The housing bubble and subsequent economic crisis in the United States is still reverberating for many people who lost everything and are still trying to pick up the pieces, particularly people with homes that went into foreclosure.
A California Supreme Court ruling in Yvanova v. New Century Mortgage Corporation et al opens up the possibility that at least some of those people could be able to file “wrongful foreclosure” suits – which might entitle them to financial damages, though it’s not likely they will be able to reclaim their homes, which have since been purchased and occupied by other people.
It’s a start in the slow path to justice for those who were victimized by lenders or caught in a financial trap, with California joining Massachusetts, Ohio and Texas in allowing such suits to move forward.
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In this particular case, the facts hinged upon questions about the transfer of title. The homeowner purchased a property for nearly $500,000, duly signing the note and committing to repayment. Shortly thereafter, the mortgage company went bankrupt and put its dissolved assets into a trust.
Five years later, the mortgage company – despite the fact that it had gone bankrupt – supposedly transferred the deed to Deutsche Bank National Trust, an investment vehicle owned by Morgan Stanley. The problem was that the trust had a “closing date” after which no new assets could be accepted, and that date had fallen some four years before, making it functionally impossible for the deed transfer to have gone through.
Five years later, another trustee allegedly completed the sale. The upshot of this convoluted process was an argument that the process of transferring the deed was “void.”
This ruling wasn’t as comprehensive as some might like, but it does set some standards. While the Supreme Court generally agreed that when someone signs a loan, she commits to repayment, it also acknowledged that repayment is owed only to the party that actually holds the loan, and while loans are transferrable without notice or consent, if no one legally holds the loan, a borrower can’t be expected to send payments out into the void. If transfers aren’t conducted properly, a company can’t exert a debt obligation, let alone initiate foreclosure proceedings.
In this instance, she was still in default, but from a practical standpoint, the sale of her debt was still void. While the beneficiary of a legal sale likely would have foreclosed anyway, it’s impossible to make that judgment call, and thanks to the confusion over who actually owned her debt, she would have had difficulty determining who to appeal to while working out a payment plan or exploring other options. These kinds of confusing paper trails exploded during the foreclosure crisis because so much debt was bought, sold and transferred back and forth between investment vehicles, one reason the crisis erupted in the first place.
Borrowers seeking recourse after wrongful foreclosure will need to take their own suits to court, and their cases could prove to be the making or breaking points of the precedent set by this ruling, nailing down how it should be interpreted in ways that might benefit borrowers, or could benefit lenders instead.
There is still a question of statute of limitations, as some of the hardest-hit borrowers in California might not be eligible for redress at all thanks to the fact that their foreclosures occurred too long ago. However, for those who do qualify, the court system could see an influx of cases, and California’s precedents along with those of other states that have created grounds for challenging wrongful foreclosures could spread to other states.
Given the issue of statutes of limitations, sooner is rather than better to capture as many people who were trapped in the subprime lending crisis as possible. Those who lost their homes in 2008 and 2009, for example, may not be able to receive compensation, but that doesn’t mean others can’t, and they should. Even if they defaulted on their loans, the failure to follow orderly procedure is worrying, and investment firms should be held accountable for it.