Wells Fargo Bank can charge New Jersey homeowners full back interest on mortgages in foreclosure cases that were delayed by a judicial review of abuses in the process, a Superior Court judge has ruled.
The decision by chancery Judge Margaret Mary McVeigh boosts the debt owed on thousands of properties at a time when major banks ostensibly are offering loan modifications to homeowners in arrears.
Now, the debt starting point for modifications will be higher for thousands of borrowers, which may increase the likelihood of foreclosure. They will be hit with back interest accrued at rates as high as 13 percent, set before the cost of borrowing plunged along with the economy.
Wells Fargo, represented by Mark Melodia and Diane Bettino of Reed Smith in Princeton, tacitly acknowledged that most of the affected homeowners will lose their properties. They told the court that the bank would not pursue borrowers for deficiency payments after sheriff’s sales, “so borrowers will never likely realize the burden of accrued interest.”
“If that’s the case, why then pursue a judgment that sets the amounts as high as possible?” said Margaret Jurow of Legal Services, who presented an amicus brief on behalf of borrowers.
In one sense, the judge’s ruling was unsurprising. With some amendments, McVeigh previously approved corrected notices of intent to foreclose submitted by Wells Fargo. In confining herself to that issue, she also rejected requests by borrowers to order Wells Fargo to negotiate mortgage modifications. The rulings cover 3,300 homeowners who have not previously contested foreclosures of their properties.
In the 3½-page letter opinion, sent to the attorneys for Wells Fargo and Legal Services, McVeigh systematically rejected most arguments made by the bank. Only at the very end did the judge endorse without elaboration the bank’s position that under contractual law she was “bound” to apply the mortgage interest rates.
Earlier in the letter, McVeigh cited a precedent giving courts discretion to set interest “based on equitable principles and considerations.”
The judge pointedly rejected the bank’s arguments that it has not been responsible for foreclosure delays, while homeowners benefitted by staying in their homes. But the case involved homeowners who received faulty notices of intent to foreclose, so “it is clear the delay was not caused by the borrower,” McVeigh wrote.
The judge noted that state Chief Justice Stuart Rabner in 2010 ordered the review in response to such widespread deficiencies. As a result, major lenders dramatically slowed their foreclosure filings in 2011. State officials have estimated there is a foreclosure backlog of 60,000 cases or more.
Wells Fargo “fails to address that its service of deficient NOIs [notices of intent] in the first place on borrowers is what caused necessary action taken by the Court,” McVeigh wrote. The bank also could have chosen to dismiss the faulty cases rather than petition to be allowed to submit corrected notices, she said.
The problem has been widespread in foreclosures around the country since the deregulation of financial markets at the turn of the century and an explosion of sales of mortgage-backed securities.
Slice and Dice
Brokers sliced and diced mortgages, repackaging them into often risky investment instruments nevertheless certified as safe by rating agencies. Lenders filed many of these transactions through their private Mortgage Electronic Registration System rather than at county courthouses, making it even harder to trace title.
In New Jersey and elsewhere, many foreclosure incorrectly identified titleholders, instead naming mortgage servicers or even former titleholders. This has complicated the task of borrowers seeking modifications or other solutions, such as “short sales” for less than the outstanding value of loans.
The confusion has come back to bite the lenders in cases where borrowers challenged foreclosure documents. For example, in February 2011, an appellate court rejected Wells Fargo’s attempt to foreclose on a Bergen County home, ruling the bank lacked sufficient documentation to show it held the title.
Since most foreclosure cases are uncontested, though, more borrowers suffered. A review for the San Francisco assessor’s office found irregularities in 98 percent of foreclosure cases, including some in which lenders who did not hold title were able to seize properties.
Such abuses triggered the New Jersey review of the practices of six national lenders, and two dozen more very active in the state. Last February, though, the state Supreme Court ruled in U.S. Bank v. Guillaume that judges could allow banks to submit corrected foreclosure notices, rather than simply bar the cases or force them to start anew.
A Wells Fargo spokesman was happy but terse about the latest ruling.
“The process that the New Jersey Supreme Court put in place was successfully implemented by the chancery court and we are pleased with the outcome,” said spokesman James Hines.
Jurow said the ruling would not necessarily govern other previously uncontested foreclosure cases. Wells Fargo was the first of the major banks to present its cases, and some will be argued before Judge Paul Innes in Trenton.
But Jurow acknowledged that McVeigh “sent a clear signal” to participants in those upcoming cases. The ruling was disappointing because the judge seemed to accept most of the arguments raised in defense of borrowers, she said.
Indeed, on another issue, Jurow interpreted similar language from the judge about late fees and other surcharges as giving more comfort to borrowers. In particular, McVeigh said there is no legal precedent to eliminate “property preservation fees,” so-called because they go to maintain foreclosed properties.
But the judge also suggested that courts have the authority to do their own assessments of what bank fees are equitable in individual foreclosures.
“The banks can’t say on the one hand that borrowers have benefitted by staying in the homes, and then charge them fees for maintaining the properties,” Jurow said.
The ruling comes on the heels of a failed federal review of foreclosure abuses. Banks and the U.S. Treasury Department initially said the review was ending because costly paid consultants were finding few problems during 2009-2010.
Instead, 10 lenders agreed to pay up to $8.5 billion to 3.8 million borrowers — an average of $2,235 — to resolve questions of foreclosure abuses during that period.
But U.S. Rep. Brad Miller (D-NC) said the agreement was timed to head off a pending report by the U.S. General Accountability Office, whose sampling found an 11 percent error rate in bank loans. The review, overseen by the Office of the Comptroller of the Currency, already had come under criticism because of close relations between some consultants and banks.