California has long been considered the epicenter of the nation’s worst housing crises in generations. In order to stem the tide of foreclosures, last year Governor Jerry Brown signed into law the Homeowner Bill of Rights. The Homeowners Bill of Rights is essentially a series of related bills meant to protect homeowners from some of the most egregious practices by the banks. Most notably, the bills ban lenders from robo-signings and dual-track foreclosures.
Dual-tracking is a common practice where the lender proceeds with foreclosure while negotiating with the owner to save their property. On its face, dual-tracking is akin to negotiating in bad-faith.
“Californians should not have to suffer the abusive tactics of those who would push foreclosure behind the back of an unsuspecting homeowner,” Governor Brown said after signing the bills into law. “These new rules make the foreclosure process more transparent so that loan servicers cannot promise one thing while doing the exact opposite.”
However, loopholes in the Homeowner Bill of Rights laws appear to allow banks to continue to dual-track on homes going through a short-sale. Earlier this month, I witnessed this reprehensible practice first hand.
A few months ago, I began the process of buying my first home. After looking at a few dozen homes in the area within my price range, I made an offer for a charming craftsman style two-story home in Forestville, California. After seeing the home, briefly talking with the homeowner, and learning about her condition, I offered her the full asking price plus closing fees.
I came with a pre-approved letter from my bank (for an amount twice the value of the home) and a 20% down payment. My offer was, as both of our agents would refer to it, extremely “clean.”
The homeowner (I’ll call her Jane) needed to sell the house quickly. She had lived in the house since the mid-90’s. Unfortunately, Jane became ill and had fallen onto hard times. She told me her medical bills had essentially wiped-out her savings and she found herself no longer able to pay the mortgage.
Jane was planning to move into a friend’s home. She had no other option. Her deed-in-leiu offers were turned down by the bank. In order to avoid bankruptcy she needed to sell the house. Remarkably, her bank gave her 7 days to find a buyer with a clean offer. As soon as the house went on the market I put in my offer. Jane accepted my offer immediately. Then came the wait. For nearly two weeks her bank went silent.
The following weekend, I decided to visit the home and take a walk around the neighborhood. Outside the house, Jane was packing up a truck with her final belongings. Seeing my arrival, she approached me nearly in tears.
“I guess you know?” Jane said.
“Know what?” I asked.
“I’m really sorry. I wanted to have a family who would love this house as much as I have. The bank says they are putting the home up for auction in a couple days”, she replied.
I Immediately sent an email to my agent who contacted Jane’s agent who then sent us the following response:
“Bank is giving me some difficulty, saying so close to sale date & investor had initially rejected a deed-in-leiu. I pointed out I met their criteria of bringing them an offer within the 7 days as set by them. I also brought up the fact that by all appearances, they were "dual tracking" this loan all along. I was placed on hold for a few minutes, then my phone person came on to tell me we were bumping up the chain and a supervisor was going to attempt to get a resolution. We will have to see as I held the dual tracking card until the last. I will be calling them tomorrow in the later afternoon as requested.”
The next day we officially received the bad news:
“We have been turned down for the short sale. I was actually turned down Fri. morning, but I brought up the fact that appearances are that this loan was "dual-tracked" all along, which became illegal in California as of 1/1/13. That bought me a little time as they claimed a supervisor was taking the package back to the investor. Again turned down. My client is devastated but not surprised.”
While the Homeowner Bill of Rights limit banks from some of their practices, loopholes still allow mortgage servicers to simultaneously negotiate a short-sale while foreclosing on a borrower. This is exactly what happened to Jane.
Lawyers on a free online legal advice site have been asked, “Shall I sue the banks for dual-tracking my home during short-sale negotiations?” The following quotes are from three attorneys responding to such questions:
“The first question of any potential claim, how were you harmed? Of the dual tracking arguments, the weakest argument involve short sales. After all, the homeowner is not entitled to a short sale. A short sale is subject to bank approval, and the bank doesn’t need to approve or consider it. Even if the bank acted in bad faith, there is still the problem of damages, or harm…Unless you have something in writing from the bank stating they would halt foreclosusre to allow the short sale to proceed, it is unlikely you have any claim a court would accept.”
A second attorney wrote, “The Homeowner Bill of Rights, which took effect this January, does not apply to short sale negotiations. The bank can’t foreclose on you while reviewing you for a modification.”
A third attorney continued, “There are several exceptions to the new law and one exception to the provisions which prohibit dual tracking is that the loan application must be ‘complete.’ Unless and until you have submitted a complete loan package dual tracking is permitted.”
Collectively, the above attorney comments pretty much sum up the problems with the new laws regarding dual-tracking foreclosures in California. Jane’s bank, Ocwen, established with Jane a criteria of 7 days for a clean offer on the short-sale. All the while they simultaneously foreclosed on her and put the house up for auction. By all appearances, Ocwen had no intention of accepting any offer to help Jane out of her foreclosure. The bank seemed to have no interest in Jane’s situation and the harm a foreclosure would inflict on her.
In spite of the new homeowner protections enacted into law this year, unless Californian’s insist on even stronger homeowner protections, the banks will continue to exploit loopholes and act in bad faith with impunity.