Financially strapped homeowners struggling to obtain mortgage modifications are taking their frustrations to court, accusing banks and loan servicers of misleading them or breaking promises to help them hold on to their homes.
The lawsuits go to what U.S. Housing and Urban Development Secretary Shaun Donovan has described as the heart of the government's anti-foreclosure efforts: ensuring that banks work in good faith from the start to help borrowers.
Although the foreclosure process is less complicated in California than in states where home seizures must be approved by judges, the litigation shows that borrower-servicer relationships can be contentious in the Golden State as well.
As controversy grew over the accuracy of foreclosure paperwork, Donovan last week said the Obama administration's top priority is "making sure that steps are being taken early in the process to keep people in their homes rather than only focusing on the steps that come late in the process, in which it's much less likely somebody will be able to stay in their homes."
A theme of the lawsuits filed by homeowners is that banks have denied permanent modifications to borrowers who make their payments on time and otherwise hold up their end of the agreements.
For example, Jean C. Wilcox of Irvine has sued EMC Mortgage Corp., accusing it of stringing her along for three years while making several offers to modify her nearly $800,000 loan, losing documents repeatedly and never intending to permanently change the terms of the mortgage. An EMC spokesman declined to comment.
"It was just 'extend and pretend,' " said Wilcox's lawyer, Anthony Lanza of Irvine. "And it was like they had the fax machine hooked up to a shredder."
Anaheim lawyer Damian Nassiri said his firm had filed about 100 lawsuits against mortgage lenders since 2007. Earlier suits alleged that lenders misrepresented terms of mortgages or engaged in other shady practices to foist abusive loans on borrowers. Most of his firm's suits now accuse lenders of dealing in bad faith with borrowers who have become delinquent on loans.
Worse, Nassiri said, in cases where foreclosure was inevitable, banks misled borrowers into accepting trial loan modifications. The intent, he claimed, was "to get some kind of money out of them" while stalling actions to seize the homes.
"There are too many bad loans for the banks to handle, and they can't dump all these properties out on the market all at once because we would have another Depression," Nassiri said.
Similar allegations of breaches of contract and acting in bad faith have cropped up in lawsuits around the nation, said Anthony Laura, a Washington lawyer who represents lenders accused of wrongdoing and tracks litigation trends.
Some suits allege that the problem is so widespread that courts should certify the plaintiffs as representing an entire class of aggrieved borrowers. Wilcox's suit, for example, seeks class-action status on behalf of other California borrowers with similar complaints about EMC.
Boston consumer lawyer Gary Klein, a longtime antagonist of mortgage lenders, has filed suits seeking class-action status against the top three loan servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — and others.
A multidistrict panel of federal judges on Oct. 8 consolidated eight such suits, including two from California, for pretrial proceedings in federal court in Boston.
The suits allege that trial loan modifications extended by Bank of America under the Obama administration's anti-foreclosure plan were contracts that the bank violated by denying permanent modifications to borrowers who fulfilled their obligations.
A spokeswoman for the Charlotte, N.C., bank declined to comment.
In court documents filed in one of the cases, Bank of America said the plaintiffs mistakenly believed they were guaranteed loan modifications if they made three trial payments under the government's program.
"A borrower must actually qualify, including income verification, an analysis of the modified loan's affordability and other factors," the bank said in the filings.
The loan-modification lawsuits add to enormous legal headaches for the banks.
The troubles include demands by mortgage giants Fannie Mae and Freddie Mac, Newport Beach bond fund goliath Pimco and the Federal Reserve Bank of New York that the banks repurchase billions of dollars in defaulted loans that were pooled to back mortgage securities.
On another legal front, several giant home lenders were forced to put evictions on hold this month after lawsuits turned up evidence that bank employees had signed thousands of court affidavits attesting that foreclosures were warranted — without reading the accompanying documentation.
Some analysts who follow mortgage lending said fixing that problem could be done with relative ease, as illustrated by Bank of America, the nation's largest loan servicer.
BofA issued a moratorium on pending foreclosures Oct. 1 but said last week that it had lifted the hold. The bank said it would resubmit legal affidavits, corrected where necessary, on 102,000 loans in the 23 states that require court approval for foreclosures and would resume asking judges for foreclosure orders.
Bank of America still has evictions on hold in 27 states that don't require court approval for foreclosures, including California, while it reviews its compliance with applicable laws.
But banks can't resolve so quickly the lawsuits they face over allegations that they lost or destroyed paperwork, failed to record payments or misapplied payments to run up fees and extra interest.
In the Wilcox case, for instance, EMC first modified her loan on a trial basis in late 2007 to lower its 8.34% interest rate, her lawsuit said, and she made the lower payments as agreed. But as time passed, she said, she was shuffled back and forth between numerous EMC employees, who kept changing the rules for a permanent modification.
EMC, which made so-called subprime loans as an arm of the collapsed Wall Street firm Bear Stearns Cos., is now a subsidiary of JPMorgan Chase. Chase spokesman Tom Kelly declined to comment.
Wilcox, a lawyer with expertise in real estate transactions, said she began having trouble paying the high-interest mortgage when her earnings as a sole practitioner slipped in 2007, leading her to seek a loan modification. She took a job at a law firm where her earnings are steady but lower.
Wilcox said that beginning in August 2008 she notified EMC four times in writing that she believed it was making false promises and demanded that it stop, laying the groundwork for one of the legal claims in her suit.
Wilcox's suit contends EMC was too buried in troubled loans to handle all the foreclosures at once. Instead, the lawsuit alleges, the company induced borrowers to accept trial loan modifications that it never intended to make permanent in order to keep payments coming in from the properties.
It also contends that EMC misapplied some payments and delayed the processing of others, intentionally inflating her balance with unjustified penalty fees and additional interest.
The company secretly recorded a notice of default as she was in the middle of her second trial modification, the suit alleges, and finally told her that her modification had been denied because an unidentified investor in her loan had refused to accept it.
The lawsuit alleges breach of contract, deceptive business practices and fraud. It seeks a court order requiring EMC to grant prompt modifications to qualified borrowers and compensate injured consumers.
Wilcox said she had about $250,000 in equity in her home when EMC first offered to modify her loan and would have sold the house had she not relied on the company's promises for a permanent modification. Now it's not clear whether any equity remains.
"You're paying out all this money," she said, "and all the time the value of your house keeps going down."