Looking Into the Foreclosure Process

by Deepak Gupta

The media and policymakers have been paying lots of attention lately to the plight of homeowners facing foreclosure. Most of that attention has been on preventing foreclosures from being initiated in the first place, and rightly so.  But it's also worth considering what happens in the foreclosure process itself: What kinds of notice and opportunity to contest the proceedings do homeowners get, what kinds of fees are they being charged, and how accurate are the claimed debts?

Fees and Overstated Claims:  A front-page article in the New York Times earlier this week reported on new research by University of Iowa law professor Katie Porter concerning exorbitant collection fees and overstated claims in mortgage foreclosure cases. The various fees charged to consumers facing foreclosure (late fees, "demand" fees, overnight delivery fees, fax fees, payoff statement charges, etc.) represent a substantial and growing percentage of the profits reaped by loan servicers. Porter's research--which is based on an examination of the actual behavior of mortgage companies in a set of 1,700 consumer bankruptcy cases--will be published in a forthcoming law review article entitled Misbehavior and Mistake in Bankruptcy Mortgage Claims (SSRN).

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures.  Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question. . . . .

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered.

Notice Procedures:  Next, consider the adequacy of foreclosure notice procedures--an issue that Public Citizen is currently litigating in the Maryland Court of Appeals (Griffin v. Bierman) and the Michigan Supreme Court (Sidun v. Wayne Co.), building on a due process challenge we won in the U.S. Supreme Court last year (Jones v. Flowers). 

If you owe me a small amount of money and I want to sue you to get a judgment and collect on the debt, I've got to make sure you learn about the lawsuit.  I've got to get a process server to track you down and give you notice.  But if I'm a mortgage lender and I want to foreclose on your home--a case in which the stakes are obviously much higher--in some states I'm entitled to give you as little as ten days notice by mail, after which I can sell your house at auction without you even knowing about it.  That's what happened to Maryland resident Joyce Griffin. She lost her house in a foreclosure sale because she never received notice until it was too late for her to save her home.

Griffin's mortgage company, the now-defunct Ameriquest, tricked her into refinancing the home she owned, when, after her fiancé died, she'd simply wanted to have his name taken off the mortgage. When the single mother could no longer make the increased mortgage payments, a "foreclosure mill" law firm representing Ameriquest quickly began foreclosure proceedings. After they made a bare-bones and unsuccessful effort to notify her of any pending action -- they sent her notice by certified mail but did nothing even when it was returned undelivered - -Griffin lost her home when it was literally auctioned off on the courthouse steps. She never learned that her home had been sold until the new owner tacked a note on her door.

If Griffin had been a defendant in a small-claims case, the law would have required that she be personally served or, in some jurisdictions, that she be provided equally reliable service (actual notice by mail, with acknowledgment of receipt, for example). Even in a routine debt collection action, the foreclosure mill's handling of Griffin's case would have violated her constitutional rights.

Why the discrepancy?  I think that the blame, as with other unprincipled anomalies in the law, lies with legal fictions that continue to live on long after their historical justifications have been cast aside.  Foreclosure proceedings are historically considered in rem rather than in personam proceedings--a legal fiction meaning that the action is against the property rather than the person, so little or no personal notice is required.  Historically, publication alone was enough.  (A closely related justification, also rejected by the Supreme Court, is the so-called "caretaker assumption"--the notion that it's acceptable to assume that property owner's will look out for their interests and that they should bear the consequences of failing to do so.)

But what does the in rem justification really mean?  Whatever label you put on it, the fact remains that someone owns that house.  When you foreclose on it, you're really depriving that person of their property. Given the special protection for the security of the home in our constitutional tradition (embodied not just in the protection of property rights in the Fifth and Fourteenth Amendments, but in the Third and Fourth Amendments as well), why should someone get less notice before they're deprived of their home than they get when they're sued for $200?

What's remarkable is that the in rem/in personam distinction lives on, and continues to be used by many states to justify summary foreclosure proceedings, even though it was rejected by the Supreme Court over half a century ago, and has been consistently rejected since.  In 1950, the Court held emphatically that "the requirements of the Fourteenth Amendment to the Federal Constitution do not depend upon a classification for which the standards are so elusive and confused generally and which, being primarily for state courts to define, may and do vary from state to state." Mullane v. Cent. Hanover Trust, 339 U.S. 306, 312-13 (1950).  If the Court had held otherwise, it would have led not only to a lack of uniformity in due process requirements, but also to circularity, because "American courts have sometimes class certain actions as in rem because personal service was not required, and at other times have held personal service of process not required because the action was in rem." Id. 

Again, in 1982, the Supreme Court firmly rejected the argument that Kentucky's method of service in actions to evict tenants from public housing could be justified on the basis that the actions were in rem, as opposed to the nature of the interests at stake:

'[A]ll proceedings, like all rights, are really against persons.' In this case, appellees have been deprived of a significant interest in property: indeed, of the right to continued residence in their homes. In light of this deprivation, it will not suffice to recite that because the action is in rem, it is only necessary to serve notice 'upon the thing itself.' The sufficiency of notice must be tested with reference to its ability to inform people of the pendency of proceedings that affect their interests. In arriving at the constitutional assessment, we look to the realities of the case before us: In determining the constitutionality of a procedure established by the State to provide notice in a particular class of cases, 'its effect must be judged in the light of its practical application to the affairs of men as they are ordinarily conducted.'

Greene v. Lindsey, 456 U.S. 444, 450-51 (1982).  While the Supreme Court has repeatedly insisted on looking at the real-world implications for the person who may lose his or her property, state courts throughout the country continue to cling to historical justifications for inadequate summary in rem foreclosure procedures--procedures that are contributing to the catastrophic impact of the subprime mortgage crisis.

If you know of a state that has a particularly quick or bare bones foreclosure process, I'd like to hear from you.

Comments

[Laura]

I have been served an In Rem Foreclosure in Florida and I only received it by mail and only because I requested it.

Laura

[david kopel]

House Bill 365 Foreclosure -- in Maryland and District of Columbia -- A whole new industry just opened up !!!

[Richard]

Before going for foreclosure the borrower has to be clear with the following questions as they are very important to know, What kinds of notice and opportunity to contest the proceedings do homeowners get, what kinds of fees are they being charged, and how accurate are the claimed debts?

[John]

When a person is in foreclosure, they are under stress and are probably frightened and worried. They are not sure what they should do to handle their problem. When someone stops paying on their mortgage, they have already stopped paying on all of their other debts. These other debts usually include credit cards and personal loans; the mortgage is always the last thing they stop paying.
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