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Foreclosure deficiencies less than expected, but still raise questions

Senior Editor Regular News

Foreclosure deficiencies less than expected, but still raise questions

Senior Editor

Florida courts apparently will not be deluged, with a couple notable exceptions, with hundreds of thousands of actions from banks seeking deficiency judgments from older foreclosure cases.

The July 1 deadline for filing deficiencies on all foreclosures concluded before July 1, 2013, passed with only a slight uptick in mortgage cases being reopened.

But the exceptions came in mortgages held by the federally sponsored Fannie Mae corporation, which has filed thousands of deficiency cases. A private company, Mortgage Guarantee Insurance Company, or MGIC, has filed a smaller number.

But, like almost everything else in the foreclosure crisis, controversy has emerged about the way those deficiency judgments are being pursued.

A New York Times article quoted a legal scholar as questioning whether deficiencies could be sought if the underlying foreclosure paperwork was faulty, even if the foreclosure was granted by that paperwork. Many of the Fannie Mae foreclosures date back to 2009 and 2010, before the widespread paperwork and robosigning scandals in foreclosures came to light.

And the Fannie Mae and MGIC, which appear to be doing many if not most of the deficiencies, did not seek to reopen the underlying foreclosure, as provided in the final foreclosure order. Instead, they filed separate civil collection actions. That has raised questions among defense attorneys about whether the proper procedure is being followed.

Lenders Not Pursuing Deficiencies

The backdrop of the deficiency actions is a 2013 law passed by the Florida Legislature intended to quicken the handling of foreclosure cases. One part of that law, though, reduced the amount of time lenders had to seek deficiency judgments from five years to one. The law became effective July 1, 2013, and meant deficiencies for all foreclosures effective by that date and for any time after July 1, 2009, would have to be filed by July 1, 2014.

By and large, lenders appear to have not pursued deficiencies.

Assistant Attorney General Victoria Butler monitors the National Mortgage Settlement that Florida Attorney General Pam Bondi, 48 other state attorneys general, and the federal government reached with major banks in 2012 over the paperwork irregularities in their foreclosure filings.

“In response to inquiries by our office, the banks involved in the National Mortgage Settlement have represented that they are not typically enforcing deficiency judgments on loans that they own, except in rare circumstances,” Butler said.

Other than an uptick of 3,000 in the number of reopened foreclosure cases last June, the Office of the State Courts Administrator has not seen a surge in reopened cases.


David Rodstein, a Boca Raton attorney, said many banks lumped their deficiencies together and sold them off as securities, similar to the way mortgages were packaged before the housing crash. He said those deficiency securities were sold to investors for pennies on the dollar — or even less — because it was understood most of the deficiencies would be uncollectable.

Rodstein, who was approached about representing some investors in deficiency cases, said, generally, what the buyers hoped was they could identify a sufficient number of defaulters with assets to make the investment pay off or who could have — and still could — pay the mortgage but made a “strategic” decision to default because of the decline of the property’s value.

“You’ve got people with considerable assets who walked out [on their mortgage] and people who walked away who could have paid. They had income, but no other assets,” Rodstein said. “They had the means to pay but decided not to for balance sheet reasons, because the property was so deeply under water.”

And that’s what Fannie Mae is doing, according to Andrew Wilson, the federally chartered agency’s senior director for media and external relations.

“We’re not filing a deficiency judgment if someone lost their job and couldn’t make the payment. That’s a hardship where we would generally waive the deficiency, or when someone worked with us to make up a shortfall,” he said. “We do pursue deficiencies in the instances where we determine the borrower had the ability to pay and chose not to do so and thereby caused a loss to Fannie Mae and then to taxpayers.. . . These cases represent a minority of the total number of foreclosures that were filed.”

The way the foreclosures are being pursued is raising questions. Fannie Mae and MGIC hired a Texas collection company, Dyck-O’Neal, to pursue the collection actions, which in turned hired the Law Offices of Daniel C. Consuegra, P.L., to file the legal actions.

