Homeowners Beware: Mortgage Servicers Still Can’t or Won’t Shoot Straight

Yves here. Tom Cox, theoretically retired Maine attorney who broke open how mortgage servicers engaged in large-scale, systematic frauds upon courts to foreclose on homeowners, is back with the sad news that not much has changed. His account shows that servicers are still trying to foreclose when they can’t prove they have the right, refusing to make modifications, and continuing to harass homeowners even after they’ve terminally lost in court.

Tom’s punch line comes at the end of his piece: his experience shows the failure of servicers to reform means homeowners deemed to be in arrears face the odds of a soon-to-come world of hurt, even with eviction freezes and CARES Act forbearance. Wells has already messed with some of its mortgage borrowers by putting them in forbearance when they were paying on time.

And I hate to say this, but we predicted this outcome years ago. Not only had mortgage originators cut corners starting in the early 2000s refi boom, skipping steps in mandated by their own rigid contracts that were necessary to transfer mortgages to securitization trusts, but servicers had failed to make the investments in IT systems and staff training to enable them to handle modifications or even correct mundane errors. We had pointed out repeatedly that mortgages settlements needed to force servicers to correct these glaring problems. But no one was willing to do that, since the higher costs of servicing mortgages properly would lead to higher costs and fewer mortgages originated. Can’t have that , now can we?

By Thomas A. Cox, of counsel to the National Consumer Law Center

You might think that mortgage servicing industry, since the beginning of the foreclosure crisis in 2007, has learned how to conduct itself properly and honestly.  After all, it has had a lot of practice as over9.3 American’s lost their homes to foreclosure or just gave them back to banks under threats of foreclosure.  If that is what you thought, you would be wrong. Let me tell you a story, but first bear with me for a bit of background in the following paragraph.

It has been just over ten years since I took the deposition of Jeffrey Stephan of GMAC Mortgage which exposed the so-called “Robo-Signing Scandal.” That scandal led to the $25 billion National Mortgage Settlement in early 2012 with the country’s five largest mortgage servicers and which later added four additional major national servicers. As the financial industry has processed its millions of foreclosures following the 2007 financial meltdown, there have been numerous other federal and state regulatory actions and settlements with the mortgage servicers in the following years. The servicing industry has indeed evolved since the financial meltdown in 2007. For example, the FDIC reported that banks accounted for about 80% of servicing volume in 2008 while non-bank servicers had less than 20% of the volume.  By 2018, the bank share of servicing volume had declined to about 58% of the volume while the non-bank share of servicing had increased to about 42% of the volume. As the servicing industry has evolved, it gave up its robo-signing practices and developed a myriad of new ways to abuse homeowners. What follows is an example

This saga begins with a 2015 foreclosure action in the York (Maine) Superior Court—Bank of America, N.A. v. Reynolds, RE-15-88.  When that case was called for trial in November 2016, the lawyer for Bank of America (hired by mortgage servicer Carrington Mortgage Services) told Justice Wayne Douglas that, while he had a trial witness present, he had discovered that the witness was not one who was qualified to authenticate the servicers’ loan history records, and that the bank’s lawyer could not proceed to put on his case. One would think that, by 2016 the servicers and their lawyers would have known what kinds of witnesses were needed to prove their cases.

I represented Clayton Reynolds in the trial of that case.  He is an elderly, disabled man living along in a double-wide mobile home in the small Maine town of Saco. With major health issues having destroyed his livelihood and living as he did on Social Security Disability Income, I represented him pro bono through the Maine Volunteer Lawyers Project.   When the bank’s lawyer admitted to Justice Douglas that the bank had no admissible evidence to prove Bank of America’s claim that Reynolds owed over $275,000 on his mortgage, I moved for judgment in his favor as a matter of law. But, I suggested to the court that it defer entry of judgment for 30 days to give the bank and Carrington an opportunity to propose an affordable loan modification for Mr. Reynolds.  Had they offered Mr. Reynolds a realistic loan modification which reduced his loan balance to the approximate $120,000 value of his home and given him a lowered interest rate and affordable monthly payments, Mr. Reynolds would have accepted such an offer. However, neither the bank, nor Carrington, nor their lawyer  ever made any loan modification proposal to Reynolds or any other attempt to salvage the difficult spot the bank was in during the 30 days after trial, so on December 26, 2016, Justice Douglas entered judgment for Reynolds. That wiped out a $275,000 mortgage debt.

