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Post-foreclosure challenge came too late

A former homeowner cannot undo a foreclosure sale based on her government-insured lender’s failure to comply with HUD-required loan mitigation efforts in the absence of fraud, Maryland’s top court held Thursday.

The unanimous Court of Appeals said people in foreclosure must raise the issue of the lender’s failure to hold mitigation discussions in court proceedings leading up to foreclosure — not after the sale.

“[A] homeowner/borrower ordinarily must assert known and ripe defenses to the conduct of a foreclosure sale prior to the sale, rather than in post-sale exceptions,” Judge Glenn T. Harrell Jr. wrote for the court. “A lender’s failure to comply with pre-sale loss mitigation requests is one such defense, which must be raised ordinarily pre-sale in an effort to prevent the sale from occurring.”

In rejecting Sonja D. Bates’ effort to get her Gaithersburg home back, the court said undoing a foreclosure sale is an extraordinary action by a court. Maryland law and public policy favor the rights of good faith purchasers of foreclosed homes over individuals who could have raised challenges before the sale but did not, the court said.

“Although we acknowledge that the specter of foreclosure is as daunting as it is disheartening, if a borrower was able to raise any sort of exception after the foreclosure sale, there undoubtedly would be a chilling effect on interested prospective purchasers coming to sales,” Harrell wrote.

Attorney Phillip Robinson, who represents homeowners in foreclosure but was not involved in this case, assailed the court’s decision as a win for lenders more interested in foreclosing than in modifying loans.

But Kathleen Murphy, president of the Maryland Bankers Association, said the decision respects the rights of borrowers while recognizing the importance of bringing closure to the foreclosure process and enabling lenders to sell foreclosed homes.

Permitting borrowers to challenge sales after the fact based on claims they could have made beforehand “would have been very detrimental to the ability to sell foreclosed property,” Murphy said, as would-be purchasers would have reason to fear a successful post-sale challenge would strip them of the home.

The high court said judges can undo foreclosure sales when “procedural irregularities” occurred at the sale, but not before the sale. Such irregularities could include a lenders’ effort to prevent someone from making a bid on the property or otherwise “chilling the bidding,” the court added.

But Bates alleged no procedural irregularity at the sale or fraud by GMAC, the court noted. Rather, she claimed GMAC failed to have loan modification discussions required by regulations, referenced in her deed of trust, promulgated by the U.S. Department of Housing and Urban Development and its Federal Housing Administration, the court said.

Bates bought her home in February 1999 with an FHA-insured loan of $148,773, according to court documents. FHA regulations require the lender to participate in “loss mitigation” on insured loans.

Bates claimed GMAC had a duty to take “affirmative steps to assist [her] with alternatives to foreclosure” after she defaulted on the loan in November 2008.

GMAC responded that it had directed Bates to contact its “loss mitigation representative immediately to discuss any questions or concerns you have regarding your options.”

At oral argument last month, Bates’ attorney said GMAC had made representations that modification discussions would occur.

“She was led to believe that things were going to be OK,” said Vicki King Taitano, an attorney with the Maryland Legal Aid Bureau in Riverdale. Neither Taitano nor GMAC’s attorney, Eric A. Frechtel of Bradley Arant Boult Cummings LLP in Washington, D.C., returned phone calls for comment on Thursday.

‘Dual-track’

Robinson, executive director of Civil Justice Inc., said the case illustrates the problem with relying on a lender’s “dual-track program.”

“On the one hand, lenders lull homeowners into believing they’re under review for loss-mitigation and nothing needs to be done concerning the foreclosure sale,” he added. “However, on the second hand, the lender is simultaneously proceeding to sale and unless the sale is stopped will acquire a home it was not permitted to foreclose upon under the terms and agreements of 90 percent of today’s loss-mitigation programs.”

The dual-track problem persists despite a Maryland law that went into effect July 1 giving people facing foreclosure a right to mediation upon request, Robinson said.

Homeowners are not requesting mediation because lenders are assuring them their loans are under review for mitigation, he said, adding that the General Assembly should make mediation mandatory in light of the court’s decision.

“The Legislature must give the courts the authority to unwind deceptive sales,” he said.

Murphy, though, said the new mediation law adequately protects borrowers.

“Maryland has been on the forefront of mortgage-reform legislation,” she said. “There are protections that are in place for the borrower.”

Thursday’s decision comes as thousands of pending foreclosures have been stayed, amid allegations that affidavits prepared on behalf of the lenders were not actually signed by the attorneys whose names appear on them.

In a nodding reference to that controversy, the high court said it was not precluding the possibility that foreclosed individuals may challenge home sales based on the bogus signatures.

“We do not rule here on whether a homeowner may raise … as a post-sale exception, allegations that a deed of trust was the product of fraud, and, therefore, the sale was invalid and incapable of passing title,” Harrell wrote.

Harrell

WHAT THE COURT HELD

Case:

Bates v. Cohn, et al., CA No. 28 Sept. Term 2010. Reported. Opinion by Harrell, J. Filed Dec. 16, 2010.

Issue:

Did the judge err in ruling a person in foreclosure is precluded from raising lender’s failure to meet loss-mitigation requirements as a challenge to a consummated foreclosure sale?

Holding:

No; people in foreclosure must raise the lender’s failure prior to the foreclosure sale.

Counsel:

Vicki King Taitano for petitioner; Eric A. Frechtel and Robert H. Hillman for respondents.

RecordFax # 10-1216-21.