Keeping up with new foreclosure rules is like 'nailing Jell-O to the wall,' lawyer says
While a standardized documentation delivery system is needed, establishing who has the right to foreclose on a residential property isn't as cloudy as it has been perceived the past few months, according to a panel of attorneys at the Mortgage Bankers Association's national servicing conference in Grapevine, Texas.
Lance Olsen, managing shareholder at Routh Crabtree Olsen in Bellevue, Wash., advises clients to get all the documentation in order once a borrower goes into default.
"If I have all I need for the loan, which, of course means all the financials, loan history, record of securitization — if there is one — and the properly endorsed note, it makes for a much more efficient process," Olsen said. "That would be my recommendation. When a loan goes in default, at that point, pull the collateral file and see what you've got. See what images and information is in there. That way you're capable of signing affidavits that your business records are, in fact, true and correct."
Olsen conceded that the process is timely and adds to servicers' costs and risks, but too often documents are not matching up when the case gets to court.
Rosemarie Diamond, managing partner in the New Jersey office of Phelan Hallinan & Schmieg, said some states have already started to mandate that counsel proves who is the custodian of the mortgage loan prior to filing the first notice with the court.
And more jurisdictions are moving to require proof of the original promissory note, according to Mike Feiwell, partner at Indiana-based Feiwell & Hannoy.
"But ownership doesn't matter under the Uniform Commercial Code," Feiwell said, adding that reports of thousands of lost notes out there the past few months doesn't ring true.
"We handle a large volume of cases, and in my experience down in the trenches, in the vast majority of the time, we're able to produce the note," Feiwell said.
Caren Jacobs Castle, partner at Castle Stawiarski, agreed and said it's been her experience that less than 1% of foreclosure cases her firm has handled, have an issue with finding the original note.
The panel also implored servicers to meet with their counsel and gain the knowledge of the foreclosure variances in other states.
"Hopefully more and more states will get involved in the process of establishing the most efficient and technically sound way to get uniform standards," for the foreclosure process in both judicial and nonjudicial states, Feiwell said.
Terry Hutchins, partner with The Law Firm of Hutchins, Senter & Britton in North Carolina, said there's a ton of new legislation coming through now that addresses the alleged lack of communication between servicer and borrower. He said courts are rapidly redefining the process and some of the new rules prohibit certain activities.
"One court recently ruled the servicer has a fiduciary obligation to the borrower," Hutchins said. "That's the scariest thing to me because it could rise to punitive damages."
Castle said the industry needs "to be far more precise" in how it approaches and deals with the changing regulatory environment.
"As we're looking to standardize the documentation process, we have all these different rulings coming down from different jurisdictions and new rules popping up all over," Castle said. "It's never been as insane as it is now."
The general discomfort permeating through the mortgage finance space will remain until the industry increases education of the foreclosure process while reassuring borrowers, lenders and investors alike and clarifying new rules, Diamond said.
Olsen agreed. "As local counsel, we're nailing Jell-O to the wall," he said. "They're passing legislation faster and faster it seems and then some (attorney general) doesn't like it and won't enforce it because he doesn't like the way it looks. Well, that really puts us at a significant disadvantage. If we don't know what words mean, then we can't comply and make everybody happy."
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