During the housing crisis banks were confronted with a previously unknown number mortgage foreclosures, and even as the height of the crisis has passed lenders are still dealing with a tremendous backlog. Overtime lenders have increasingly engaged third party contractors to assist them in managing these assets. These property management companies — with supposed expertise in the management and preservation of real estate — have taken charge of a large swathe of distressed properties in order to ensure that, during the post-default and pre-foreclosure phases, the property is being adequately preserved and maintained. But in mid-2013 a flurry of articles began cropping up in newspapers and media outlets across the country recounting stories of people who had fallen behind on their mortgage payments returning home one day to find that all of their belongings had been taken and their homes heavily damaged. These homeowners soon discovered that it was not a random thief that was the culprit, but rather property management contractors hired by the homeowners’ mortgage servicer.
The issues arising from these practices have become so pervasive that lawsuits have been filed in over 30 states, and legal aid organizations in California, Florida, Michigan, Nevada, and New York report that complaints against lender-engaged property managements firms number among their top grievances. This Article analyzes lender-engaged property management firms and these break-in foreclosure activities. In doing so, the paper makes a three-part call to action, which includes the implementation of bank contractor oversight regulations, the creation of a private cause of action for aggrieved homeowners, and the curtailment of property preservation clauses in mortgage contracts.
In addition to examining the history of not only subprime lending, the mortgage crisis, the National Mortgage Settlement ("NMS") and the beginning of the CFPB, this article also includes numerous examples of break-in foreclosures and judicial and governmental responses, as well as efforts by mortgage servicers to evade responsibility for actions taken by Mortgage Field Services contractors.
This includes a recognition that while the NMS subjected many mortgage servicers to oversight of their foreclosure practices, including for property inspection, that settlement included not private right of enforcement for individual or systemic violations, instead adopting a cumbersome administrative procedure.
And while the contractual right, found in nearly all consumer mortgage documents, to inspect and secure collateral is undeniably important for lenders, the failure to restrain such right under the inherent duty of good faith has been a serious problem. Similarly, the ability of servicers to declaim that MFS companies are independent contractors and consequently the mortgage servicer is not subject to traditional agent/master liability, has been an issue. This has been curtailed upon demonstrating that the servicer uses scorecards or other oversight to show control and thus liability.
Looking at other causes of action, the article discusses the strengths and weaknesses of claims for trespass, conversion, negligence and, least successful, intentional infliction of emotional distress.
The article also suggests that problems of break-in foreclosures would benefit from an industry-wide standard from the CFPB, including a obligation that all servicers be responsible for the actions of their retained MFS contractors.
A enacting legislation that would create a private right of action for break-in foreclosures, comparable to the well-established and uncontroversial prohibition from the Uniform Commercial Code at §9-609(b)(2), would also stem this problem. Provision of attorney's fees for a successful action would be vital, to supplement authority of government action.
Lastly, the right of inspection should be conditioned either through statutory reform, regulation or promulgation in the standard Fannie Mae/Freddie Mac mortgage documents which dominate the lending market, to require reasonable notice of an intent to inspect, enter and/or secured property.
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