The nation’s five biggest mortgage lenders are facing a major legal challenge in Massachusetts to seek relief for homeowners foreclosed on during the housing crisis, a case that could have reverberations for consumers across the nation.
In the first such lawsuit filed by a state, Massachusetts Atty. Gen. Martha Coakley claims that Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc. and GMAC Mortgage used fraudulent documentation in the foreclosure processes, took back homes without showing they owned the actual mortgages, and failed to uphold loan modification promises to borrowers in the state. Also named is the electronic mortgage registry known as MERS, which was set up by banks to track ownership changes.
Coakley said the lawsuit, filed Thursday, was necessary because “the banks have charted a destructive path by cutting corners and rushing to foreclose on homeowners without following the rule of law.”
The new front against the mortgage industry is seen as putting more pressure on banks to strike a deal with a coalition of attorneys general seeking relief for consumers allegedly wronged by faulty mortgage servicing practices. The suit could also serve as a blueprint for other individual states to file actions.
“This is an important move because to some extent it gives California and any other state who wants to take on the mortgage servicers a road map on how to do that,” said Kurt Eggert, a professor of law at Chapman University School of Law. “To some extent it gives the state a huge amount of leverage in their negotiations.”
However, the latest legal salvo against the banks could take years to resolve, especially if it spawns similar lawsuits by other states.
“State attorneys general continue to play a critical role in trying to resolve some of the thorniest legal problems that are creating a cloud over the housing market,” said Ray Brescia, a visiting professor at Yale Law School. “While a 50-state settlement may have been preferable to many, the idea that the banks will have peace on these issues through such a settlement seems to have gone out the window.”
The banks said they would defend themselves from the lawsuit.
Chase, Wells and Ally Financial, which owns GMAC Mortgage, issued statements expressing disappointment at the Massachusetts suit, and a spokesman for Bank of America said that “collaborative resolution rather than continued litigation will most quickly heal the housing market.” Citi said it believed its in compliance with the law and would defend itself “vigorously.” MERS said in a statement that the company had “not engaged in or facilitated any violation” of Massachusetts law.
Coakley said at a news conference Thursday that she was no longer part of negotiations with the coalition of attorneys general. She pledged to evaluate any proposal so long as it holds banks accountable for alleged faulty foreclosure practices.
Iowa Atty. Gen. Thomas J. Miller, who is leading the negotiations with the banks, said he was still hopeful that a resolution could be reached soon. A deal of up to $25 billion between the banks, the attorneys general and federal agencies was expected to have been reached by now. Talks have dragged on for more than a year.
Coakley “is open to joining our settlement effort if the terms adequately address the needs of the people of Massachusetts,” Miller said in a statement. “We’re optimistic that we’ll settle on terms that will be in the interests of Massachusetts.”
New York, Delaware, Nevada, Massachusetts, Kentucky and Minnesota have all signaled that they were unhappy with the direction of the talks with the banks. Those states were concerned that the banks were being let off too easily.
New York and Delaware have been cooperating in their own probes separate from the coalition.
California Atty. Gen. Kamala Harris formally walked away from the negotiations after meeting with bank representatives in Washington, concluding that what they were offering was not good enough for residents of the state. Since then, proposals to try to entice her back to the table have been floated, as California is seen as key to forging a strong settlement.
Harris has opened a number of her own probes. Investigators with her office have subpoenaed information from mortgage titans Fannie Mae and Freddie Mac as part of a wide-ranging inquiry into lending and foreclosure practices in the state, The Times has previously reported.
A spokesman for the attorney general declined to comment.
Her office has also subpoenaed BofA and its mortgage arm Countrywide Financial, along with Citi, seeking information on their practices selling mortgaged-backed securities in California.