Four years after New Jersey courts required lenders to prove they are following the law in foreclosure cases, new procedures and technology have improved the process and provide greater assurance of accuracy, according to court officials.
That claim is being put to the test. At a time when foreclosures are receding across much of the country in the wake of the Great Recession, the number of cases in New Jersey is again rising rapidly. Last year, more than 54,000 foreclosures were filed here, the third-highest total since the state started keeping records.
In contrast to the situation at the start of the recession, though, electronic filings now allow prompt recording of documents, court staff has been added to the payroll, and new certifications spell out lenders’ claims more clearly, according to Kevin Wolfe, the assistant director of the civil practice division of state courts.
Defense attorneys caution that the changes may not materially improve the decisions that foreclosure defendants can expect. In particular, they said, additional paperwork from lenders and their attorneys may not withstand scrutiny — but only if homeowners are prepared to insist on it.
That’s a big “if” since, as Wolfe said, “Only a small fraction of total foreclosure cases ever get contested in court.”
Defense attorneys are more encouraged by two decisions in recent weeks that upend New Jersey courts’ handling of two common foreclosure issues.
In Jesinoski v. Countrywide, the U.S. Supreme Court unanimously held that the Truth in Lending Act allows borrowers to rescind a mortgage agreement within three years simply by notifying the lender. Courts here and elsewhere have been requiring the homeowners to file suit, or even hand over their homes, within that time.
Meanwhile, in Arias v. Elite Mortgage, a New Jersey appeals court ruled against homeowners on the facts. But it found that standard language in Bank of America’s trial mortgage modification program requires the banks to offer permanent deals to borrowers who fulfill its requirements. Banks have routinely dropped such borrowers without permanently modifying their mortgages.
New Jersey Chief Justice Stuart Rabner was focused on the paperwork issue in 2010, when he received a report from New Jersey Legal Services documenting irregularities in some foreclosure cases here and around the country. Many of the violations occurred when employees of lenders or loan services swore that they had used reviewers’ documents to support foreclosures and determined they were accurate. In some instances, they had never read the documents; in others, the documents were inaccurate or incomplete; still others had all those flaws. Fraud and false swearing are the legal terms, but the practices acquired a jaunty name in the business media, “robo-signing.”
It became common at a time when a mortgage had been transformed from a straightforward transaction between borrower and lender into just one link in a complex train of investment transactions. The final piece is often an investor with little information about the product being purchased, a slice of a vast mash-up of mortgage notes, good, bad, or indifferent, which might unravel into something like a Great Recession.
Often in New Jersey and elsewhere, foreclosure notices identified only the company hired to service a mortgage loan, not the actual holder of the underlying note, making it difficult for homeowners to negotiate or to correct misinformation.
Responding to these problems, Rabner issued orders to plaintiffs in foreclosure cases requiring their attorneys to communicate with employees handling documents to ensure they were adequate and accurate, and then file certifications with the courts. Given the timing amid unprecedented numbers of foreclosures in the state, Rabner also imposed the requirement on cases where judgments already had been entered against homeowners, but the properties had not yet been taken at sheriff’s sales.
The chief justice “intended to provide greater confidence that the tens of thousands of residential foreclosure proceedings underway in New Jersey are based on reliable information,” he said at the time. “Nearly 95 percent of those cases are uncontested, despite evidence of flaws in the foreclosure process.”
“There’s really only a few times in the life of a foreclosure case that the court has control,” Wolfe said. “Most of the time, it’s the plaintiff’s attorney who is driving the process.”
With that in mind, requiring those attorneys to certify their own “diligent inquiry” into the accuracy of the supporting documents at least theoretically puts their heads on the chopping block alongside any corner-cutting client.
Rabner required particular presentations of proper internal procedures from the major mortgage lenders in the state at the time — Ally Financial (GMAC), Bank of America, Citigroup, JPMorgan Chase, OneWest Bank, and Wells Fargo — whose subsequent cases also are being reviewed by a court-appointed monitor. The Chief Justice also required showings from two dozen other lenders that had filed more than 200 foreclosures in 2010.
That produced what some analysts described as a judicial “moratorium,” as foreclosures statewide dropped from 58,445 in 2010 to 11,037 in 2011, according to the Administrative Office of the Courts. But the term annoys court personnel.
“The big lenders were under a similar order from the (U.S.) Comptroller of the Currency” to justify their procedures, and chose how fast to respond to New Jersey, Wolfe said.
