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5 Ways Homeowners Are Victimized by Wrongful Bank Foreclosure

Many legal experts seem to agree: the so-called technicalities go to the heart of the American system of law and property rights.

The issue at the center of the foreclosure scandal isn’t the use of robo-signers and shortcuts in paperwork: It’s whether the banks’ mistakes and lack of due diligence caused people to face wrongful foreclosures.

Banks have denied that this has happened, saying, “We are confident that processing errors did not result in any inappropriate foreclosures.” Foreclosure defense attorneys, however, say that wrongful foreclosures not only happen, they’re widespread. This disagreement comes down to what constitutes a wrongful foreclosure.

Here’s our attempt to break through the rhetoric and lay out the arguments:

1) Homeowners were not in default but faced foreclosure.

Most everyone agrees it’s wrong for banks to foreclose on someone who isn’t behind on a mortgage or has even paid off a mortgage. Homeowners in both these scenarios have faced foreclosure actions due to processing errors -- often involving miscommunication between lenders, servicers, title insurers, foreclosure law firms and other bank contractors. In many of these cases, banks have apologized for such errors.

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.

It’s not uncommon for banks to give this kind of advice to homeowners who were at the time current on their mortgage but were seeking a modification. In a survey we conducted in August, nearly half of the 373 homeowners who responded told us that their mortgage servicer incorrectly told them that they had to stop making mortgage payments in order to qualify for a loan modification.

This has led some homeowners across the country down a path to foreclosure. Several have lost their homes -- or come very close -- because the bank instructed them to default and then foreclosed, according to reports by Courthouse News Service.

One Colorado Springs, Colo., family, seeing a drop in business income, sought a loan modification and was told by GMAC Mortgage that to qualify they had to miss two mortgage payments [4], reported the Denver Post. When they took that advice and were rejected for the modification, they tried to catch up on what they owed in order to avoid foreclosure, but by that time their debt had increased because of additional fees.

3) Homeowners were behind on their mortgage but could have caught up if not for additional fees.

In a speech this month, Federal Reserve Governor Sarah Bloom Raskin criticized the mortgage servicing industry for using a “ Pandora’s Box of predatory tactics” including “the padding of fees, such as late fees, broker-price opinions, inspection fees, attorney’s fees, and other fees.” (The Federal Trade Commission has a consumer fact sheet on its website that urges homeowners to “read your billing statements carefully to make sure that any fees the servicer charges are legitimate” and to ask for itemizations and explanations when needed.)

Raskin also mentioned servicers’ practice of taking out overpriced forced-place insurance policies and the “strategic misapplication of payments” -- whereby homeowners’ payments for the mortgage principal and interest were first applied to pay fees and insurance premiums, triggering default or precipitating foreclosure on the mortgage principal.

In light of these problems, some state judges presiding over foreclosure cases have begun asking banks and the law firms they hire to justify the thousand-dollar fees they’ve charged to homeowners. From a piece in the Tampa Tribune:

"Routinely, routinely, I'm seeing charges of $1,600, $1,800, $1,000, $800, any of those are ridiculous, and there had better be a good reason for it," [Pasco County Circuit Judge Susan] Gardner said, noting that these fees should typically be $45 to a couple hundred bucks.

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