A California court ruled that irregularities in the Notice of Default do not harm the borrower and are not grounds to avoid foreclosure.
Irvine Home Address … 362 DEERFIELD Ave #111 Irvine, CA 92606
Resale Home Price …… $420,000
It was a long and dark December
From the rooftops I remember
There was snow, white snow
Clearly I remember
From the windows they were watching
While we froze down below
When the future's architectured
By a carnival of idiots on show
You'd better lie low
Coldplay — Violet Hill
Last week I wrote Notice of Default irregularities: new false hope for loan owners. Well, the false hope didn't last very long. A recent ruling has struck down the idea of suing based on irregularities in the Notice of Default.
by KERRY CURRY
Tuesday, February 1st, 2011, 12:22 pm
A California appeals court ruled that a former homeowner's lawsuit against U.S. Bank (USB: 27.39 -0.98%) for fraud may continue after the bank allegedly reneged on a promise to negotiate a mortgage modification, opening the door for claims from potentially thousands of similarly situated troubled borrowers in the Golden State.
While the court ruled that a case for fraud–which includes claims for damages–could proceed, it also ruled that the homeowner, Claudia Jacqueline Aceves, lacked sufficient cause to get her home back after the foreclosure sale.
What could become a landmark foreclosure ruling appears to be both a win and a loss, for mortgage servicers and foreclosure defense attorneys alike. Mortgage servicers prevailed on issues of alleged defects in the foreclosure process, with the court ruling that none of the Aceves allegations of irregularities “would permit the trial court to void the deed of sale or otherwise invalidate the foreclosure.” Aceves had claimed, for example, that the notice of default was defective and therefore void, a claim the court rejected outright. “Absent prejudice, the error does not warrant relief,” according to the ruling.
The idea of getting a free house because someone made a clerical error on a Notice of Default is crazy. We live in a society that believes unjustified enrichment due to “technicalities” is fine, and if millions of deadbeats get free houses, justice must somehow be served.
The court spent most of its 15-page ruling, however, discussing how U.S. Bank had purportedly promised to negotiate a potential loan modification if the homeowner agreed to allow the bank to lift a bankruptcy stay, which had protected the home from seizure. Yet, when the homeowner agreed and attempted to begin negotiation on a loan modification, the bank allegedly opted to foreclose without negotiating.
Another feature of this ruling is going to be a renewed reliance on the defense that borrowers are immune from foreclosure while a loan modification is being negotiated. Banks will need paperwork from the loan modification department demonstrating the loan modification has been denied before a foreclosure can go forward.
Paul Jackson notes the passing of the Notice of Default irregularity defense in his editorial on the case:
by PAUL JACKSON
As we roll the 2011 calendar over to February — already?— outcomes of hand-to-hand legal combat in courtrooms across the nation over the sprawling foreclosure mess are continuing to unfold. Early this year, a state supreme court case out of Massachusetts called Ibanez managed to forever alter the meaning associated with one of the world’s most famous electric guitar makers.
Innocent music instruments aside, a new ruling out of California in the past week has the potential to be every bit as important: Aceves v. U.S. Bank. HousingWire’s own Kerry Curry broke the story Tuesday afternoon, which really is a Jeckyll and Hyde sort of ruling that has the potential to be one of the nation’s most significant rulings in the foreclosure morass.
Depending on your view, in Aceves, you have something to cheer; and depending on your view, you also have something to fear. Regardless of your view, you have a ruling you can’t ignore, especially in California.
But, as we’ll see, the real bombshell in the Aceves ruling isn’t at all what you might expect.
The majority of the ruling’s text discusses the borrower’s right to pursue potential fraud and so-called promissory estoppel claims against the servicer, as HousingWire's original coverage provides strong detail on. And while the ruling should be instructive on that front to servicers working with borrowers in bankruptcy in California, there is far more buried in the pages of the ruling that is likely to be missed by the media hype.
Instead, the real importance of Aceves is buried on page 14 of a 15-page ruling, in a section called, innocuously enough, “Remaining Claims.”
And in particular, within a single paragraph:
Aceves also takes issue with the notice of default, pointing out that it mistakenly identified Option One as the beneficiary under the deed of trust when U.S. Bank was actually the beneficiary. Although this contention is factually correct, it is of no legal consequence. Aceves did not suffer any prejudice as a result of the error. Nor could she. The notice instructed Aceves to contact Quality Loan Service, the trustee, not Option One, if she wanted ― “[t]o find out the amount you must pay, or arrange for payment to stop the foreclosure, or if your property is in foreclosure for any other reason.” The notice also included the address and telephone number for Quality Loan Service, not Option One. Absent prejudice, the error does not warrant relief. (See Knapp v. Doherty (2004) 123 Cal.App.4th 76, 93–94 & fn. 9.)
This is a much larger finding than it might seem, according to at least two California attorneys I spoke with that practice in creditor’s rights. Explaining why, however, requires some unpacking.
Let’s get legal
For those of you that are intrepid researchers, you’ll note that the appellate court ruling in Aceves above cites Knapp v. Doherty as the controlling authority regarding its finding on the validity of the notice of default — that full case ruling is available here.
And if you read Knapp v. Doherty, you’ll note that the 2004 California state appellate ruling in that case applied only to the notice of sale in a nonjudicial foreclosure, not explicitly to notices of default.
