Foreclosure Seminar Training For Alabama Lawyers By Stan Herring
UPDATE: This article is a bit out of date but might be of interest to you as to what was happening in 2010.
My partner Stan Herring was asked to give a short overview of litigating Alabama foreclosure cases at the end of 2010. As lawyers we have to receive a certain number of hours and Stan and I have been asked on a number of occasions to train other lawyers locally and nationally on foreclosures and other consumer issues (suing debt collectors, credit reporting, defending debt buyer lawsuits, illegal calls to cell phones, etc).
I found his handout to the lawyers in the training and thought it was good and that if you are facing foreclosure issues you might enjoy seeing it.
AN OVERVIEW OF LITIGATING
FORECLOSURE CASES IN ALABAMA
By Stan Herring
In this presentation we will look at several topics. First, an overview of the foreclosure process in Alabama. Then we will turn our attention to what happens after a foreclosure. Then we will discuss the potential causes of action that a homeowner (or former homeowner) has against a mortgage company that has violated the law in the context of a foreclosure.
OVERVIEW OF ALABAMA FORECLOSURE LAW
In Alabama, as in most states, foreclosure law is based upon the documents which control the relationship between the mortgage company and the homeowner.
The “note” is the document which sets forth the amount of money that the mortgage company has loaned to the homeowner, along with the terms of repayment. The note is the debt.
The “mortgage” is the document that makes the note secured by the property. It explains that the property has been put up for security in case the note is not paid.
A simple way to think about these terms is that the “mortgage ties the debt to the dirt.”
When a homeowner is behind on her note, the mortgage company can “accelerate” the debt and call it all due.
When the acceleration happens, normally the mortgage company also sets the foreclosure sale date at least thirty days out. The sale will happen at the courthouse steps in the county in which the property is located, between the hours of 11 A.M. and 4 P.M. Alabama Code Section 35-10-14.
To properly set up the sale, the mortgage company must advertise the sale for at least three weeks in a newspaper in the same county where the property is located. Alabama Code Section 35-10-13.
At the foreclosure sale date, the auctioneer stands on the courthouse steps and “auctions” off the home to the high bidder. Normally the high bidder is the mortgage company or one of the quasi governmental companies such as Fannie Mae or Freddie Mac.
The critical distinction to keep in mind is that 99% of foreclosures in Alabama are “non-judicial” which means in all of the steps of the process above there is no judge involved. This contrasts sharply with, for example, Florida where every foreclosure goes through a civil court and a judge must rule in favor of the mortgage company for the foreclosure to happen.
So does this mean that there is never a judge involved in an Alabama foreclosure? Not exactly….
WHAT HAPPENS AFTER AN ALABAMA NON JUDICIAL FORECLOSURE?
The new owner will record a foreclosure deed in the probate court of the county where the home is located. This gives notice to the world that this new owner (again normally the mortgage company) is in fact the new owner of the property.
Normally the day after the foreclosure sale a letter will be mailed to consumer (certified and regular) from the lawyer representing the new owner informing the consumer of the sale and telling the former homeowner that she must leave (“vacate your home”) within 10 days. If she does not leave within 10 days, she can lose her “right of redemption.”
The right of redemption is basically the option, within 12 months, to buy back (“redeem”) the home for the amount paid for it, any improvements made, and other amounts including interest. Alabama Code Section 6-5-248.
At this point, the homeowner has options to consider. The options are not as attractive as what existed before the foreclosure sale as the sale itself removes many options such as bankruptcy, paying off the amount the homeowner is behind, etc.
But now, after the foreclosure, the homeowner still has a decision to make. If she leaves, will she do it in a “cash for keys” program where the mortgage company pays money for her to leave (and give up her right of redemption) and thereby avoid an ejectment lawsuit?
Or does she stay in her home and force the new owner (normally her mortgage company) to sue her in what is known as an ejectment lawsuit?
Outside of the rich uncle who can buy the house back for her, these are the main options.
