable modified mortgage payment.

Moore complains that because Wachovia promised Carriaga a mortgage modification and Carriaga believed what he heard, his client missed other opportunities to save his house, such as filing bankruptcy, taking a second job or borrowing money from friends and family.

Wells Fargo denies that it gave Carriaga any indication that he would soon receive a mortgage modification and says he was informed of the scheduled foreclosure “well in advance,” said Wells Fargo spokeswoman Amy Savicky-Injaian.

Free guidance

Melinda Opperman, vice president for community outreach at Springboard, a Riverside-based nonprofit organization that provides free foreclosure counseling, said any time a homeowner receives a notice of foreclosure while negotiating a mortgage modification, he should take action.

Opperman said the home owner should quickly seek help from a government-approved agency such as Springboard, which she said has stopped unwarranted foreclosures by calling a bank’s advocacy department or going directly to the office of a bank president.

It is important to act before the house is sold at a foreclosure auction, perhaps to a third party. “We get right at it,” she said. “You can’t unring a bell that has already been rung.”

Kevin Stein, associate director of the California Reinvestment Coalition, a consumer advocacy group, said a survey last year of foreclosure counselors in the state revealed that 60 percent had seen clients notified of foreclosure while in mortgage modification negotiations.

“The potential for mistakes is great, and the consequences of the mistakes are huge,” Stein said. He said he was skeptical whether the servicers know the full extent of the mistakes that are made “when the right hand doesn’t know what the left is doing.”

Also, Stein said once a foreclosed home is sold to a third party, it is questionable whether a judge would require the buyer to return it.

“We think (the dual track) is a significant problem that warrants legislation, said Stein.

Stein said this year that the coalition plans to reintroduce legislation that would legally mandate mortgage servicers in California to halt all foreclosure actions while deciding whether a home owner is eligible for a mortgage modification. A similar proposal failed to pass the California state legislature last summer.

Opponents, who included a broad array of industry trade associations such as the California Bankers Association and California Building Industry Association, complained that, among other things, the legislation would “create a series of procedural traps” for loan servicers “that will lead to ever increasing litigation.”

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