But by granting the Aceves allegation of errors on the notice of default — and then still tossing out the claim anyway — the court in Aceves made it unmistakably clear that the so-called “prejudice rule” as applied to notices of sale in Knapp v. Doherty now applies to notices of default in the state of California, as well.
In plain English, the court basically said: We don’t care what the alleged defect in the notice of default is, unless you can also demonstrate that you were somehow harmed by that same defect.
This is common sense. The delinquent borrowers knew they were delinquent, and with notices taped to their door, they knew it was their property coming to auction. Notice of Default irregularities should not have become a defense against foreclosure. It no longer is.
It’s worth noting that state appellate court rulings are binding on lower-level trial courts, according to the legal sources I’ve spoken with — so this ruling has extremely wide implications on potentially thousands of existing cases in the state of California where borrowers are contesting a foreclosure on something akin to the validity of the notice of default. It's equally worth noting that California's so-called “prejudice rule” is not new, and is extremely well-established.
Going forward, attorneys I’ve spoken with tell me this is a sea change relative to how foreclosure-related litigation will be managed in the state. It also is likely to influence other states with similar “prejudice rules,” especially those that permit a nonjudicial foreclosure process, these attorneys have suggested. California attorneys have told me for months that nearly every contested foreclosure case in the state has involved a challenge in some way to the notice of default; it’s the single most common claim, I've been told.
I suppose when borrowers have nothing else, finding some minor technical error is weak but better than nothing.
It was only a few weeks back, after all, that colleague Kate Berry at American Banker made national headlines with a story that echoed the concerns (hopes?) of many lawyers contesting foreclosure actions, who were quick to suggest to the press that procedural errors in notices of default—including that evil of all judicial foreclosure evils, robo-signing — could render even nonjudicial foreclosures invalid, too.
Now? Probably not so much, at least in California.
I’d guess some of the same sources that led Berry to write her original story are moving fairly quickly at this point to marshal their resources around the fraud issue now green-lighted in Aceves (and detailed in HW’s news coverage of the case). After all, while the facts in the case are pretty unusual, pretty much every troubled borrower on Earth can allege: “I would have filed bankruptcy, too, if only I’d known the truth about loan modification.”
Paul Jackson is the founder and editor-in-chief of HousingWire. As with any HW columnist, his views are his own only and do not represent those of HousingWire. Follow him on Twitter: @pjackson
Attorneys will have to retool their cases by taking out the claims about deficient NODs and put in claims about being foreclosed while a loan modification was being considered. The latter circumstance being quite troubling for lenders. Everyone who went though a foreclosure who made a verifiable attempt at a loan modification will make a claim against the banks.
What a mess.
Zero down, $100K free money
Sometimes, I feel pretty stupid not buying a house in 2004-2006. I might have bought if I had known that I could purchase with nothing down and within a couple of years go back to the bank and get free money.
Of course, I know that is going Ponzi, so I couldn't get myself to do that; however, through ignorance, carelessness, and greed, many bubble-era buyers did buy these properties, and they did go Ponzi.
The owner of today's featured property paid $385,500 on 8/26/2003. He used a $308,080 first mortgage, an $77,020 second mortgage, and a $400 down payment. Perhaps the bank saw that as a security deposit?
On 10/31/2005 the obtained a $401,250 first mortgage and a $80,200 HELOC to raise the total property debt to $481,450 and the total mortgage equity withdrawal to $95,950.
Now that prices have gone south, this borrower is short selling and leaving the lender wondering how they are going to get their free money gift back.
Irvine Home Address … 362 DEERFIELD Ave #111 Irvine, CA 92606
Resale Home Price … $420,000
Home Purchase Price … $385,000
Home Purchase Date …. 8/26/2003
Net Gain (Loss) ………. $9,800
Percent Change ………. 2.5%
Annual Appreciation … 1.2%
Cost of Ownership
$420,000 ………. Asking Price
$14,700 ………. 3.5% Down FHA Financing
4.84% …………… Mortgage Interest Rate
$405,300 ………. 30-Year Mortgage
$85,388 ………. Income Requirement
$2,136 ………. Monthly Mortgage Payment
$364 ………. Property Tax
$0 ………. Special Taxes and Levies (Mello Roos)
$70 ………. Homeowners Insurance
$289 ………. Homeowners Association Fees
$2,859 ………. Monthly Cash Outlays
-$350 ………. Tax Savings (% of Interest and Property Tax)
-$502 ………. Equity Hidden in Payment
$27 ………. Lost Income to Down Payment (net of taxes)
$53 ………. Maintenance and Replacement Reserves
$2,088 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,200 ………. Furnishing and Move In @1%
$4,200 ………. Closing Costs @1%
$4,053 ………… Interest Points @1% of Loan
$14,700 ………. Down Payment
$27,153 ………. Total Cash Costs
$32,000 ………… Emergency Cash Reserves
$59,153 ………. Total Savings Needed
Property Details for 362 DEERFIELD Ave #111 Irvine, CA 92606
Sq. Ft.:: 1367
Lot Size:: –
Property Type:: Residential, Townhouse
Style:: Two Level
Year Built:: 1985
2 bedrooms, 2.5 bath.