A pair of Florida court rulings will make foreclosures in this hard-hit housing market even more painful for lenders.
The state Supreme Court said last month that before foreclosing, a lender must verify that it has all the proper documents, including proof it owns the mortgage in question. This isn't as easy as it may sound, since during the securitization boom of the last decade, mortgages were typically sold several times over.
If, when pressed by the borrower, a lender cannot produce such papers, the institution could be fined for perjury, the court said.
Foreclosures in other states have been dismissed for lack of such proof, but those rulings were handed down on a case-by-case basis. Florida stands out for trying to uniformly make lenders do more due diligence up front.
"Florida is the first state that I'm aware of that … is requiring some pretty strict rules of evidence and documentation of who is the actual holder of the note," said O. Max Gardner 3rd, a consumer bankruptcy attorney at Gardner & Gardner PLLC in Shelby, N.C.
In December, the same court said all Florida foreclosure cases must go through mediation, a process that has been gaining popularity in other states and that bankers say makes foreclosures expensive for them.
Both rulings are designed to help ease the backlog of foreclosure cases that have been clogging Florida courts. The verification requirement, for example, precludes long, drawn-out arguments over whether the lender has the right to bring an action against the borrower in the first place.
"The effect here is in part to help the individual homeowner, but it's also an effort to try to ensure that the creditors' sloppiness in preparing these foreclosures isn't imparting a huge burden on the court," said Katie Porter, an associate professor at the University of Iowa College of Law. It's a clear message to lenders "to clean it up," she said.
Florida's approach isn't expected to be widely duplicated elsewhere. Only 20 states even require lenders to go through courts to conduct foreclosures. (In most other states, lenders can simply move to sell the house, though the borrower can sue to stop the foreclosure. A handful of states have a hybrid system where a lender can choose to process a foreclosure in or out of court.)
Even so, anything affecting foreclosures across Florida has an industrywide impact. Florida has one of the highest foreclosure rates in the country, with one in every 187 homes receiving a foreclosure filing in January, according to the latest data from RealtyTrac Inc.
The problem of proper documentation is one that has only surfaced in the last couple of years, but that has taken some courts awhile to figure out.
"This has been an issue going on in bankruptcy court for four or five years at least," Gardner said. "There was a long learning curve for the lawyers that were representing the consumers and an educational process for the court system to understand … the complexities of securitization."
One of the more prominent instances of a borrower's lack-of-documentation defense holding up occurred in October 2007, when a federal judge in Cleveland dismissed 14 foreclosure claims brought by a subsidiary of Deutsche Bank AG on the grounds that it could not adequately show it owned the mortgages in question.
The Florida Supreme Court's February ruling doesn't require lenders to submit documentation of the note with an initial complaint. The perjury charges become a risk only when a borrower demands to see the papers and the lender cannot produce them. Though the maximum fine is just $500, a second-degree misdemeanor is embarrassing. "Perjury before a court is not a good thing," Porter said.
The court said it wanted "to provide incentive for the plaintiff to appropriately investigate and verify its ownership of the note or right to enforce the note and ensure that the allegations in the complaint are accurate."
Legal experts said it's common for lenders to claim that they've lost the note. The Supreme Court said it wanted "to conserve judicial resources that are currently being wasted on inappropriately pleaded 'lost note' counts and inconsistent allegations."
So now, when filing an action for foreclosure of a residential property in Florida, the plaintiff must include an oath verifying that the facts alleged in the complaint are true and correct to the best of the plaintiff's knowledge.
John Rao, an attorney with the National Consumer Law Center, said Florida's requiring foreclosure complaints to be verified is unusual.
"I'm not aware of that being required in other places," he said. "Normally the verification requirement is only in unusual circumstances, like where someone is seeking an emergency injunction."
Usually, if a court does find that the pleadings were filed without proper backup or proper investigation of ownership of the loan in question, the judge could impose some type of monetary penalty, Rao said. However, the lender can come back to court and refile the foreclosure correctly, he said.
