In stark contrast to this improving backdrop are the legal battles still being waged over wrongful foreclosure practices. The glacial progress in these cases is not surprising, given the crowded courts and combatants’ usual stalling tactics.
What is surprising is the fresh evidence these cases are turning up of cockeyed mortgage practices, during both the boom and the bust. As these matters are adjudicated, perhaps we will finally learn whether these practices were intended or accidental.
Take the problem of questionable legal fees levied on troubled borrowers. Although these costs may seem small in the scheme of things, they certainly add to the burdens of many hard-pressed Americans.
A foreclosure from Ohio highlights this problem. The facts from this matter are central to a prospective class action filed by a borrower, who contends he was charged improper court costs and legal-related fees in his foreclosure.
The case involved legal moves taken against a bank in 2007 that did not even have an interest in either of the two mortgage liens associated with the foreclosed property. Even though the bank should never have been dragged into the matter, it was — generating $775 in court costs and legal fees paid by the borrower, documents show. Only two years later, during the discovery process, did it emerge that the bank had no ownership in the underlying property.
That $775 may not sound like much. But Paul Grobman, a lawyer in New York who represents the borrower, said he believed the collection of what he called improper legal charges is rampant in foreclosures.
The case involving the $775 began in 2007 when Eugene D. Kline fell behind on the first and second mortgages on his home in Centerville, Ohio. Wells Fargo, noting that as trustee of a securitization it held the note backing the $160,000 first mortgage, sued Mr. Kline and his wife, Patricia, in state court.
Because Mr. Kline had also taken out a second mortgage, Wells Fargo sued the institution that it said owned the additional obligation. Here is where Mortgage Electronic Registration Systems comes in, the company that runs the database set up by banks in the mid-1990s to speed the transfer of mortgages nationwide and track their ownership. To save the costs of recording a mortgage’s transfer from one institution to another, MERS acts as mortgagee in county land records. But it does not own the note underlying a property.
Amid the foreclosure crisis, however, critics have contended that the registry actually served to hide the true owner of a mortgage, making it difficult for borrowers to get help in working out their loans.
The facts in Mr. Kline’s case seem to indicate another flaw with the MERS registry — that it may not even track mortgages effectively.
MERS was the nominee for WMC Mortgage, an entity that held the second lien on the Kline property, according to Wells Fargo’s court filings. Oddly, lawyers for WMC confirmed that it had an interest in the loan, whose value was around $30,000.
In 2008, Mr. Kline advised the lawyers for the banks that he would sell the house and pay off the loans, which totaled approximately $200,000. He did so, paying the legal costs associated with the suit involving the second lien.
But in 2009, documents produced in the Ohio action showed that WMC Mortgage had not, in fact, held the second mortgage when the foreclosure began. WMC had sold Mr. Kline’s loan three years earlier into a securitization trust put together by Merrill Lynch. That trust also held Mr. Kline’s first mortgage and was overseen by — you guessed it — Wells Fargo.
So, to recap: At the time of the foreclosure, Wells Fargo held both loans taken on by Mr. Kline. Nevertheless, its lawyers sued WMC, contending WMC held the smaller loan. Even though WMC did not own the loan, its lawyers represented to the court that it did. All the while court costs and other charges were billed to Mr. Kline.
Many questions arise in this case. For starters, if the MERS registry is the accurate record it claims to be, why didn’t Wells Fargo or its lawyers see that it, not WMC, held the second lien when the Kline foreclosure began?
A MERS spokeswoman declined to comment, citing the pending litigation. Elise Wilkinson, a spokeswoman for Wells Fargo, said that as trustee of the securitization, the bank “would not be in possession of any information regarding a foreclosure action.”
“All such information would be in the possession of the mortgage loan servicer,” she said, “which is the party responsible for initiating and managing all aspects of the mortgage loan foreclosure process.” That was the HomEq Servicing Corporation, which is no longer in the business, the Wells spokeswoman said.
Ditto for WMC. Why didn’t it recognize early on that it had sold the Kline loan years before, saving Mr. Kline legal fees? Rick DeBlasis, a lawyer handling the matter at Lerner Sampson & Rothfuss of Cincinnati, declined to comment, saying it was part of the class action.
It will be interesting to watch that case unfold. But in a unanimous ruling against MERS last month in Washington State Supreme Court, the judges described their problems with the registry. “Under the MERS system,” they wrote, “questions of authority and accountability arise, and determining who has authority to negotiate loan modifications and who is accountable for misrepresentation and fraud becomes extraordinarily difficult.”
Mr. Grobman agrees, arguing that the involvement of MERS in the Kline case allowed the law firms to charge improper fees. “Both Wells Fargo, MERS and their attorneys in this action could falsely represent that the first and second mortgage were owned by different entities,” he said, “and could pass on the legal fees and expenses purportedly incurred in the suit.”
And what about the Klines? They now rent a home. “It’s a rental that we were blessed enough to be able to rent from a friend,” said Ms. Kline.