If an ejectment lawsuit is filed, this means the new owner is suing her to force her out of her home, to recover damages for staying in the home, and to have a judicial order that the right of redemption no longer exists. A statutory ejectment action in Alabama is premised upon Code of Alabama Section 6-6-280(b) which states:
An action for the recovery of land or the possession thereof in the nature of an action in ejectment may be maintained without a statement of any lease or demise to the plaintiff or ouster by a casual or nominal ejector, and the complaint is sufficient if it alleges that the plaintiff was possessed of the premises or has the legal title thereto, properly designating or describing them, and that the defendant entered thereupon and unlawfully withholds and detains the same. This action must be commenced in the name of the real owner of the land or in the name of the person entitled to the possession thereof, though the plaintiff may have obtained his title thereto by a conveyance made by a grantor who was not in possession of the land at the time of the execution of the conveyance thereof. The plaintiff may recover in this action mesne profits and damages for waste or any other injury to the lands, as the plaintiff’s interests in the lands entitled him to recover, to be computed up to the time of the verdict.
Ejectment lawsuits are filed in Circuit Court and proceed as any other case. Normally they are filed as a non jury case but the Defendant/Homeowner can request a jury and can file a counterclaim. The vast majority of our cases involving alleged wrongful foreclosure are filed as counterclaims to ejectment suits.
I put a copy of a recent case we had against Well Fargo where Wells Fargo foreclosed against our clients and then sued our clients for ejectment. You will see our Answer and Counterclaim along with discovery requests that we served with our Answer and Counterclaim.
I don’t provide these documents to say that they are perfect — they are most certainly not — but to give you an idea of what I am talking about with counterclaims in an ejectment suit.
SOME POSSIBLE CAUSES OF ACTION FOR WRONGFUL FORECLOSURES
Most wrongful foreclosure cases are filed against “mortgage servicers.” Servicers are the companies that actually handle monthly payments, escrow, and take steps when there is a default including foreclosing.
The alleged true owner of the note/mortgage is often a Trust created under New York law. The Trust has to operate through a Trustee which is normally a large bank. The Trustee will not personally handle the mailing of bills, processing of payments, escrow accounts, etc. but instead will leave that to the hired servicer.
Often consumers will raise the issue that the Trust does not truly own the loan as these Trusts have stringent rules on when they can accept assets — that is the loans — or otherwise they will lose certain tax benefits. The Trust agreement will almost always prohibit this so if the Trust is trying to claim that it owns a loan that was not properly submitted to the Trust, then often the law governing the creation of the Trust will prohibit that transaction from occurring. It will be void under New York law.
This means that the foreclosure itself may not be proper as we don’t have the correct entity foreclosing but instead have someone foreclosing (servicer) who has been hired by a company that does not even own the loan (Trust/Trustee). This can be somewhat tedious to go through the documents but it does provide an opportunity to challenge the foreclosure and the ejectment lawsuit.
Another area of wrongful foreclosures involves unlawful fees. Servicers really don’t make much money except for when the homeowner is in default. Then the fees can quickly add up and these fees are extraordinarily profitable to servicers.
So what fees are we talking about? Inspection fees (when someone drives by your home to see if you are still living there). Broker price opinions. Attorney fees. Late fees. These can range from $50 to $1000 per item. There are numerous other fees but these that we have listed will give you the general concept.
What’s the problem with them? For most of these there is no authority in the loan documents for the homeowner to be charged these fees (outside of late fees). Or if there is, the amount is not set out. Think about it – the loan was supposed to last for 30 years so the loan companies don’t want to put a dollar amount on the fees and expenses. Sometimes we see charges imposed, for example, for inspections when there were no inspections. Or the fee is inflated over the actual charge of the inspection. Lawyer fees where no lawyer looked at your account.
A fascinating look at bogus fees is provided a decision out of Louisiana in which a mortgage company claimed to do inspections of a home when the whole area was shut down due to a hurricane. How did this happen? Well, the charges are imposed automatically regardless of if someone actually does anything. Remember these fees are how the servicers make their real money so the temptation is to abuse these fees and gouge the homeowner.
