Feeling the weight of mortgages on two properties and several thousand dollars of credit card debt, Jason and Kristin Koontz filed for bankruptcy last year.
The couple surrendered one property to foreclosure but say they were still making payments for their house in Mishawaka, Indiana. EverHome Mortgage Co. filed a claim on the three-bedroom ranch to ensure its rights in the bankruptcy proceedings.
But the validity of a key document that EverHome used to back up its claim has now been called into question, throwing the status of the Koontzes' mortgage — like thousands of others around the United States — into uncertainty.
"Our goal is to pay the mortgage," Jason Koontz, a branch manager at a credit union, said in an interview. His lawyer is assessing next steps after a bankruptcy judge last week said EverHome is not entitled to a fast judgment in its favor because of faulty paperwork.
Revelations that lenders used so-called "robo-signers" who signed foreclosure orders but did not actually read them could give borrowers leverage to seek loan modifications rather than lose their homes. The problems could put new pressure on the already shaky housing market, still clogged with homeowners at risk of default after the real estate bust.
Bank of America Corp. on Friday extended a moratorium on foreclosures and sales of foreclosed properties to all 50 U.S. states while it reviews its practices. Two other big lenders — Ally Financial unit GMAC and JPMorgan Chase & Co. — have halted evictions or foreclosures in 23 states. State and federal officials are investigating the situation.
In cases where document problems are easily fixed, banks can re-file paperwork without derailing a foreclosure. But when the validity of mortgage documents is called into question — as in the Koontz situation — lenders could be left without legal recourse to collect on the property.
It is unclear how many of the thousands of cases fall into each basket. Banks say the problems are merely technical.
Faced with the prospect of costly litigation — or losing the right to collect full payment on a mortgage — lenders are more willing to explore deals with borrowers, said Judith Fox, a Notre Dame Law School professor who also represents borrowers.
"There is more of an incentive to settle," she said.
When contacted, lenders would not comment on whether the document problems would lead to more loan modifications. An Ally spokeswoman, Gina Proia, said only that "initiating the foreclosure process is a serious matter and only pursued when all other home preservation options have been exhausted."
To foreclose on a house, a lender must prove it has a valid claim. That means it must certify through an affidavit and other documentation that it clearly holds the right to enforce the terms of the loan.
When a borrower enters bankruptcy to stave off foreclosure, faulty documents can frustrate a bank's ability to secure its right to payment.
In the Koontz case, U.S. Bankruptcy Court Judge Harry Dees Jr. in Indiana ruled that a document submitted by EverHome was signed by a "bogus" employee who purported to work for MERS, the nation's central electronic mortgage registration service.
Because EverHome could not demonstrate a clear right to enforce the loan, a trial may be necessary to sort out control of the mortgage. EverHome is part of privately held EverBank in Jacksonville, Florida.
If EverHome cannot prove its rights at trial, it could be reduced to the status of an unsecured creditor, said attorney Debra Voltz-Miller, who represents the Koontzes. That would drastically reduce the amount it could collect on the loan.
An attorney for EverHome did not respond to messages seeking comment.
WORKING IT OUT
Many cases involve less complicated allegations, such as bank executives signing affidavits without being in the presence of a notary. In those cases, judges have allowed lenders to simply resubmit the right paperwork.
The costs associated with correcting technical problems average between $1,500 and $5,000 per case, said an attorney who represents lenders.
"If a lender has to get paperwork in order to re-file, it is a natural time to explore the possibility for modifications," said the attorney, who declined to be identified. "People who file defenses to the foreclosure or who file for bankruptcy are the people who want to work things out."
Consumer attorneys say they are highlighting more serious document problems. A GMAC employee, Judy Faber, testified in a deposition that it was standard practice to prepare mortgage documents after the fact, upon request of the foreclosure attorney, according to a proposed class-action lawsuit filed in South Carolina last week.
For Koontz, the bankruptcy process just got a lot more complicated, though the paperwork problems could help lead to a settlement. His lawyer, Voltz-Miller, said she is not sure whether EverHome can ultimately prove it holds the mortgage.
"There could be a settlement achieved, or it could go to trial," she said.
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