For homeowners who have dealt with the loss of a home due to a mortgage company's fraud, misconduct, or illegal activities, it is little surprise that banks most often win their foreclosure lawsuits against the clients they target. Nearly all of the laws are designed to give some token disclosure notices but, more importantly, make sure that homeowners are kept as much in the dark as possible about what is actually happening to them in the mortgage process.
There have been a surprising number of cases coming out in the news lately, however, that illustrates just how corrupt the mortgage industry had become in the decades-long run-up to the boom and the orgy of bad loans during the subprime fiasco. Mortgage servicing fraud, banks taking advantage of bankruptcy laws, the impossibility of banks to prove they own the mortgage to have standing to sue for foreclosure, and now violations of the Truth in Lending Act may eventually give homeowners some new opportunities to hold their lenders accountable.
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Mortgage servicing fraud occurs when a servicing company is hired by the financial institution which holds a mortgage to collect payments from the homeowners and take care of the administration of the loan. Because the financial companies are more interested in getting as much as they can out of homeowners, and the fact that simply collecting interest does not provide a huge return, servicers routinely turn to fraudulent methods of jacking up loan fees and pushing homes into foreclosure for the purpose of resale at a higher price.
Homeowners who have gone through this type of predatory collecting report the forced insurance, escrow account balance discrepancies, obscene legal and late fees, and other charges that can add tens of thousands of dollars to their mortgage balance. Although they may initially believe it to be some sort of dreadful mistake on the part of the lenders, many quickly realize that their efforts to stop foreclosure are thwarted at every turn by the bank's lawyers. Numerous class action lawsuits have resulted in some servicing companies being forced to pay their victims, but this often comes at a much later date than the initial foreclosure and the companies are given a slap on the wrist and allowed to continue perpetuating fraud on clients.
This kind of fraud and obscene profit taking by mortgage companies is also apparent in the bankruptcy process. The bankruptcy reform laws were designed to prevent borrowers from taking advantage of the process to avoid their loan obligations. However, this was never a problem so much as the huge fees, interest charges, late charges, and so on that banks charge to homeowners (and other borrowers) once they fall behind on their payments.
Bankruptcy courts have recognized this, although there is little that they can do about first mortgages right now in terms of lowering the total balance owned. There has been some talk of allowing bankruptcy court judges to reduce the total to be more in line with the actual value of a given property, but this proposal has so far gone nowhere in Congress. Banks and their constituents, the politicians, have argued against giving this kind of power to people to wield in their most desperate financial hour against banks.
One of the more surprising defenses that homeowners have used recently to fight a foreclosure lawsuit is demanding that the bank prove to the courts that it has the original mortgage contract and has standing to sue for foreclosure. With the Enronization of the mortgage industry, this can be a difficult requirement to meet for the banks, which often only hold various rights to a portion of the mortgage. The loans were sliced up and sold off to investors in packages, meaning that no one in particular was ever assigned ownership of a particular mortgage. For some courts, this has indicated that the company coming in to sue for foreclosure has no right to do so, since no one can sue for default of a contract they do not own.
Finally, a relatively new type of lawsuit by homeowners against banks has been to point out blatant disregard of the Truth in Lending Act (TIL) and that the bank failed to provide disclosures required by law. A class action suit that is being allowed to proceed against a lender is seeking that mortgages found to be in violation of the act be rescinded, or canceled altogether. Clear violations of the TIL have never been taken lightly, but the possibility of lenders having to release their loans because of this fraud should cause significant worry in the boardrooms of many of the largest mortgage companies.
If the plaintiffs receive a victory in this case, it could be a significant victory for homeowners facing foreclosure, many of whom were not given required disclosures or did not fully understand how their mortgage worked. With so many admissions by financial professionals that no one working for the banks knew exactly how the loans worked, it may be somewhat easy for homeowners to make this case even if they did sign the disclosures. After all, if not even the bank's high-priced lawyers can explain how the mortgage works, then how could the homeowners themselves really understand them?
State attorneys general have also gotten in on the new game of suing lenders long after the fraud has been perpetrated on the constituents of the states. Countrywide Financial Corp., one of the largest mortgage lenders in the country and one hardest hit by the subprime fallout, has been sued by three states so far for such practices as misleading customers, making risky loans, discriminatory lending, and deception. The states are attempting to have the lender pay for its violations and unfair business practices and provide restitution to homeowners, although this may be a bit too late for homeowners who have already lost their homes.
Although it may seem like small consolation to homeowners trying to find some way to hold onto their homes, any new legal methods to fight back against the bank should be welcome tools. There is still no guarantee that corrupt judges will not just let banks railroad homeowners attempting to defend themselves, and the banks will fight back against these tactics vigorously. However, the growing trend of using the bank's own profit-maximization-risk-elimination schemes against them may point to more power of homeowners and local and state governments to make sure that banks can not come pump and dump the wealth of a community, taking massive profits and leaving massive poverty in their wakes.
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