Financially strapped homeowners struggling to obtain mortgage modifications are taking their frustrations to court, accusing banks and loan servicers of misleading them or breaking promises to help them hold on to their homes.
The lawsuits go to what U.S. Housing and Urban Development Secretary Shaun Donovan has described as the heart of the government's anti-foreclosure efforts: ensuring that banks work in good faith from the start to help borrowers.
Although the foreclosure process is less complicated in California than in states where home seizures must be approved by judges, the litigation shows that borrower-servicer relationships can be contentious in the Golden State as well.
As controversy grew over the accuracy of foreclosure paperwork, Donovan last week said the Obama administration's top priority is "making sure that steps are being taken early in the process to keep people in their homes rather than only focusing on the steps that come late in the process, in which it's much less likely somebody will be able to stay in their homes."
A theme of the lawsuits filed by homeowners is that banks have denied permanent modifications to borrowers who make their payments on time and otherwise hold up their end of the agreements.
For example, Jean C. Wilcox of Irvine has sued EMC Mortgage Corp., accusing it of stringing her along for three years while making several offers to modify her nearly $800,000 loan, losing documents repeatedly and never intending to permanently change the terms of the mortgage. An EMC spokesman declined to comment.
"It was just 'extend and pretend,' " said Wilcox's lawyer, Anthony Lanza of Irvine. "And it was like they had the fax machine hooked up to a shredder."
Anaheim lawyer Damian Nassiri said his firm had filed about 100 lawsuits against mortgage lenders since 2007. Earlier suits alleged that lenders misrepresented terms of mortgages or engaged in other shady practices to foist abusive loans on borrowers. Most of his firm's suits now accuse lenders of dealing in bad faith with borrowers who have become delinquent on loans.
Worse, Nassiri said, in cases where foreclosure was inevitable, banks misled borrowers into accepting trial loan modifications. The intent, he claimed, was "to get some kind of money out of them" while stalling actions to seize the homes.
"There are too many bad loans for the banks to handle, and they can't dump all these properties out on the market all at once because we would have another Depression," Nassiri said.
Similar allegations of breaches of contract and acting in bad faith have cropped up in lawsuits around the nation, said Anthony Laura, a Washington lawyer who represents lenders accused of wrongdoing and tracks litigation trends.
Some suits allege that the problem is so widespread that courts should certify the plaintiffs as representing an entire class of aggrieved borrowers. Wilcox's suit, for example, seeks class-action status on behalf of other California borrowers with similar complaints about EMC.
Boston consumer lawyer Gary Klein, a longtime antagonist of mortgage lenders, has filed suits seeking class-action status against the top three loan servicers — Bank of America Corp., Wells Fargo & Co. and JPMorgan Chase & Co. — and others.
A multidistrict panel of federal judges on Oct. 8 consolidated eight such suits, including two from California, for pretrial proceedings in federal court in Boston.
The suits allege that trial loan modifications extended by Bank of America under the Obama administration's anti-foreclosure plan were contracts that the bank violated by denying permanent modifications to borrowers who fulfilled their obligations.
A spokeswoman for the Charlotte, N.C., bank declined to comment.
In court documents filed in one of the cases, Bank of America said the plaintiffs mistakenly believed they were guaranteed loan modifications if they made three trial payments under the government's program.
"A borrower must actually qualify, including income verification, an analysis of the modified loan's affordability and other factors," the bank said in the filings.
The loan-modification lawsuits add to enormous legal headaches for the banks.
The troubles include demands by mortgage giants Fannie Mae and Freddie Mac, Newport Beach bond fund goliath Pimco and the Federal Reserve Bank of New York that the banks repurchase billions of dollars in defaulted loans that were pooled to back mortgage securities.
On another legal front, several giant home lenders were forced to put evictions on hold this month after lawsuits turned up evidence that bank employees had signed thousands of court affidavits attesting that foreclosures were warranted — without reading the accompanying documentation.
Some analysts who follow mortgage lending said fixing that problem could be done with relative ease, as illustrated by Bank of America, the nation's largest loan servicer.