Posted on Monday, December 27, 2010
Since the meltdown in the housing market began more than three years ago, Maryland and the District have changed their foreclosure laws to give borrowers greater protection. Virginia has moved in the opposite direction.
Last year, the state legislature overwhelmingly passed a law making it easier for lenders to defend themselves when accused of giving homeowners too little warning of impending foreclosures.
The process moves so quickly in Virginia - one of the fastest states in the nation - that homeowners can receive less than two weeks' notice that their house is about to be sold on the courthouse steps.
That confronts homeowners with an almost impossible deadline. To get a court to stop the sale in that narrow window, they must gather evidence, file a lawsuit and potentially post a bond with the court that could total thousands of dollars. Instead of trying to find a lawyer and prepare a suit, many borrowers run out the clock trying to deal with their lender.
At a time when lenders have been cutting corners and using phony documents to seize huge numbers of houses, the hurdles can be insurmountable, according to lawyers, consumer advocates and borrowers who have tried to save their homes.
"There's no question that people are losing their homes when they should not be," said James W. "Jay" Speer, executive director of the Virginia Poverty Law Center, which is part of a legal-aid network.
In many states, homeowners facing foreclosure automatically get a day in court, a chance to tell a judge why they should keep their homes. The judicial process provides at least a modest check on error and abuse.
But in Virginia and 28 other states, as well as the District, according to the RealtyTrac foreclosure information service, borrowers have no such luck. They face "nonjudicial" foreclosure processes, meaning lenders can foreclose without going through the courts.
Maryland occupies a middle ground; it allows the process to play out with little if any substantive judicial review, but it sets a lower bar for homeowners asking a court to delay a sale.
In Virginia and many other nonjudicial states, homeowners' fate is largely in the hands of private authorities known as "trustees" rather than judges.
The trustees are supposed to protect the rights of both borrowers and lenders, but they have a built-in conflict of interest: They are hired by lenders.
Virginia lawyer Suzanne Wade used to serve as a trustee but switched sides and now represents bankrupt consumers. Years ago, the trustee system "worked well," Wade said. "Then you had the pressure from the larger lending institutions that made it more and more difficult to always do what you thought was the right thing."
A homeowner's best hope may be that a trustee will put the sale on hold, and lawyers say trustees sometimes back down when challenged.
Bruce T. Whitehurst, president of the Virginia Bankers Association, said judicial review would make a bad situation worse. As it is, he said, borrowers who have stopped making payments can stay in their homes for many months, and by the time they receive a foreclosure notice, they have had plenty of time to address the problem.
Slowing "a process that already has ample protections just adds costs" that would be absorbed by everyone involved, he said.
The Virginia approach offers advantages, Whitehurst said. By hastening the day when banks can move delinquent loans off their books, it can cut their losses.
Only when the necessary foreclosures run their course can real estate prices hit bottom and begin to climb again, he added.
When it recently came to light that foreclosure documents have been tainted by rampant "robo-signing," economists and government officials fretted that a resulting slowdown in foreclosures could jeopardize the nation's economic recovery. They feared it could paralyze an already crippled real estate market and send the banking system back into a tailspin.
But some state and local officials are concerned that the system does too little to protect homeowners' rights.
In Maryland, judges have called for slowdowns in foreclosures to ensure documents are handled properly, and the state legislature passed a law that this year gave homeowners the option of trying to avert foreclosure through mediation.
The District also instituted a mediation option, and D.C. Attorney General Peter J. Nickles has pushed for careful review of paperwork to confirm that a lender has the standing to foreclose.
Virginia has taken a different approach.
In 2008, the Supreme Court of Virginia invalidated a foreclosure, saying a property owner was given insufficient warning. Then, last year, the state legislature overwhelmingly passed a law making it easier for lenders to win similar disputes.
Virginia homeowners may get less than two weeks' notice that their house is scheduled to be auctioned. The notice must be sent 14 days in advance of the sale, but delivery time eats into that.
For homeowners expecting a loan modification, the 14-day notice may be the first warning that their application has gone off the tracks.
Unable to prevent the foreclosure, some homeowners fight the subsequent effort to evict them from their house. But by then, the grounds on which borrowers can build a defense have eroded; judges can refuse to consider arguments that the foreclosure was improper.
In Salem, Va., Army veteran Scott Neff and his family spent Thanksgiving packing their possessions and loading a U-Haul, staying up late in a painful rush to comply with an eviction order.
Their descent into foreclosure began when Neff's wife lost a job. Like many borrowers, they applied for a modification - a deal to ease the payment terms on their loan - and they were awaiting an answer when the foreclosure notice arrived, Neff said.
They called their lender in a panic and were lulled into a false sense of security when - in keeping with Department of Veterans Affairs guidelines - loan servicer Chase Home Finance promised to postpone the foreclosure sale, Neff said.
But the Neffs discovered after the fact that the sale had gone through as scheduled. They missed their chance to challenge it in court.
"I think it's definitely a broken system," Neff said. "I don't think it's fair at all."
When the Neffs asked a court to stop the eviction, a judge said his hands were tied, Neff said.
"The Neffs went to court thinking someone would listen to their story of what went wrong in the process but found their story was legally irrelevant to the question being decided," said Thomas Domonoske, a lawyer with the Legal Aid Justice Center in Charlottesville who has studied their case.
Asked to explain what happened, Chase spokesman Tom Kelly looked into the matter and said Chase would contact the borrower to inquire further.
"Misunderstandings can occur. If it turns out we made a mistake, we will work with the customer and try and make it right," Kelly said.
One Falls Church resident, an executive at a small defense research firm, said his effort to fight foreclosure has been an exercise in frustration. The court doesn't take credit cards, so to withdraw enough cash to post the bond for a lawsuit, he had to visit three bank branches and nervously walk around carrying thousands of dollars.
He said his trouble began when his lender imposed more than $14,000 of baffling charges. He asked that he not be identified because his wife's security clearance could be jeopardized.
His attorney, Christopher E. Brown, sued to reverse a foreclosure sale, arguing that the homeowner's rights were violated.
The case revealed a Catch-22: To obtain evidence that might flesh out those suspicions, his lawyer needed to file a lawsuit and enter the court-supervised process known as discovery. To file the lawsuit, however, the lawyer needed evidence.
A judge in Fairfax County Circuit Court threw out the lawsuit and ordered Brown to pay almost $10,000 to cover the other side's legal expenses. In an August ruling, Judge Jonathan C. Thacher said the lawyer was trying to turn Virginia's foreclosure process into something it was not. He cited an earlier opinion:
"I don't find that the Court should be creating a judicial foreclosure procedure when the legislature has mandated a nonjudicial procedure to be appropriate."
By David S. Hilzenrath
Washington Post Staff Writer