Fed up with the slow pace – and what many people see as unjust actions -- of foreclosures, some victims of the crisis are looking to go on the offensive, opt out of the New Jersey court system, and seek justice from federal courts.
Jerome and Sandra Barnes of Paterson are one couple who hope to outrace their mortgage-holder by filing a federal suit.
Like many others, the couple bought a house at the wrong time, in May 2008, just as the housing bubble was about to burst and the Great Recession about to take jobs. Their single-family home on a quiet street was close to Jerome Barnes' job for the Saturn car company. With housing prices inflated at the time, it was also "the only area we could afford," Sandra Barnes said.
First, Jerome lost his job when General Motors closed Saturn, but eventually he regained stable employment. The couple had fallen behind on their mortgage payments, but negotiated a modification. Even more fortunately, they were approved for a low-cost federal loan that covered their arrears.
But the Consumer Finance Protection Bureau has identified mortgages and foreclosures, including modification attempts, as a leading source of consumer complaints. All too predictably, New Jersey, which has the highest foreclosure rate in the country, is near the top of the bureau's complaint statistics. The bureau's reports are available.
In describing the complaints , the CFB cited the sort of issues the Barnes cases raises: frequent "confusion and frustration" after mortgage loans are transferred among lenders; borrowers claiming lenders rejected or misapplied their payments, and lenders moving to foreclosure even while ostensibly reviewing modifications.
So it may not be surprising that the Barnes are going to court, claiming their mortgage servicer failed to properly credit a major payment and continues to charge more than agreed to in an approved modification. But their destination is uncommon among recipients of foreclosure notices in New Jersey: federal court. While widely discussed among attorneys during the surge of recession-related foreclosures, relatively few cases have left state courts. Federal jurisdiction is limited to cases that meet particular standards.
Big banks, the usual foreclosure plaintiffs, generally like to avoid federal courts. State courts -- even those derided as slow-moving as in New Jersey -- are directly tied to enforcement actions such as sheriff's sales. Meanwhile, the complexities of packaging modern mortgages into securities sold to multiple investors, often in many locations, can compound the difficulty of establishing federal jurisdiction based on citizenship.
Rather than wait for foreclosure proceedings, the Barnes have decided to take the offensive and have sued the Bank of America of Charlotte, NC, the current holder of their loan, and Carrington Mortgage Services of Anaheim, CA, its hired loan servicer, accusing them of violating federal debt collection and truth-in-lending laws.
Kaplan Stewart Meloff Reiter & Stein, the Pennsylvania firm that represents Carrington and Bank of America, has moved quickly to try to dismiss part of the Barnes suit. In her motion, attorney Sandhya Feltes argues that law and precedent show the two companies are not covered by the Truth in Lending Act in this instance because they did not originate or own the original mortgage.
But Adam Deutsch of Denbeaux and Denbeaux in Westwood, the couple's attorney, said his clients stand a better chance of receiving an attentive hearing in federal court than they do in New Jersey courts.
In order to cope with the continuing wave of foreclosure cases here, the state courts have added support staff, recalled retired jurists, and dismissed thousands of lagging foreclosure cases. After receiving a report on foreclosure abuses, in December 2010, state Chief Justice Stuart Rabner ordered major mortgage lenders to clean up their foreclosure practices and ensure cases were properly documented.
But that still requires judges to review documents thoroughly and be informed on recent precedents and new laws at the federal and state level, Deutsch said. Instead, some New Jersey jurists seem to be "in over their heads" and reducing the foreclosure caseload by "rubber-stamping and pushing things through," he said.
According to Joshua Denbeaux, a principal in the law firm where Deutsch works, several New Jersey judges have even stated that mortgage "fraud is not a defense" in foreclosure cases.
"More borrowers are heading to federal court because the state courts have really shut us out," said anti-foreclosure activist Laura Walsh. "It's very hard for anyone to get a state judge to even consider their case on the merits."
Linda Fisher, a Seton Hall University law professor who has done extensive research into foreclosure and its effects, said these are not isolated complaints.
"Other lawyers have been saying that the New Jersey courts are no longer interested in borrower defenses except when outright fraud is involved," which "seems to me to be the case as well," she said. "It has now been a few years since I saw an appellate case in which a borrower won, except when the adversary directly engaged in fraud."
