Homeowners Win Lawsuit Over Fraudulent Foreclosure But May Still Lose House

A California couple recently won a lawsuit claiming that their mortgage servicer fraudulently foreclosed on their home, but limits on the damages in the case mean that the homeowners can’t even cover their legal bills, let alone keep their house.

The mess goes back to the collapse of the economy in 2008. The original lender on the mortgage went belly-up and was put under FDIC conservatorship and eventually taken over by OneWest.

The homeowners claim that in 2009 they requested a loan modification and a rep for the FDIC told them — in what has since become a regularly repeated statement that banks often deny ever telling customers — to stop making payments in order to qualify for a modification.

They says they never received a notice of default for skipping payments. Instead, they received a notice of trustee sale, which is the penultimate step in the foreclosure process.

When the homeowners contacted the bank to find out what was going on, their lawyer says they were told “Don’t worry about that, just send in your loan modification application, and you’ll hear within 30 to 60 days.”

But that didn’t happen. In July 2009, the bank attempted to evict them and foreclose on the property.

This happened because of a practice known as dual-tracking, in which one department of the bank will be (slowly) processing mortgage modifications while a separate group continues to move forward with foreclosure.

The practice is so controversial that after Jan. 1, it will be against the law in California.

The homeowners were able to delay their eviction until January of this year, but were forced to leave while the wife was eight months pregnant.

They finally had their day in court this summer, where their lawyer convinced the jury that the bank had violated a 2009 law requiring lenders to give borrowers an additional 60 days before filing a notice of trustee sale.

“But the key thing was that one part of the bank was telling [the homeowner] that he would be getting a loan modification and the other part of the bank was going ahead with the foreclosure,” the lawyer tells the San Francisco Chronicle.

Even though the homeowners were victorious in court, the jury could only award them $13,500. Under California law, if a property in a wrongful foreclosure is underwater — worth less than what’s owed on the mortgage — the plaintiff can only recover lost equity. The only way to get their house back is to tender all the money remaining on the loan.

“California really screws the borrower. If your house was wrongfully foreclosed and you want it back, you have to offer the whole amount,” explains the lawyer.

The jury could have awarded punitive damages to the homeowner, but elected not to in this case.

“If someone defrauds you, you go to court and the wrongdoer should make the other side whole,” the homeowner tells the Chronicle. “The jury found there was fraud and (OneWest) wrongfully foreclosed on the property, but they said ‘That’s OK because (OneWest’s) lawyer indicated it was upside down.’ If that’s the case, it means it’s OK for banks to foreclose on anybody who’s upside down.”

Starting Jan. 1, California’s new Homeowners Bill of Rights will ban banks from dual-tracking delinquent loans. If a homeowner successfully receives an injunction to prevent a foreclosure, they will be entitled to legal fees but not damages. If the home has already gone into foreclosure, homeowners who successfully sue will receive legal fees and may seek damages.

Meanwhile, the homeowners in this case are considering a second lawsuit to try to get their home back.

Legal win means little after foreclosure [SFgate.com]