The opinion, In re Stewart, 391 B.R. 327 (Bkr. Court, ED LA 2008), is quoted at length to give a flavor of what is happening with fees and charges:
As previously indicated, the Fidelity MSP and BWS will apply computer logic to certain events, triggering automatic action on a loan file. Wells Fargo testified that in this case the decision paradigm allowed for property inspections if the loan was twenty (20) days past due. According to Wells Fargo, this principle controlled the loan’s management both prior to and after bankruptcy filing. Wells Fargo has produced 43 of the 44 inspection reports prepared on Debtor’s property.
. . .
Wells Fargo argues that the decision to conduct drive-by inspections every time a loan is twenty (20) days past due is reasonable. It maintains that once a debtor is past due, industry experience supports the belief that the collateral is often at risk. As such, inspections are ordered to guard against a potential loss. Wells Fargo further argues that the charges are minor and constitute a reasonable exercise of discretion to manage the risk.
Wells Fargo requests blanket authority to charge every debtor or borrower a fee for a drive-by inspection no matter what the circumstances, provided, in Wells Fargo’s view, the loan is twenty (20) days past due. While this might seem both logical and practical at first blush, in practice it is much less so.
In this case, Debtor fell one month behind in December of 2000. Despite Wells Fargo’s assertion that property inspections are always ordered when a loan is twenty (20) days past due, this does not appear to be the case. Although Debtor was one month past due in December 2000, and according to Wells Fargo remained so for the rest of 2001, property inspections were not ordered until July 2001. What risk suddenly existed in July 2001 was not explained, but it is clear that Wells Fargo does not have a policy of automatically inspecting properties once a loan is twenty (20) days past due. The six month delay in ordering an inspection calls into question Wells Fargo’s assertion that loans twenty (20) days past due constitute a risk to the note-holder justifying immediate inspection.
Once the Fidelity MSP system went into action, a drive by inspection was ordered, performed, and its cost charged to Debtor’s account. The first report revealed that the property was occupied, well maintained, and in good condition. The next month, Debtor paid her monthly installment. However, upon its receipt, the computer posted the payment to the previous month’s installment. The computer then read a delinquency for August, now twenty (20) days past due. The Fidelity MSP system dutifully recognized the triggering event and ordered yet another drive-by inspection which was performed and charged to Debtor. This chain of delayed payment continued for eight (8) months until the 2002 Bankruptcy was filed. Each month, a drive-by inspection was ordered, performed, and charged to Debtor’s account.
All eight (8) inspections indicated that the property was occupied and well maintained. Because the vendor uploads the finished report directly into Wells Fargo’s computer mainframe, the system, rather than a person, checks for the condition of the property and alerts Wells Fargo if a property appears to be at risk. The actual electronic file of the report is stored in the Property Management Department of Wells Fargo but never appears to be read by anyone.
All forty-three (43) reports describe the property as being in good condition. Further, since most were obtained while the Debtor was making regular monthly payments, the paradigm that signaled a risk to the property was imperfect if not inapplicable. In addition, the inspections were of little use to Wells Fargo because a review of the inspections reveals that many were performed on property other than Debtor’s.
For example, the inspection completed on July 5, 2001, indicates that Debtor’s house is of brick construction, while the inspections completed from August to February of 2002 describe a house of frame construction. Obviously, two different properties were inspected. However, since Wells Fargo blindly relied on a computer to both order inspections and evaluate their conclusions, it did not know that the erroneous inspections it received were of no benefit. The failure of Wells Fargo to notice such significant inconsistencies evident on the face of the reports further confirms that they were not reviewed by any human being. If Wells Fargo did not believe the reports were important enough to read, this calls into question the importance of obtaining the reports in the first place.
Assuming the inspections were properly performed, the other troubling point raised is the frequency of their performance. Forty-four (44) inspections were ordered on one property over a period of seventy-nine (79) months. Every report indicates that the property inspected was in good condition. Why was there a need to continuously reinspect? No answers were supplied. In short, the Court concludes that Wells Fargo’s computer system automatically generates these inspections for no discernable purpose or benefit to the lender.
