What trends will shape the mortgage foreclosure landscape in 2012? As I look towards the next 12 months, I’m expecting that the most influential trend will be a recent Connecticut Supreme Court ruling that could have a significant impact on who can sue to foreclose. As the foreclosure defense attorney who represented the borrower in this case, I had a front row seat on Connecticut’s recent Supreme Court decision, and I’m expecting it to be something that will give lenders pause. Only a few months into 2012, I’m already seeing how it’s been rocking business as usual when it comes to who has the right to foreclose. Before this decision, lenders claimed that being a holder (the legal term for possessing the note) meant that they had the right to foreclose. The court’s decision confirms that only the owner of the debt has a right to foreclose. Holder status is not enough. I would expect lenders to be slow to change their procedures to account for this decision, which could very likely mean more dismissed foreclosures in 2012.
I also foresee a number of other important developments in the foreclosure arena in 2012:
Lenders will continue to have problems proving they are holders
Even though mere holder status is still beneficial for lenders, establishing that they are holders of the note will continue to be difficult for lenders. I recently had a case dismissed for a client because the party that started the foreclosure suit failed to prove that it was the holder—had possession of the note—on the date the action started.
Borrowers will be more proactive in their defense
By recognizing that only the owner of the debt can foreclose, the Supreme Court decision gives borrowers a 10-pound sledgehammer to fight a foreclosure. Before it, borrowers had only a three-pound hammer because they were effectively limited to challenging holder status. But no hammer is any good unless it’s swung. Borrowers should not expect the decision to mean that the courts are going to “swing for them” in the upcoming year. They will need to take part in the foreclosure and make sure they—and their lawyers—push institutions to prove ownership of the note. It will continue to be up to the borrowers and their legal counsel to make sure that happens in the coming 12 months.
Continued low interest rates to have limited effect
The Federal Reserve’s promise to keep their rates low in 2011 and 2012 won’t necessarily have a dramatic impact on the number of people falling behind on their mortgages. These rates do have an impact on adjustable-rate mortgages (ARMs), but it won’t be significant. A lot of the problems that would have been associated with ARMs have been ameliorated by keeping interest rates low. That’s good news, because the rates aren’t going to explode next year. But, a lot of those ARMs were fixed rates for five years or less and many of them were interest-only for the fixed period. The bulk of these loans are past the five year period, and it’s time for those borrowers to pay back principal. Even though the interest portion of the payment might decrease because of the low interest rates, the overall payment may increase because it now includes a principal payment.
Longer mediations with little impact on loan modifications
A number of state and federal programs were aimed at getting banks to work with borrowers on loan modifications. Many arrived with a lot of fanfare, but they haven’t really impacted the number of loan modifications the way they were intended. This is why President Barack Obama made it part of his recent State of the Union speech, but I don’t think even that will have much of an impact on the foreclosure scene. The fundamental problem that no one has been able to fix is that lenders don’t seem capable of processing modification requests promptly. They frequently claim that packages are incomplete and request documents or information that the borrowers have already provided. When the same information is re-submitted, they often claim that other documentation has become outdated and needs to be resubmitted. This cycle can be repeated multiple times. There was a lot talk that the banks were striving to make modifications, but there has been extreme criticism that these plans have done nothing and that few loans are getting modified. But, I do see something of a silver lining on this cloud. The foreclosure process generally does not move forward while mediation is ongoing and the mediation generally continues until the bank says “No.” Borrowers who may not ultimately qualify for a modification benefit from being able to stay in their homes.
Government Report Cards could impact the modification process
In 2011, the Federal government began monitoring loan mods and began issuing Report Cards on lenders. These Report Cards suggest areas in which the lenders need to improve. I’m going to be an optimist here and suggest that the lenders are going to take these suggestions to heart in 2012 and actually try to meet the standards they advocate. I don’t expect the government to go away on that front. I think they’ll put pressure on lenders to get their acts together. We recently had a case where the bank agreed to modify, told us what the new payment would look like and promised to send a written modification agreement. We had to send the written agreement back twice to be corrected because the numbers didn’t match what they told us. I don’t think it was intentional. It was the kind of bungling that has become part of the loan mod process. It’s not uncommon for these modifications to take over a year. I’m hoping that these Government Report Cards will show lenders just how often these kinds of things occur and encourage them to change their processes.
Courts to order lenders to send representatives with real authority to mediation sessions
The law requires borrowers to be physically present for mediation, but permits lenders to send only their lawyers. These lawyers are supposed to have the authority to agree to a resolution. In addition, there’s supposed to be a lender representative available by telephone. In practice, that almost never happens. The lenders’ lawyers often do not have authority, and rarely does the telephone representative. Without someone at the table with real decision-making ability, it’s tough to get things done. It also makes it easier for the lenders get away without making a decision or to ask for the same information repeatedly. When lenders do not have to take the time to be there in person, it’s easy for them not to take mediation seriously. Lately, borrowers have been asking the courts to direct someone with real bargaining power to attend mediation and the courts have been granting those requests. I expect that trend to increase. I am cautiously optimistic about banks changing their ways. The more they are ordered to come to mediation sessions in person, the more likely they will be to rethink how they are doing things.
Commercial borrowers to benefit from changes on the residential level
I believe that the Connecticut Supreme Court’s decision will also help commercial borrowers. Commercial loans were bought and sold on the secondary market just like residential loans. Plus, the loan documents for commercial loans can often be exotic when compared with residential loans. I would expect to see ownership of the debt issues applied to commercial loans, forcing commercial lenders to re-think their procedures and assumptions here as well. I know that I am doing just that in a number of commercial foreclosures I am defending.
In general, I expect the foreclosure environment in 2012 to look very much like 2011 with a few glimmers of hope for borrowers. The economy is still not on the upswing, as joblessness is still a significant issue. Nevertheless, I am hoping that the influence of the courts and an understanding of the need to change will bring banks to the understanding that they have to make adjustments to the ways they deal with mortgage holders.
Christopher G. Brown of Begos Horgan & Brown has represented defendants in a number ground-breaking foreclosure cases. His practice concentrates on foreclosure defense and debtor-creditor law. He has been litigating financial cases for 19 years, representing borrowers in residential and business foreclosures and parties on either side of a debtor-creditor or other financial dispute. He may be reached by phone at (203) 226-9990 or e-mail
[email protected].