Bank of America did not appeal Justice Douglas’s decision and in March 2017, the law firm hired by Carrington paid my legal fees of $2,297.48 to forestall my filing a motion a motion for fees as allowed under Maine law where banks lose their foreclosure cases.  Under the Maine Supreme court holding in Johnson v. Samson Constr. Corp., 1997 ME 220, the judgment for Reynolds meant that any future foreclosure complaint would have been barred by the legal doctrine called res judicata. However, Carrington never stopped sending Reynolds monthly mortgage statements. In fact, even though it had lost the foreclosure trial and therefore had no right to recover its legal fees from Reynolds, in the subsequent monthly mortgage statements Carrington charged Reynolds loan account for the legal fees and costs of its failed foreclosure attempt.  Not only that, Carrington never stopped paying the real estate taxes and insurance on the Reynolds property even though Bank of America had lost, due to the incompetent trial effort of Carrington and its attorney, any right to foreclose in the future.

Because Bank of America’s loss in its 2016 foreclosure trial meant that it was barred from attempting to foreclose on Reynolds’ mortgage again, in July 2018, I filed on behalf of Reynolds a new law suit seeking a declaratory judgment against Bank of America in the York Superior Court ordering that the Reynolds note and mortgage had become unenforceable and that the mortgage owned by Bank of America was no longer a lien upon Reynolds’ property.  This declaratory judgment complaint, as it was amended, tracked closely the complaint of the plaintiff considered by the Maine Supreme Court in Pushard v. Bank of America, 2017 ME 230where the Court held that a prior foreclosure trial judgment on the merits in favor of Pushard “precluded [Bank of America] from seeking to recover on the note or enforce the mortgage” and that “the note and mortgage are unenforceable and that the Pushards hold title to their property free and clear of the Bank’s mortgage encumbrance.”

Carrington Mortgage Services, as servicer for Bank of America in the Reynolds case, hired two major law firms– Chicago based Maurice Whutscher (claiming to have 15 offices across the country), and the Verrill firm (claiming to employ over 130 lawyers) of Maine, to oppose our declaratory judgment action. These are two major national law firms with unlimited legal resources and legal talent.  They filed a motion to dismiss my suit on behalf of Mr. Reynolds to remove the unenforceable mortgage (supported by 20 pages of briefing), and they had  a lawyer from the Chicago firm to call in to the York Superior Court hearing on the motion to dismiss to tell York Superior Court Justice O’Neil that he should interpret the Maine Supreme Court’s decision in Pushard  as not allowing Reynolds to receive the same relief that Pushard got.  The motion to dismiss was denied. The bank’s lawyers then answered the declaratory judgment complaint by again denying Reynolds’ entitlement to the same relief granted in Pushard, and they counterclaimed, asserting two claims and against Reynolds for unjust enrichment—one for the amounts due on the note, and the second count for the amount of taxes and insurance paid by Carrington after the defense judgment in the foreclosure case. The parties filed cross motions for summary judgment.  On behalf of Bank of America, Verrill and Maurice Whutsher filed 67 pages of briefing, statements of material facts and affidavits—all on the very simple issue of whether the defense judgment in favor of Reynolds entitled him to the relief provided for in Pushard.