What's different about a verified pleading is that the plaintiff as well as the attorney is signing the complaint and acknowledging that the information contained in it is true to the best of their knowledge.
Foreclosure case filings stood at nearly 369,000 in Florida trial courts at the end of 2008, according to the state's Supreme Court, and that inventory was expected to grow to about 456,000 pending cases by the end of 2009.
Fed up with the trend, the Florida Supreme Court established a task force in March 2009 to recommend "policies, procedures, strategies, and methods for easing the backlog of pending residential mortgage foreclosure cases while protecting the rights of parties."
FAILURE TO COMMUNICATE
After months of examining cases and brainstorming ideas, the task force concluded that a "lack of communication between plaintiffs and borrowers" was the most significant factor preventing swift resolution of foreclosure cases.
To improve communication between parties, the task force recommended that the court require all foreclosure cases go to mediation no earlier than 60 days and no later than 120 days after the suit is filed, unless the plaintiff and borrower agree otherwise. The costs of the managed mediation program were to be paid by the plaintiff and not to exceed $750.
In December, the court signed an order requiring mediations (which some lower Florida courts had already been using), and followed up with the amendment to the Florida Rules of Civil Procedure in February requiring that all foreclosure complaints be verified, another one of the task force's recommendations.
The changes "will shut down foreclosures," said April Charney, a senior staff attorney at Jacksonville Area Legal Aid and a member of the task force. "Getting that trustee to sign, to swear that the complaint is accurate, that's a big problem."
What's more, the mediation process requires that the mediation manager notify borrowers of their rights to demand documents showing the chain of ownership of the loan. "As a borrower's lawyer, really I look at mediation as an avenue of discovery, because I'm going to get documents I otherwise would have had to work really hard for," Charney said. "Mediation can't be scheduled until this borrower has this documentation."
According to the court's order, mediators must be certified by the Florida Supreme Court and specially trained in residential foreclosure matters. (The task force also developed training standards for mediators.)
Some legal experts aren't so sure the rulings, especially the one requiring verified complaints, will do much to stem the tide of foreclosures.
"I think this is important in a legal sense, but do I think foreclosures are going to slow down? Hell no," asserted Porter. "I do think that there's now the ability for a real penalty, a monetary penalty. … It may force some changes in process when they start getting real penalties."
Anthony DiMarco, executive vice president of government affairs at the Florida Bankers Association, said Florida's ruling requiring verified complaints is "just one more hoop" lenders have to jump through in the foreclosure process.
In principle, DiMarco said the trade group supports mediation. "Our problem with this is we're going to foot the whole bill. The borrower has no skin in the game," he said.
"The borrower can answer to mediation and never intend to carry on with it," he added. "They may use it to delay. It's going to cost them nothing."
The use of mediation in foreclosure cases has been on the rise. Since mid-2008, at least 25 foreclosure mediation programs have sprouted in 14 states, according to a report last fall from the National Consumer Law Center in Boston.
Geoffry Walsh, a staff attorney at the center, said there are at least a dozen state bills pending right now proposing or revising mediation laws in foreclosure cases.
Mediation in foreclosures has been garnering support on a national level, as well. In September Sen. Jack Reed, a Democrat from Rhode Island, introduced a bill in the U.S. Senate that would, among other things, establish a grant program for state and local government foreclosure mediation programs.
The Florida bankers group has presented its own solution to the problem of foreclosures.
The trade group worked with State Sen. Michael Bennett, a Republican representing a district in the southwest part of the state, in drafting a bill, which he introduced in late February, proposing that lenders in Florida have the option of settling foreclosures on non-homestead properties (which include commercial and vacation properties), as well as residential properties that have been abandoned, outside of court. A similar bill has subsequently been introduced in the Florida House of Representatives.
"We have one group saying you shouldn't foreclose, you should work on helping property owners. And another group saying you need to foreclose tomorrow," DiMarco said. "This is our solution. … The bill gives lenders a choice. If you go nonjudicial, that's one more case that's not in the court system."