Local Law Blogs

The Futures and Financial Well Being of Condominiums and HOAs are Further at Risk From the Foreclosure "Moratorium" Issued by America's Largest Banks and Mortgage Companies

By David J. Byrne

GMAC Mortgage (the country's fourth-largest home lender), Bank of America (the country's third-largest lender by assets) and JP Morgan Chase, three (3) of the country's largest and most troubled home lenders, recently announced that they were imposing a moratorium on their foreclosures as it tried to ensure they were done correctly.  GMAC said the suspension might be a few weeks or might last until the end of the year.  The lenders' foreclosure moratorium exists in New York, Pennsylvania, New Jersey and Connecticut, along with at least 19 other states, mostly on the East Coast and in the Midwest.  Chase has over 56,000 pending foreclosures throughout the country, which will now be stopped.  Bank of America's position goes beyond halting action on foreclosure judgments:  it will 'amend all affidavits in foreclosure cases that have not yet gone to judgment.'
 

Foreclosures in these states are processed via the court system.  They are otherwise known as "judicial foreclosure states".  The moratorium stems from pending foreclosures, and other litigation, in which GMAC employees have been found to have executed foreclosure judgment affidavits without having actual knowledge of the facts of that mortgage and/or foreclosure, despite stating under oath that they did.  GMAC is now even investigating the nature and facts of foreclosures - and evictions - that have already ended and/or taken place (where there may actually be new owners).  The GMAC moratorium even applies to the 'short sale' of distressed properties.  Even lenders with no known problems - Wells Fargo and Citigroup - are expected to approach defaulting homeowners more cautiously and look more aggressively for resolutions short of outright eviction.  The turmoil and fear is so great that if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners.  In turn, one of the country's largest title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that 'until further notice' it would not insure title to properties foreclosed upon by GMAC.  Attorneys general in half a dozen states are demanding action or opening investigations. The Treasury Department recently said that it was asking regulators to look into 'these troubling developments.'   In depositions taken by lawyers for homeowners, executives at GMAC and Chase said they or their teams signed 10,000 or more foreclosure-related affidavits and related documents a month.  They all admitted that at such a pace their employees could not have had time to actually review the cases.
 

As everyone knows, we are seeing an unprecedented number of foreclosures.  According to LPS Applied Analytics, a mortgage data firm, 2 million households are in foreclosure. Another 2.37 million households are seriously delinquent and waiting for their lender to take action.  Sometimes these loans are still owned by the lender but often, the banks are merely the loan servicer acting on behalf of the owner. Many of the loans are owned by Fannie Mae and Freddie Mac, the mortgage holding companies now controlled by the federal government. In other cases the loans have been sold to private investment pools.  Confronted with so many cases, the lenders tried to process them on a wholesale basis, with the goal of avoiding the expense of a full trial and instead getting summary judgments.  The tool for doing this was the so-called rob-signers, in which mid-level bank executives would sign thousands of affidavits a month attesting that they had personal knowledge that the facts of the case were as presented. The affidavits were prepared by lawyers who were paid a flat fee, which also placed a premium on volume.   When defense lawyers started deposing these rob-signers, they acknowledged that they could not possibly have knowledge of all the cases.
 

Typically, an owner delinquent in the payment of his mortgage is delinquent in the payment of his assessments and/or maintenance fees.  Also, the lenders connected with those units typically become responsible for ongoing assessments and/or maintenance fees following their foreclosures and sheriff's sales.  Hence, condominiums and HOAs often eagerly await the end of a lender's foreclosure so that regular - and needed - assessments and/or maintenance fees begin flowing from a delinquent unit into that association's coffers.  The pace of foreclosures across the country has already slowed to a crawl, often resulting in empty units throughout condominiums and HOAs, from which no revenue is received on the one hand, while on the other hand that condominium and/or HOA provides services, insurance, etc. with respect to it.  This 'moratorium' issued by three (3) of the country's largest lenders will only exacerbate this problem, further threatening the already weak financial position of our condominiums and HOAs.  It is imperative that every condominium and HOA develop a collection strategy that does not depend on the rapid 'turnover' of delinquent units, and the payment thereafter of ongoing assessments by the lender.  There are several available collection strategies that can employed to lessen the blow of this delay and/or moratorium; and some that even take advantage of it, to the condominium's, and HOA's, benefit. 

Full post as published by New Jersey Law Blog on October 12, 2010 (boomark / email).