Even as lenders file thousands of new foreclosure cases in state courts, more New Jersey borrowers are giving up. In 2010, Rabner expressed concern that only 5 percent to 6 percent of foreclosure cases were being contested, emphasizing the need for judges to review the documentation. While the rate grew to 10 percent immediately after his order, it has dropped to 4 percent this year, according to the state Administrative Office of the Courts.
The AOC made no response to the complaints, noting the Barnes case is active.
Until Congress removed Depression-era banking regulations at the turn of the 21st century, getting a mortgage was a straightforward transaction between borrower and lender, frequently a local lender. Since then, a mortgage is often the first step in a complex chain of financial transactions: sliced, diced, and repackaged with many others in securities that may be passed through several institutions and sold to multiple investors.
When it comes to an individual mortgage, there is often no clear record of who owns what share of it. Compounding the confusion, many transactions are recorded in the Mortgage Electronic Registration System, a private company created by major lenders, rather than with county clerks or other government records offices readily available to the public.
The system is ripe for fraud, and as housing prices soared in the early years of the 21st century, sharp-dealing blossomed too. Knowing they could pass mortgage notes along to others, banks made loans to borrowers who previously would not have qualified. They duped some who did qualify into accepting onerous terms. When the housing bubble burst and home values dropped, many borrowers were left "underwater," owing more than their properties are currently worth.
In an era where the ownership of mortgage notes can be tangled, many foreclosures have relied on incomplete or dubious documents and testimony. The financial media came up with a cheery name, "robosigning," for the practice of bank employees signing or attesting to mortgage foreclosure documents that they never read, or sometimes never saw.
That prompted Rabner to strengthen document requirements for foreclosure actions. Retired Judge Richard Williams, the state special master, subsequently reviewed and approved the internal foreclosure measures adopted by big banks. Nevertheless, he complained that their attorneys are not making "diligent inquiry" into employee certifications.
State appellate courts are reluctant to push foreclosure plaintiffs even on the threshold test of establishing their standing, proving that they actually own the mortgages at issue, Fisher said.
"Most appellate courts now hold that banks need only provide an assignment of mortgage in order to demonstrate standing to foreclose," she said. "This is clearly incorrect under the Uniform Commercial Code, which governs negotiable instruments, but the courts don’t seem to care."
Like many first-time homebuyers in the early 21st century, the Barnes were unaware of what was happening behind the financial curtain. They did not invest astutely. Scarcely 18 months before they took out a $251,060 mortgage to buy their home, the mortgage was sold for $77,000. The Zillow real-estate service estimates that their home is currently valued at $164,807.
Moreover, about the time Saturn closed, Sandra Barnes said she and her husband were hit for the costs of cleaning up an oil spill from an old, leaking underground storage tank on the property. The couple had never been told the tank was there at any time during the sale or at closing, she said. Although eventually compensated with $11,000 from a federal fund, their up-front costs were $15,000, the couple said.
The couple originally obtained their mortgage from SLM Financial Corp., which has offices in Mt. Laurel. In December 2011, after the Barnes had fallen behind, Bank of America purchased the note. The Barnes said they had numerous contacts with the bank, trying to modify the loan and catch up on payments. In May 2013, the bank designated Carrington as the servicer, leading to more back and forth.
In September 2014, Carrington alerted the couple that they were eligible for help under the federal Home Affordable Modification Program,. The notice cited both a potential modification and the program's "partial claim" option.
Under that, a borrower executes a promissory note and subordinate mortgage to the U.S. Department of Housing and Urban Development. In return, the Federal Housing Administration advances up to 30 percent of the outstanding mortgage cost to the borrower, which uses the money to cover arrears and refinancing.
"We thought the trial modification was perfect," and successfully completed several months of payments to Carrington, Jerome Barnes said. After that, the firm offered a permanent modification, contingent on the couple obtaining the partial claim funds. They did, and in March HUD paid $72,933 on the partial claim, and Carrington recorded the subordinate mortgage. In April, the firm recorded a signed and notarized mortgage modification at 4.125 percent interest.
That should have resulted in monthly payments of $1,284, and the couple paid accordingly, Deutsch said. But Carrington continued to bill them for $2,279, and did not credit the HUD payment or the modification payments toward their debt, he said. Instead, in July, the firm sent the Barnes a notice of default and intent to foreclose.