A wrongful foreclosure is any foreclosure where foreclosure was a direct result of a bank’s failure to follow proper procedures. This is still in litigation, so a precise legal definition is not available. In fact, banks and foreclosure defense attorneys disagree strongly over the number of wrongful foreclosures because they differ over what exactly is a wrongful foreclosure.
Nearly everyone agrees that a wrongful foreclosure is a foreclosure that would not have happened at all if the bank had acted correctly. However, at that point, the definition falls apart. ProPublica identifies 5 situations which are under dispute.
1. Homeowners were not in default but faced foreclosure.
A foreclosure on a homeowner who has no legal reason to expect a foreclosure is a wrongful foreclosure. This situation covers any foreclosure on a homeowner who is not behind on his mortgage, or who has paid off his mortgage, or who may even have paid for his home in cash, is considered wrongful foreclosure. Extreme versions of these foreclosures often make national news.
These kinds of wrongful disclosures are usually the result of processing errors or miscommunication between the bank and a business involved in the foreclosure. For example, a severed lot under separate ownership may be wrongfully foreclosed along with the property from which it has been severed, because the severance and separate ownership has not been correctly processed or communicated.
ProPublica reported that in many of these cases, banks apologized for the error. However, the struggle to untangle the mistake can mean that months or even years may pass before that apology is made. Sometimes, only dramatic action achieves results.
2. Homeowners who were told that to be eligible for a loan modification, they needed to fall behind on their mortgage – and subsequently found themselves on the path to foreclosure.
Courthouse News Service reports that banks do give this kind of advice regularly. In fact, many banks won’t even discuss loan modifications which clients who are not currently in breach of their loan terms.
However, the advice gives an incomplete or inaccurate picture. Once the homeowner has defaulted according to the advice, the bank often starts foreclosure proceedings on the property.
There is also no guarantee that the homeowner will qualify for the loan modification, even after missing the required number of mortgage payments. If he does not qualify, the missed payments must still be caught up. The full debt will also be larger, due to the fees and extra interest incurred. These changes may be enough to tip the homeowner into a foreclosure which would otherwise not have occurred.
3. Homeowners were behind on their mortgage but could have caught up if not for additional fees.
When a homeowner falls behind on mortgage payments, the bank may order “default-related services” to protect the value of its property, and charge the homeowner a fee for those services. The practice of adding on these additional fees may be responsible for triggering foreclosure in as many as half of all foreclosures.
However, the ability of a bank to charge unspecified default-related fees is often covered in the mortgage fine print. This is where banks start arguing hard that they are not in the wrong.
Foreclosures will usually be allowed by the courts where the default-related fees can be demonstrated to be reasonable. Yet in some cases, court analysis of those fees shows that an individual has been served multiple times, at inflated process serving fees. If a person has a common name, the process server may try to track down and serve everyone of the same name, at the homeowner’s expense.
The Federal Trade Commission advises homeowners to review their billing statements carefully and question any added fees. For vaguely worded fees, such as “corporate advances” or even “other fees,” the FTC advises homeowners to contact their mortgage provider and obtain a written explanation of exactly what those fees are and why they were charged.
4. Mistaken foreclosures due to dual track of foreclosure and loan modification processing.
If a homeowner requests and receives loan modification when he is close to foreclosure, the property may be foreclosed before the loan modification can be processed. This can happen because they are processed by different divisions within the bank.
Any attempt to appeal based on the loan modification also takes time. By the time the appeal is processed, the foreclosure may be complete and the house auctioned. This would not have happened if the bank had correctly paused foreclosure proceedings until the loan modification could be processed.
5. Foreclosures in which the bank can’t prove it has standing to foreclose.
If the bank can’t produce the relevant documents, it should not be able to foreclose. This is the case even when the homeowner is clearly in default.
However, according to a 2007 analysis, banks did not provide the proper paperwork to start foreclosure proceedings as much as 40% of the time, often by taking advantage of legal technicalities. This situation has not improved with the recent flood of foreclosures. Yet if the paperwork is missing, there is no check on the foreclosure process in case of mistakes.
In theory, banks are not supposed to start foreclosure proceedings until they have exhausted all available loss mitigation options. In practice, the volume of foreclosures in recent years, combined with the general economic downturn, has caused many institutions to cut corners. In cases of wrongful foreclosure, those corners have been cut at the expense of the homeowner. Yet in the end, when a wrongfully foreclosed house is sold for less than half the amount it is worth, no one benefits, not even the bank.