Some might argue that it is unfair for Bank of America to have lost its right to enforce Reynolds mortgage when it lost its foreclosure case in 2016. Indeed, that is exactly what Fannie Mae contended in another Maine Supreme Court case in 2017 in which Fannie Mae lost a foreclosure trial against the property of Deschaine and then tried to foreclose as second time. The Maine Supreme Court was not impressed with that argument, stating:

Fannie Mae also contends that adherence to Johnson will result in a windfall to the Deschaines—namely a “free,” or deeply discounted, house—and that this consequence is disproportionate to the bank’s procedural default in the 2011 action.

We disagree. To the contrary, abandoning our analysis in Johnsonwould result in a windfall to Fannie Maeand all other similarly situated mortgagees because those parties would become entitled to commence successive foreclosure actions indefinitely until they eventually win. In other words, mortgagees would be treated differently from all or most other litigants in other types of cases. We have held that a judgment entered for the defendant based on a procedural aspect of the case, such as the statute of limitations or some other grounds unrelated to the substance of the claim, bars another effort by the plaintiff to obtain the same relief from the same defendant… The salutary purposes supporting the doctrine of claim preclusion—to promote judicial economy, and to conserve the resources of the courts and litigants by protecting them from sequential, piecemeal litigation …are as relevant and important in foreclosure litigation as in other areas of the law. We find no persuasive justification for carving out an exception to the settled doctrine of claim preclusion that would protect mortgagees from the adverse consequences of judgments dismissing their complaints with prejudice, particularly when unsuccessful litigants in all other categories of civil litigation would continue to be barred from relitigating their claims.

Federal National Mortgage Association v. Deschaine, 2017 ME 190.

In Mr. Reynolds’ case, when the York Superior Court set up a hearing on the cross motions for summary judgment in my suit to remove the mortgage, Verrill moved to continue the hearing because Maurice Whutscher wanted a lawyer out of Chicago (who was not admitted in Maine and whose law degree was from Florida State University College of Law) to argue the motion and to explain to our Maine court how it should interpret Maine law (absurdity, plain and simple), and that lawyer was busy with other matters on the scheduled hearing day. The motion to continue was denied, and the Chicago attorney then suddenly found the time to fly to Maine for the hearing on the summary judgment motions.  He attempted to explain to Justice O’Neil  (1) why Pierce Atwood (Maine’s largest, and its own opinion and the opinion of some others, Maine best law firm), which had represented Bank of America in Pushard,  had failed in Pushard to properly argue the issues of that case, and why it was not good law (flat out wrong), (2) why Justice O’Neil was empowered to and should overrule the Law Court’s holdings in Pushard (another open and obvious absurdity), (3) why, as a result of losing in Bank of America v. Pushard, Bank of America was not barred in the Reynolds case from making the same or additional arguments (plainly wrong), and (4) why, despite explicit and recent Law Court precedent holding that unjust enrichment claims will not exist where the parties’ relationship is defined by contract and that notes and mortgages are such contracts,  Bank of America was entitled nevertheless to unjust enrichment damages (doubly wrong).

In a 14-page order on the cross motions for summary judgment, Justice O’Neil methodically demolished each of the arguments made by the Verrill and Maurice Whutscher firms. Reynolds v. Bank of America, N.A. , RE -18-55 (Me. Super. Ct., York, Mar. 17, 2020).  Justice O’Neil had no difficulty in holding that Bank of America’s loss in the 2016 foreclosure trial meant that “the note and mortgage [of Reynolds] held by Bank of America, N.A. are … unenforceable and Reynolds holds the property unencumbered by the mortgage.” Displeased with Justice O’Neil’s decision, Verrill filed a notice of appeal to the Maine Supreme Court.  Ten days before its brief was due in that Court, Verrill voluntarily dismissed the appeal on July 23, 2020.

The result here is that Bank of America, in 2016 lost any right to enforce a mortgage on which over $275,000 was due, and in 2020, after wasting a lot of money on legal fees, Bank of America saw its mortgage interest in Reynolds property wiped out and its saw its claim for unjust enrichment damages exceeding $300,000 be denied.

