Financially battered state courts simply cannot keep up with rising mortgage defaults
In many ways, Frank and Deana Dixon's saddening, maddening story is the story of America's ongoing (and oft-forgotten) home foreclosure crisis. It's not just about bad loans, venal banking practices, and desperate borrowers. It's also about state court systems, addled by budget shortfalls, which cannot remotely keep up with the pace of foreclosure lawsuits. These two lamentable trends, speeding trains headed in opposite directions, have created a terrible mess that is hindering the nation's economic recovery.
The Dixons live in Scituate, Massachusetts. In 2009, like millions of other American homeowners that year, they sought to modify the terms of their home loan. They verbally agreed with their lender, Wells Fargo, to take certain steps toward such a modification. The bank told the Dixons to stop making their payments on the loan (funds that would later be added to the modified loan amount) and to provide loan officers with certain financial information. The Dixons complied and began to work with bank officials.
Eighteen months later, however, instead of modifying the loan, Wells Fargo told the Dixons that they had defaulted upon their payment obligations -- because they hadn't made their monthly payments. The bank told the family it intended to foreclose upon their house. The notice from Wells Fargo, which arrived 17 days before Christmas 2010, gave the family roughly 30 days notice. The Dixons sued to stop the foreclosure and their case wound up in federal court, before Chief U.S. District Judge William Young of Massachusetts.
Last Friday, Judge Young issued a ruling that gives the Dixons an opportunity to win their case (the family sought merely to bring Wells Fargo back to the negotiating table to discuss the loan modification). Here is the text of the ruling in Dixon v. Wells Fargo. In it you can assess not just how difficult the law has made it for families like the Dixons to vindicate their rights in court (thank you, banking lobby) but also how swamped the nation's court systems have become in handing the flood of foreclosure cases brought on by the sub-prime lending scandal.
When the Dixons sued Wells Fargo to stop the foreclosure of their home, they argued that they had reasonably relied upon the oral promises of bank officials who had told them to stop making their monthly payments. The Dixons were damaged by this reliance, they told Judge Young, because their failure to make their payments for month after month while they negotiated with the bank made them vulnerable to default and foreclosure, which of course is precisely what happened.
Wells Fargo, meanwhile, argued that the oral promises of its banking officers was not sufficiently "definite as to be binding" and that the Dixons' reliance "on its promise was neither reasonable nor detrimental." The bank also argued that the family's claim was preempted by the Orwellian-titled "Home Owners Loan Act," a Depression-era federal statute that has been amended over the decades to help lenders far more than borrowers. The failure of the parties to reach a loan modification, the banking giant told Judge Young, was none of the court's business.
Although it received tens of billions in federal bailout money, Wells Fargo evidently has made a habit of stringing its borrowers along before refusing to agree to loan modifications. And its foreclosure practices already have been blasted by the Supreme Court of Massachusetts. For his part, Judge Young first determined that the Dixons and the bank had not made an oral agreement to agree, which would have been more difficult to enforce under the ancient doctrine of promissory estoppel, but rather an "agreement to negotiate" further on the loan modification. And then he came to the core of the case:
In the present case, Wells Fargo convinced the Dixons that to be eligible for a loan modification they had to default on their payments, and it was only because they relied on this representation and stopped making their payments that Wells Fargo was able to initiate foreclosure proceedings. While there is no allegation that its promise was dishonest, Wells Fargo distinctly gained the upper hand by inducing the Dixons to open themselves up to a foreclosure action. In specifically telling the Dixons that stopping their payments and submitting financial information were the "steps necessary to enter into a mortgage modification," Wells Fargo not only should have known that the Dixons would take these steps believing their fulfillment would lead to a loan modification, but also must have intended that the Dixons do so.
Where's George Bailey when we really need him? Judge Young then determined that "no consensus" has yet emerged from the courts about the extent to which the Home Owners Loan Act precluded state law claims like the Dixons'. So he concluded that the family could proceed toward trial to see if they could prove their clams against the bank. The family's claim, Judge Young wrote, legitimately seeks "... to hold the lender to its word." The bank now may appeal the ruling to the 1st U.S. Circuit Court of Appeals or it may work out a loan modification with the Dixons.
Few civil cases are more important to individuals than those which affect their right (or lack thereof) to live in their own homes. Yet while the worst of the foreclosure epidemic appears to be over -- largely as a result of increased regulatory and judicial pressure put on banks to ease their aggressive approaches -- state court systems from sea to sea have been financially battered to the point where they simply can't keep up with those foreclosure cases which still are pouring through. As Judge Young put it in his opinion:
Clogging the operation of the mortgage foreclosure system with court delay simply will not work. Either individual rights will be submerged, and people will lose their homes unlawfully, or home mortgage liquidity will atrophy, the larger economy will suffer, and potential home buyers will be denied homeownership, although financially able to support mortgage payments.
In Massachusetts, where both Judge Young and the Dixons live, budget shortfalls have resulted in chaos. Earlier this month, two of the Commonwealth's Supreme Court Justices, reacting to budget figures offered by Gov. Deval Patrick, said that 11 state courts would likely have to close. In California, a state ravaged by foreclosures, dozens of courthouses have been (or soon will be) closed, hundreds of court workers have been laid off, and thousands of others have been furloughed as a result of budget cuts. "It has never been worse," California Supreme Court Chief Justice Tani Cantil-Sakauye recently told the San Jose Mercury News.
Pick a state, any state, and you can see how bad the problem is. For example, how would you like to be a homeowner fighting your foreclosure case in Florida? Here's how the Sun-Sentinel described the problem last summer:
Statewide, more than 700,000 foreclosure cases have been filed in the past two years, one out of four in Broward and Palm Beach counties. In South Florida, the number of foreclosure cases has increased tenfold in five years. In Broward, about 52,000 cases were filed last year, up from 5,300 in 2004. In Palm Beach County, about 30,000 foreclosure cases were filed last year, up from about 3,200 five years earlier. "It's overwhelming the courts," said Broward Circuit Judge Jack Tutor. He estimates he and the other circuit civil judges are each juggling 5,000 to 6,000 cases at one time. Two of three are foreclosures.
Judge Young cited me in Dixon v. Wells Fargo (Footnote 11) for the proposition that the legislative and executive branches are abandoning the judicial branch just when people need their judges and courthouses most. The Dixons got lucky. They were randomly assigned a judge who was willing to quickly move on their case and to speak out about the larger problem. But for every family like the Dixons there are thousands more whose lives are in limbo while they wait for their foreclosure cases to wend their way through court. It's yet another sign that America is slouching toward third-world justice for its citizens. Surely we can do better for these other families, if not for their own sake then for the sake of the nation's real estate market.
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