85 Pages Posted: 20 Dec 2012 Last revised: 11 Jun 2013
Date Written: October 19, 2012
In 27 states non-judicial foreclosure is the primary method of foreclosure. Non-judicial foreclosure means that a secured party may sell the property of a homeowner without ever providing proof to a court that default has occurred or that the foreclosing entity has standing to foreclose. In place of a court, the foreclosing entity provides documents to a trustee who then carries out the task of providing notice to the homeowner of default, carrying out a foreclosure sale, and deeding the property to the new buyer. In this process, the trustee is the only neutral who oversees the forced transfer of one party’s property to another.
Non-judicial foreclosure has long been justified as a simple way to carry out foreclosures. Historically, there was little chance that there would be any dispute about 1) whether payments were made, or 2) who had the right to foreclose. Further, because the lender almost certainly valued the stream of revenue from mortgage payments more than it did the chance to foreclose, to the extent that there were payment disputes, they could often be resolved. As a result, the trustee’s job was uneventful and could be carried out by a sheriff or a private citizen.
Today, as a result of the mortgage crisis – including sloppy underwriting, rampant securitization, poor record keeping and questionable legal practices regarding recording – the fundamental principles that supported non-judicial foreclosure in its current state are no longer present. The result is that antiquated laws are being applied to novel new foreclosure problems. The only potential neutral in this new frontier is the trustee. The fundamental problem with this is that these trustees are inadequate to ensure just resolutions both because 1) they are untrained and unregulated, and 2) they are almost exclusively loyal to the banks that initiate foreclosures.
The lack of training and regulation is prevalent. States do not require trustee to be licensed, and there are usually no statutory guidelines about trustee responsibilities. The result is that trustees carry out the important task of the forced transfer of one person’s property to another as the only neutral, but they are ill-equipped to serve as that neutral. The need to consider whether the note has been transferred, whether state recording laws have been complied with, whether default has occurred under the deed of trust, whether robo-signed documents are present, and a host of other questions that relate to whether foreclosure is appropriate are beyond what most trustees can or will consider. The result is that trustees rely upon the representation of large institutional banks, the same banks that repeatedly have been shown to be sloppy and/or fraudulent in their record keeping, payment tracking and foreclosure initiations.
The second issue identified above is that many trustees are simply not neutral at all. In many cases in most states, the trustees in non-judicial foreclosures are either the attorney for the bank that is foreclosing or they are employed by a company that is owned by attorneys for the bank. A cottage industry, sometimes referred to as foreclosure mills, has sprung up. In these mills, attorneys churn out foreclosures in mass at bargain, bulk prices. These same attorneys may own title companies that do the title work related to foreclosure, they may serve as debt collectors for the bank prior to or after foreclosure, and they often represent the same banks in actions to remove homeowners from their homes after foreclosure. As a result, there are financial incentives for the trustees to keep the repeat business of the banks, both because they make money in the foreclosure process, and because they often make additional money representing the bank in related foreclosure matters before and after the foreclosure. These close financial ties between the bank and the trustee, the ethical duty to represent the bank zealously (despite a duty to be neutral to the borrower), and the need to process foreclosures quickly (as opposed to conducting investigations into the bona fides of the conditions needed to justify foreclosure) all conspire to make it highly improbably that the trustees can fulfill their duty of neutrality.
The results are shocking and troubling. Reports from throughout country are emerging that suggest that wrongful foreclosures, which amount essentially to home theft, are occurring regularly. These range from foreclosures carried out by parties without standing to foreclosures in situations where there was no default at all.
This article details the history of mortgage era and non-judicial foreclosure, focuses on the law relating to trustees, identifies the current problem with trustees, details real-life scenarios that have played out as a result of unchecked or biased trustees, and then proposes changes to trustee law and practice. Specifically, this article argues that concrete reform regarding the role of trustees, including who may serve and how they are regulated, can produce a ripple effect that prevents the most egregious and erroneous foreclosures from proceeding by shepherding some of them into court and encouraging the bank to consider alternatives to foreclosure in other cases. This article offers suggestions to improve the situation by focusing on three distinct arenas and methods: 1) legislative reform, 2) potential impact litigation, and 3) application of existing ethical rules that might apply to attorney trustees.
Keywords: trustee, non-judicial foreclosure, foreclosure, mortgage crisis, mortgage fraud, securitization, MERS, subprime
Suggested Citation: Suggested Citation
Campbell, John E., Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures (October 19, 2012). Catholic University Law Review, Vol. 63, 2014; U Denver Legal Studies Research Paper No. 13-22. Available at SSRN: https://ssrn.com/abstract=2191738 or http://dx.doi.org/10.2139/ssrn.2191738