What is truly absurd about the attempt by Carrington on behalf of Bank of America to recover unjust enrichment damages against Mr. Reynolds is that (1) the Carrington lawyers admitted that they had lost any right to attempt to foreclose again, and (2) any award of damages that they might have hoped for would have been uncollectable. Mr. Reynolds has a $95,000 homestead exemption in his home under Maine law  His house is not worth a great deal more than that and it is his only asset.  His only income is SSDI. Yet Carrington and the Bank were looking for a judgment in excess of $300,000. It is my estimate that on their expenditures with the Verrill firm and the Maurice Whutscher firm, and on their continuing to pay taxes and insurance on the Reynolds property, they spent over $50,000 of new money, and received no return on that wasted money.

Nothing in this entire affair, from the servicer coming to trial with an unqualified witness in 2016 through its recent dismissal of the appeal in the declaratory judgment action, makes much sense unless one finds sense in the fact that two major law firms made a lot of money in legal fees in their failed efforts on behalf of their bank client.

While this is a story about one bank’s dealing with one Maine homeowner, I can tell you as one who has been working on behalf of Maine homeowners full time for over ten years now, the examples of foolish and incompetent conduct evidenced here are common and frequent.  What this sorry set of fact reveals is the following:

1. The mortgage servicer model of hiring and (not) supervising foreclosure mill law firms is working little better now than it did when the foreclosure crisis blew up 13 years ago. Paying foreclosure mill law firms a (too low for competent representation) flat fee per case while demanding high speed, and high volume foreclosure production without concern for quality of results assures the continuing kinds of botched foreclosure trials such as occurred in the Reynolds case.
2. The mortgage servicers continue to be unable to properly manage their servicing systems. In the Reynolds case, there was no possible justification for Carrington to continue to send monthly mortgage statements to Reynolds after he won at the foreclosure trial because (a) Carrington had accelerate the loan before trial meaning that the entire balance was due and that there were no longer monthly installments coming due, (b) under Maine law the loan had become unenforceable, and (c) there was no rational basis upon which Carrington to add the legal fees of its foreclosure mill which botched the foreclosure trial to Reynolds now uncollectable loan account. In addition, it was utterly absurd for Carrington to continue to pay the taxes and insurance on the Reynolds property once it lost the foreclosure trial and the loan became uncollectable.
3. The servicer model of Hiring Tall Building Law firms (“TBL” is the acronym) to try to fix foreclosure cases botched by the foreclosure mill law firms solves few problems and enriches the TBLs. If a TBL reviews a botched foreclosure case and advises the servicer that there is little chance of fixing the failure, the TBL’s work on that case will end and it will earn only a minimal fee. On the other hand, if the TBL tells the servicer that the TBL can fix the problem, then, even if a fix is not likely possible, the TBL will start earning handsome hourly rates and be incentivized to put voluminous hours into the effort.  I have seen no evidence that TBLs suffer consequences when they fail at their expensive efforts to fix the botched foreclosure cases.
4. The loan owners still seem to have no adequate system for supervising the performance of mortgage servicers. In the Reynolds case discussed above, when Carrington’s lawyer botched the foreclosure case, Bank of America should have made Carrington buy that loan back at face value, but we know from the subsequent debacle with the Verrill and Maurice Wutscher firms that Bank of America continued to own that loan as it threw good money after bad trying to solve the botched foreclosure problem.  Is that because Bank of America was not paying attention, or is it possibly because Carrington was not telling Bank of America the truth about the botched foreclosure and about TBL’s dismal chances of defeating our effort to remove the mortgage?

These examples from the Reynolds case occurred during “normal times.” I shudder to think about how bad mortgage servicing is going to get and how homeowners are going to suffer when the CARES Act and GSE freezes on new foreclosures lapse later in the year.