The Court can only conclude that the necessity of performing drive-by inspections is not critical to the administration of a loan. If the first report reveals a property in fair to good condition, nothing justifies, without further evidence of a problem, monthly inspections thereafter. The fact that Wells Fargo does not appear to read the inspections it orders further substantiates this finding.
Paragraph 9 of the Mortgage provides that “[l]ender or its agent may make reasonable entries upon and inspections of the Property. Lender shall give Borrower notice at the time of or prior to an inspection specifying reasonable cause for the inspection.” Ms. Miller testified that Wells Fargo does not send borrowers notice when it performs a property inspection. The Court has already found that Wells Fargo does not notify the borrower that she has incurred a charge for this service.
Wells Fargo is entitled to recover necessary costs incurred in connection with the protection of its rights in the property. The Mortgage specifies that the disbursements shall be payable upon notice from Lender to Borrower. Even after notice, the assessment of disbursements attributable to protect the property must be reasonable. In this case, Wells Fargo’s imposition of inspection fees was neither noticed nor reasonable.
Broker’s Price Opinions/Appraisal Charges
Wells Fargo ordered nine (9) broker’s price opinions (“BPOs”), originally characterized as appraisals in Wells Fargo’s proof of claim, on this property in the same seventy-nine (79) month period. Only two BPOs were produced, although invoices delivered by Premiere Asset Services (“Premiere”) to Wells Fargo for every BPO were entered into evidence. None of these charges were noticed to Debtor at the time they were incurred.
Wells Fargo testified that when a property is placed in foreclosure, a BPO is ordered. Wells Fargo testified that this property was in a continuous foreclosure proceeding from 2002 until 2007. Multiple BPOs were required because Debtor (or her spouse) filed for bankruptcy relief multiple times. Each time a bankruptcy case was filed, the foreclosure sale was stopped. However after each case’s dismissal, the foreclosure sale was rescheduled and a new BPO was necessary.
Debtor did not contest the logic of this explanation, but a review of the account indicates that Wells Fargo ordered many more BPOs than were necessary. Over the life of the loan Wells Fargo charged Debtor:
The BPOs performed in January 2002 and March 2004 appear to have been completed while Wells Fargo was actively foreclosing on the property. The two BPOs in September of 2004 were completed while Debtor had a bankruptcy pending and an adequate protection order in place. No explanation as to the necessity of these charges was offered and the reports were not produced. In addition, the charges appear to be duplicative.
In September of 2005, two identical BPO charges appear on the account. While one charge appears to be duplicative of the other, it is also unlikely that inspections could have been performed at this time given that Jefferson Parish was under an evacuation order due to Hurricane Katrina and closed to all but emergency personnel. Again, copies of the reports were not produced.
In March of 2006, two identical BPO charges again appear. Both, along with the BPO charges in September of 2005 and the property inspections ordered post Hurricane Katrina seem to have been reversed on October 13, 2006, due to the “hurricane.” The last BPO, in March of 2007, was after the foreclosure on Debtor’s home and when the property was owned by Wells Fargo. This charge would not be attributable to Debtor. The Court finds that the only two BPOs properly ordered under Wells Fargo’s stated policies were the BPOs ordered in January 2002 and March 2004.
An additional objection to the BPOs was asserted by Debtor regarding the amounts charged by Wells Fargo. Wells Fargo’s testimony at the trial was that BPOs were secured from Premiere, an independent entity, although affiliated with Wells Fargo. Copies of the invoices representing the amounts “paid” to Premiere were produced. Wells Fargo admitted that the invoices included profit for Premiere although it did not know how much. Wells Fargo insisted that all costs are “passed through” to a borrower’s account at the amount actually billed by the third party.
Following this trial, Wells Fargo stipulated in another matter that Premiere is a division, not an affiliate, of Wells Fargo, and “invoices” produced as evidence of the costs associated with the acquisition of BPOs are internal memos between departments allocating costs of administration. While it remains true that the BPOs are performed by third party vendors, the amount paid is not what is reflected on the “invoices.” Wells Fargo’s national counsel has represented to this Court that only $50.00 of each invoice represents the actual cost incurred by Wells Fargo for a BPO. The remaining amounts, approximately $880.00 in total, were added to the actual costs by Wells Fargo. The Court concludes that these additional charges are an undisclosed fee, disguised as a third party vendor cost, and illegally imposed by Wells Fargo.
