Hefty payments to reach military foreclosure victims

April 19, 2012

by Tom Philpott

So far, several hundred military members who lost homes to illegal foreclosure actions by big banks and mortgage servicers have received settlements of $116,785 apiece for economic loss and emotional distress. They also have been paid any equity lost plus interest.

The number of hefty payments to military members and recently-separated veterans likely will swell to several thousand, predicts Thomas E. Perez, assistant attorney general for civil rights in the Department of Justice.

Since last May, Perez and his division of attorneys have reached eight separate settlements involving groups of military borrowers and banks that violated protections in the Servicemembers’Civil Relief Act (SCRA).

The first two involved home foreclosures conducted without court orders by BAC Home Loans Servicing LP (formerly Countrywide Home Loans Servicing), a subsidiary of Bank of America, and by Saxon Mortgage Services Inc., a subsidiary of Morgan Stanley.

Those settlements "were critically important because they were the template for all of the subsequent agreements we reached with other servicers,"Perez said in a phone interview Wednesday.

Agreements to compensate more military victims of illegal foreclosures were finalized April 4 with JP Morgan, Wells Fargo, Citigroup and Ally Financial. The settlements are not seen as proof of intentional efforts by banks to prey on vulnerable military families, said Perez. Rather, they reflect "a chronic ignorance and inattention to legal obligations pertaining to service members"by the biggest players in the mortgage service industry.

That ignorance has ended thanks to enforcement actions by the DoJ in cooperation with attorneys general in 49 states and the District of Columbia.

"I am very proud of the work we did in all of these cases because I think we’ve really raised awareness and, frankly, we have been able to change the industry practice. Every [mortgage] servicer is now clearly on notice of their obligations under the SCRA,"Perez said.

"To put a human face on this ,"he added, "we had a number of cases of service members who had been deployed overseas [and] injured in battle and, to add insult to injury, their homes were being illegally foreclosed on. When service members are protecting our nation, they need to know that we have their back, and that’s really what these cases have been about."

Since collapse of the real estate market, which began by 2006, tens of thousands of military members lost homes to foreclosure. Only a fraction of these members, however, had their rights under the SCRA violated and thus have suffered illegal foreclosures to qualify for compensation.

The most common illegal practice was to foreclosure on homeowners without a valid court order, which the SCRA requires for mortgage debt acquired before a service member came on active duty. This occurred most often in states like California that otherwise don’t require servicers to go to court before foreclosing on homes.

"When you’re doing a volume business, [as is] occurring right now in foreclosure, the due diligence was not being done to ensure that this person wasn’t a service member protected under the SCRA,"Perez said.

In other cases, when a court order requirement was recognized but homeowners failed to appear, servicers filed affidavits regarding active duty status that were inaccurate. So the court orders had been obtained under false pretenses. In such cases, SCRA protection is violated even if the debt had been acquired after a service member entered active service.

Also, the SCRA requires that interest rates on certain debts incurred before entering active duty be reduced to six percent. In many instances, banks had ignored this. The largest banks now have agreed to refund with interest any amounts charged in access of six percent, and also to pay triple the amount refunded, or $500, whichever is larger.

The banks involved also agreed to strengthen foreclosure protection beyond what the SCRA requires. For example, the prohibition against foreclosure without a court order is being extended to anyone serving in an imminent danger zone, no matter when they got their loan.

"If you got your mortgage while on active duty, and you’re serving in Afghanistan, they can’t foreclose on you without a court order, even though the SCRA would allow them to do that,"explained Eric Halperin, special counsel for fair lending in DOJ’s civil rights division.

The servicers also will provide short sale agreements to military folks who currently are ineligible for the military’s Housing Assistance Program if they were forced to sell homes below what they owed on mortgage as a result of permanent change of station orders. This benefit applies to service members who bought homes between July 1, 2006, and December 31, 2008, or received PCS orders after October 1, 2010.

The settlement deals, Perez said, have "already helped hundreds. I suspect by the end of our thorough review…we will probably end up helping thousands of service members. And what’s important to understand is that there is no cap"on total dollars paid. "If you’re the thousandth person who gets helped, you will still get $116,785 plus any lost equity with interest."

Service members who believe SCRA rights were violated through foreclosure are invited to contact the Department of Justice by calling 800-896-7743. But they don’t have to, Perez said. The agreements require that mortgage servicer records with names of foreclosed homeowners be cross-referenced with personnel lists kept by the Defense Manpower Data Center.

"That will provide us with the universe of potential service members who were foreclosed while on active duty,"Halperin explained. "From that group, we will determine who had their SCRA rights violated."

A team of DoJ lawyers and paralegals are overseeing the process. Independent consultants are being hired, at the banks’expense, to assist in gathering and reviewing foreclosure information. DoJ must approve the methodology used and then will decide who are the victims.

"The process will take time but we will work as quickly as we can,"Halperin said. Military people with questions can call the toll free number or consult armed forces legal assistance offices. Local contact information for offices is available online at: http://legalassistance.law.af.mil

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