Court delays contributed to delays as the housing bubble burst and the stock market crashed, when the state’s office of foreclosure only had seven employees, Wolfe acknowledged. But beyond instructing attorneys to follow procedure, Rabner added staff, he said. The office now has 25 people, though not all are full-time, he said. After presenting their internal systems for review, it took the big banks until January 2012 to resume foreclosing at pre-Recession levels. By 2013, new cases were streaming in again at near-record levels, but Wolfe said the courts can handle the flow.
Moreover, the documents being filed by attorneys for lenders are “appreciably better,” at least in terms of deficiencies noted by the foreclosure office staff, Wolfe said. That means including important information, such as properly identifying who really holds the note underlying a mortgage, not just the company hired to service the loan.
But some regard such changes with a shrug.
Legal scholar Linda Fisher, a Seton Hall University law professor who studies the impact of foreclosures on communities, said she has not been involved in many recent court battles.
“But I can say, from the few cases that I take on each year, that the two certifications of diligent inquiry now required in foreclosure cases don’t give me much assurance that things have improved much, if at all,” she said.
Now in private practice, Peggy Jurow was a Legal Services attorney when it presented the report that prompted Rabner to act. She gives the court credit for taking administrative steps to prod plaintiffs to provide better documentation and move cases along.
“I’ve seen much better handling of documents,” Jurow said, but added lenders often “nit-pick” about what they are required to provide.
In terms of the certifications from plaintiffs’ attorneys, “I don’t think they’re being scrutinized at all” by the courts, she said. In the cases she has taken since leaving Legal Services last spring, Jurow said she has been generally satisfied that the paperwork has been correct so far as it goes. But in the one instance where she challenged the certifications, they promptly fell apart, she said.
“It turned out that the plaintiff in the foreclosure was not really the person who held the note,” Jurow said. “And when another hearing was scheduled to hear from the real note-holder, they didn’t show up.”
AnneMarie DeLaCruz of Bergenfield knows firsthand that a trip to foreclosure court can be like visiting a hall of mirrors. She and her husband Juan lost a foreclosure case against their home in 2012, when a judge threw out their response to the lender’s claim and entered a default judgment against them.
It was only after the couple appealed that they were able to obtain discovery documents from the latest holder of their debt that appear to support their description of the terms of the mortgage terms.
“I don’t know how they can do it, but companies can go into court and not tell the truth,” she said. “They inflate numbers, they make up numbers … where is the justice system?”
Like others caught up in New Jersey’s foreclosure crisis, the couple combined bad timing with bad decisions. They moved to Bergenfield from Queens, NY, in 1998 to provide a better environment for their two young daughters. At the time, DeLaCruz was working at HBO while her husband drove a limousine and wanted to remain close to the airports.
All went well for years. Her husband started a successful contracting business, DeLaCruz helped out and had a third child. They decided Bergenfield was their home. But they also watched TV, and saw commercials for Lend America, at the time a prominent mortgage lender specializing in refinance. The couple decided to put money into their home and business.
Although DeLaCruz thinks “it was a good deal,” the refinance came at 8.25 percent — two points above the prevailing mortgage rate at the time — and with a “balloon” repayment of much of the loan quickly. According to DeLaCruz, she and her husband quickly encountered problems, like a $30,000 closing fee that she says was only disclosed after the fact. Lend America did not accept their attempt to rescind the deal, so they began making large payments, she said.
Two years later, the housing bubble had burst, the value of their property had dropped and Lend America had halted operations after being sued by the federal government. As they battled, the couple’s loan passed through other hands. According to the DeLaCruzes, they were able to negotiate a modification with one.
But the note then passed to Lynx Asset Services of Manalapan, which maintained it had no record of the prior modification. The firm obtained the judge’s ruling that the couple owed more than $700,000, including interest.
In repeated telephone conversations, Lynx employees referred questions to a manager, who was never available and did not return calls, and eventually said they had been instructed not to comment.
Now, DeLaCruz points to emails to Lynx from prior servicers. One from 2007 disclosed the modification and put the loan balance at $102,379. Another reported having a letter confirming the modification, though without describing it.
“Lynx had these communications, so they know the judgment is overstated by $600,000,” DeLaCruz said.
When Rabner acted, many financial institutions that had received taxpayer bailouts — notably the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) — had decided it would create a “moral hazard” to extend similar consideration to taxpayers who had borrowed from them.
Since then, some lenders have changed their tunes, Jurow said, and some borrowers “are being offered better deals” on modifications. But other mortgage problems may be beyond the reach of court rules, she said.
“I’m not sure that it’s something that can be corrected with a procedural fix,” she said.