I’m going to offer several facts, then I’ll ask a few questions.
- Many states allow foreclosures to occur entirely outside of the court system. In these “non-judicial” foreclosure states, a “trustee” is deemed to be a “neutral” party charged with the duty to make sure that the foreclosure process is fair.
- Since 2008, U.S. banks have foreclosed on more than 10 million families. About half of these have been non-judicial foreclosures supervised by trustees.
Trustees are appointed by the banks at the time homeowners take out their home loans. These trustees are strangers to the homeowners, but highly paid repeat-player legal advocates for the banks. - Many foreclosures occur despite the fact that homeowners are disputing whether the foreclosure should occur at all. In many of these cases, the homeowner claims that he or she has made all mortgage payments timely, indicating that the bank has lost or misallocated the payments. In significant numbers of these cases, the
[1]Creative Commons homeowner has offered written proof that he or she has made every mortgage payment on time. In other cases, the bank unjustifiably added charges to the bill (such as forced-place insurance, even though the home-owner already has insurance) and the homeowner refuses to pay these bogus charges. On other occasions, the bank has mangled the accounting, giving the homeowner no confidence that the bank has any idea of what is owed or what has been paid.
- I have seen each of these situations in cases I’ve handled. Despite knowledge of each of these problems, the “neutral” trustee in each of these cases nonetheless proceeded with the foreclosure.
- On occasions too numerous to count, homeowners facing unjustified foreclosures had turned for help and advice to these supposedly “neutral” trustees, calling them up and asking questions. In many of these cases, the trustees gave the customer terrible legal advice—advice that was helpful to the banks and harmful to the homeowners. In many cases, the trustees gave the homeowners no advice at all, indicating that the customers should simply pay the banks unwarranted late fees and back interest, or else lose their homes.
- Many “trustees” are also law firms (consumer advocates refer to them as “foreclosure mills”), who in addition to falsely claiming that they are “neutral trustees,” also serve as attorneys in fact to the banks. On occasions too numerous to count, the same “neutral” trustee who decides to proceed with a foreclosure despite the existence of substantial bank errors, also serves as the bank’s attorney, appearing in court in unlawful detainer cases to kick the home-owners out of their homes.
The main question is “How can this be?”
Indeed, how is it possible that when it comes to the “American Dream,” banks are allowed to corrupt the neutrality of trustees by hiring them as the banks’ attorneys at the same time that they are supposedly serving as neutrals?
Attorney John Campbell has asked these questions, and many others, in a forthcoming law review article titled , “Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures.” [Disclaimer: I work on many cases with John Campbell at the Simon Law Firm in Saint Louis. Campbell is also a Law Professor at the University of Denver].
Campbell’s article is not merely an informative collection of facts that will disturb and dismay. It is a withering critique of the mortgage industry, seen through the lens of these trustees, who should be serving as neutral gate-keepers to make sure that only fully justified foreclosures occur. Things don’t work that way, however. Banks are often happy to foreclose on houses where foreclosures are unwarranted. Trustees are willing to simultaneously wear the two hats of “neutral” and attorneys for the bank, accepting substantial amounts of legal fees from banks while calling themselves “neutral.” Most home owners facing foreclosure don’t have the means to challenge this outrageous situation. They can’t afford attorneys to defend themselves against the banks and their not-neutral hired guns.
Campbell describes the role of the modern trustee:
In many states, trustees are deeply imbedded in every step of the foreclosure process. The trustee is a sort of chameleon who takes on multiple roles, many of which are contradictory, all while the law requires the trustee to act as a neutral. In any given transaction, it is not uncommon for the trustee to serve as a debt collector, the attorney for the bank, the party with the power to appoint a successor trustee, the successor trustee, an agent for MERS who assigns mortgage documents during the foreclosure, the attorney who opposes the homeowner if he or she seeks to stop the foreclosure, the coordinator and direct or indirect provider of title services, the attorney who represents the new buyer after foreclosure in the lawsuit to remove the homeowner, and the coordinator of “default services – the process of removing the homeowner from the home, cleaning up the home, and preparing it for sale. This is a staggering number of hats to wear, and one can probably already sense that the inherit conflicts are legion. These conflicts are at the heart of some of the most egregious foreclosure problems and are precisely what this article seeks to highlight and then cure.
What does Campbell suggest for reforming the system? A variety of approaches, including the implementation of new laws to prevent trustees from taking the banks’ side when the homeowners and the banks have legitimate disagreements. In short, there is a third alternative to taking the bank’s side or taking the side of the homeowner:
A trustee reform statute should require that if there is a dispute between the parties as to the right to foreclose, the trustee must file a document in the public record stating that the foreclosure cannot proceed non-judicially because it would require the resolution of disputes. The bank retains the right to foreclose, as a foreclosure can always be carried out judicially even in non-judicial states. The bank will be forced to consider whether its claim is valid, as will the homeowner. If the bank determines it has a legal right to foreclose, it can file in court. If the bank prevails, the statute should allow the bank to recover damages for the time the homeowner remained in the home. This will discourage frivolous claims from homeowners filed only to cause delay. This solution puts legal and factual disputes where they belong: in courts who have considerable expertise in deciding such matters.
Once one appreciates this problem of “neutral” trustees who always take the side of the bank, one also realizes that the American economic meltdown was exacerbated by these trustees, these alleged gatekeepers, who kicked many families out of their houses regardless of whether foreclosure was warranted. As Campbell argues, it’s time to make sure that trustees actually act in neutral ways to protect innocent homeowners from biased, and in many cases, corrupt, trustees.
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