In re Stewart, 391 B.R. 327, 343-46 (italics in original, bold added).
Another related matter is the order of payments. Most loan documents require a payment to be first applied to interest and principal for whatever month the payment is owed. Only after this can fees and expenses be paid. But sometimes the servicers will instead apply the payment to the fees and expenses first (remember this is where they make their money). Then there is not enough left for the monthly payment so . . . the homeowner gets another late charge. People have been forced into considering bankruptcy or have faced foreclosure over this seemingly small detail but it can become catastrophic.
We recently looked at a case where the consumer had paid the payments but the mortgage company was holding thousands of dollars in a “suspense account” and refused to apply the payments to the principal and interest. When the homeowner complained, the mortgage company “found” the thousands of dollars and applied them. But it also took out the late fees for not making the payments on time . . . except they were made on time. Remember the fees and expenses are where the servicers make their money so expect there to be fraud and abuse in this area.
Typically when consumers catch the mortgage companies in this type of misconduct, the blame is put on the “computer system” which the mortgage servicers apparently have no control over and are helpless to prevent misapplication of payments, bogus charges, etc. The computer has taken over and the humans have left the building…..
Fraud can be an avenue of recovery. Fraud is most common on the date of the foreclosure. The classic example is the mortgage company says “We have decided to not go forward with the foreclosure on Friday. You’ll receive a loan modification application from us next week.”
The homeowner is ecstatic and does not take other steps to stop the foreclosure – after all there is no foreclosure now. The mortgage company knows when it will foreclose. It has the right to go forward with the foreclosure or to stop the foreclosure.
No one in the world knows better than the mortgage company what it has decided to do.
So it tells the homeowner there is no foreclosure on Friday and then on Monday she gets a letter from the foreclosure lawyer saying the property was foreclosed on Friday and she must get out or be sued.
This is classic fraud and we routinely bring fraud cases against mortgage companies for this type of abusive conduct.
This fact pattern will typically support a claim under the Fair Debt Collection Practices Act (FDCPA) if the mortgage servicer is a “debt collector.” A servicer is a “debt collector” if it obtained the loan after the loan was in default.
If the FDCPA applies, it has a lot of advantages to the homeowner including fee shifting and, to some extent, strict liability on violations.
Fee shifting means the mortgage company may have to pay the reasonable hourly rate of the homeowner’s lawyer. To give this context, my hourly rate is $400 an hour. In a recent FDCPA case (non foreclosure — just a simple debt collector abuse case) my fees (along with co counsel’s fees) exceeded $125,000.
This fee shifting can be a huge encouragement to mortgage servicers (who know they have violated the law) to do the right thing and settle rather than face the prospect of a verdict, paying its own lawyers, and paying the homeowner’s lawyer’s fees.
The somewhat strict liability means that often “intent” is removed from the equation. Did the servicer/debt collector violate the FDCPA or not? If so, fees and damages are imposed.
If we have false credit reporting then the FDCPA can apply to servicers who are debt collectors and the Fair Credit Reporting Act (FCRA) can also apply. The FCRA has some advantages and disadvantages compared to the FDCPA and there are some traps that can cause problems but the FCRA is something that should be considered as it supplies fee shifting and the potential for punitive damages.
Finally, remember standard breach of contract and tort claims such as negligence, wantonness, defamation, slander of title, abuse of process, etc. It is beyond the scope of this presentation to cover all of these areas in detail but when you get a handle on the facts then the causes of action will be apparent.
I hope that this short presentation has given you an overview of the foreclosure process and some of the options homeowners have when they have faced a wrongful foreclosure.
Always feel free to contact me if you have any questions.
These websites contain additional information about foreclosures, the background of how we arrived at this place in our economy, and some causes of action that are available to homeowners.
M. Stan Herring