Allegations of Illegal Banking Maneuvers in Home Foreclosures
Editor’s note: The following article originally appeared in the September 7 print edition of Caribbean Business.
SAN JUAN — Egla (not her real name) was paying her home mortgage each month, even though she was already 90 days behind, to avoid going past the 120-day delinquency period that is required before a bank can legally start foreclosing a home. However, the bank rejected her last check and started procedures to foreclose her home after an employee who visited her home erroneously told the bank that her house was empty. While she is trying to negotiate a deal with the bank, she has to pay legal fees of more than $1,600.
José, who declined to give his name, said he began the process of loss mitigation, but the bank is continuing the foreclosure process. He said the bank is offering to refinance his loan for another 30 years. “At my age, I cannot do that,” he said.
Marta Meléndez, who lost her home last year, alleges she was the victim of the bank’s tricks and her own ignorance. The woman, who has formed the support group Victims of Home Foreclosure, said she went to the bank to seek orientation before she even fell behind on her payments, as she knew her financial situation was going to get worse. Bank officials told her to stop paying the mortgage for three months so she could go into loss mitigation, which was the worst thing she could have done.
In the middle of the battle to save her home, the bank sold the mortgage to a hedge fund, which took advantage of the fact that the bank had sued her in court to move on with the foreclosure. The hedge fund, which bought the mortgage at a discount price, declined to sell her back her home for the amount it had purchased the mortgage.
Attorney Luis Trinidad, who defends homeowners from foreclosures, said banks not only engage in actions that may be illegal but also noted there are lawyers and judges who are unfamiliar with the law and make things worse for homeowners.
“In law school, they teach you mortgage law but not banking laws, and lawyers often cannot invoke the right law,” he said.
Trinidad said a judge in Caguas foreclosed a home whose mortgage was not registered in the Property Registry, a requirement for a mortgage to be valid. “If the mortgage is not registered, it does not exist, but the judge foreclosed the home anyway,” he said.
The law also states that when a house is put up for public auction, a notice must be placed in three different places within the town where the property is located. “I had a house in Caguas, but the notice of the public auction was made in Carolina,” he said, adding that such things would have made the auction invalid.
He said another problem is the erroneous accreditation of payments. “I had this couple who had a mortgage and was paying through direct deposit. After 60 months, the bank agreed to lower the interest. Instead, [the bank] declared a default, contending [the couple] had not paid…. Even the judge became angry at the bank’s behavior,” he said.
Trinidad noted he dealt with a bank that had the address of the debtor correct, but gave the court an incorrect address. As a result, the debtor did not receive the court’s correspondence and was unable to defend himself. Meléndez said the same thing happened to her; she did not get the court’s letter and was declared in contempt, which accelerated her foreclosure.
There are more than 15,000 homeowners in Puerto Rico that are 30 days behind on payments and 7,000 behind on payments for 60 days, according to the Financial Institutions Commissioner’s Office. The number of homeowners whose homes will be foreclosed could soon go up, spurred in part by the cut in income many government workers will face when—and if—the furloughs start. About 20 municipalities comprising some 15,000 workers are already enduring furloughs.
Critics say banks are doing little to educate consumers about their rights, referring them to loss mitigation when other alternatives exist, such as a payment plan that includes paying legal fees or a loan modification. “Many people don’t know that loss mitigation is not the only alternative. [The U.S. Housing Department] also has programs that help consumers keep their homes. But banks do not tell you that,” Meléndez said.
Importance of consumer education
However, consumers also engage in behavior that often adversely affects them. For instance, individuals should go immediately to the bank and answer all correspondence once they start to get behind on payments instead of ignoring them. Once they are in court, they should also be monitoring the process to ensure they answer all court requests to avoid a fast-track process on foreclosure.
“They should also get legal help as soon as possible,” Trinidad said.
Nonetheless, there are things homeowners should know. For instance, a bank is not supposed to start foreclosure in court until after the homeowner falls behind on payments for 120 days. The bank is supposed to give the homeowner a list of documents to submit when seeking alternatives to foreclosure.
Homeowners who seek help from loss mitigation should also know that once they have turned in all the required documentation, the bank must stop the foreclosure process. However, some banks are not doing that and continue the legal process against the homeowner after he or she is already in loss mitigation. This is called dual tracking.
“Dual tracking is prohibited. However, some banks continue the legal process against people who are in loss mitigation, and that is why I decided to investigate,” said Yashira Lebrón, chairwoman of the P.R. House Banking Committee.
Enrique Almeida Bernal, a lawyer, said homeowners have several defenses they can raise against foreclosure that are listed on his webpage. They include that the mortgage is not registered and therefore not valid; that the bank violated the loan contract; that the bank made a mistake in listing payments; or that the homeowner filed for bankruptcy.
Mediation a possible alternative
Popular Democratic Party Rep. Jesús Manuel Ortiz, on the other hand, said he is working on a bill that would allow homeowners to seek the alternative of mediation with a bank before the court process to foreclose begins, and not after, as is the case now. “I am very worried because I know foreclosures will go up,” he said.
Zoimé Álvarez, executive vice president of the P.R. Bankers Association, defended the loss-mitigation process, noting that while banks have foreclosed 32,745 homes over the past eight years, some 174,756 have been saved.
But Financial Institutions Commissioner George Joyner said he has received complaints against banks related to foreclosures but refers them to the Justice or Consumers Affairs departments for follow up. He confirmed that many banks are indeed engaging in the illegal practice of dual tracking, but also noted there is a lack of information to educate homeowners about their rights.