Robosigning Is Again a Problem

A November article in the New York Times questioned whether the deficiencies were based on faulty underlying mortgages.

It quoted Kathleen C. Engel, a research professor at Suffolk University Law School, as saying, “Sending these cases to debt collectors, when the underlying foreclosures involved unlawful robosigning, is unfair and potentially even deceptive.. . Fannie Mae is not entitled to collect on those debts when the foreclosure was unlawful.”

Darren Wilson, a property law professor at Stetson University College of Law, at least partially agreed, saying robosigned documents on the foreclosure could be problematic in a deficiency proceeding.

“If there was robosigning or something of that nature, it would be a basis for a defense,” Wilson said. “I think in most of those cases, nobody filed a defense, so it was a default judgment.”

But, he said, allowing the default could make a stronger case for the creditor, although it would have to still be demonstrated that the proper numbers were used in calculating the deficiency.

“If they didn’t answer and allowed a default, that’s going to be an interesting procedural issue, in my mind,” Wilson said. “Since the cases are tied together, does the default judgment stand?”

Fannie Mae’s Wilson said “a number” of its deficiency cases do date from the 2009-10 period, noting it frequently took a long period to resolve a foreclosure in Florida courts. A spokesperson for MGIC said most of its cases were from 2011 or later.

Civil Actions?

Jacksonville attorney Chip Parker has a different concern dealing with the way the deficiencies are being pursued. Parker represents about 60 clients who are being pursued for deficiency judgments. He disputed that all of them can afford the deficiencies, which he estimated average around $100,000 per case.

What surprises him is the way the cases were filed. Rather than reopening the underlying mortgage, the cases were filed as new civil actions. And they were filed in the county where the foreclosure occurred, which in many cases is not where the former homeowners now live. Many don’t live in Florida anymore.

“There’s one big issue that could eliminate every one of these Dyck-O’Neal cases, which is if you look at the original foreclosure judgment, or look at any foreclosure final judgment, one of the very last paragraphs says the court retains jurisdiction for additional matters, including deficiency judgments,” Parker said. “The case law, I think, is pretty clear that the state courts have no subject matter authority to hear the deficiency if the original court retained jurisdiction, and that would kill all the Dyck-O’Neal cases.”

And in a December 2 ruling, Fourth Circuit Judge Thomas M. Beverly agreed with Parker’s argument, dismissing without prejudice a Dyck-O’Neal case against one of Parker’s clients by granting Parker’s motion to “Dismiss for Lack of Subject Matter Jurisdiction.”

Aside from that issue, Parker has filed a federal class action suit in the federal Middle District of Florida seeking to dismiss Dyck-O’Neal cases that were not filed in the home jurisdictions of the defendants. He claimed that violates the federal Fair Debt Collection Practices Act, which requires that most debt collection actions be filed in the home jurisdictions of the debtors to avoid the difficulty of trying to defend a debt collection action from a long distance.

“It’s really the connective tissue to all of these Dyck-O’Neal cases, which is whether jurisdiction over a person is conferred because the original debt was based on a mortgage,” Parker said. “Is the deficiency lawsuit really just an extension of the mortgage that would give rise to jurisdiction over that person? We think it’s crystal clear that it doesn’t.”

Deborah Bailey, a magistrate who handles foreclosure issues in the 12th Circuit, agreed. In a deficiency case brought in Sarasota County, she said that Dyck-O’Neal could not pursue its civil suit against a foreclosed couple because they no longer lived in Florida. She rejected the claim that just because the foreclosure occurred in Florida, that Florida courts retained jurisdiction over the homeowners in the subsequent deficiency action, which was filed as a separate civil action, rather than reopening the underlying foreclosure.

She noted the plaintiffs erroneously said the couple held the mortgage, while, in fact and by law, the lending bank held the mortgage. Bailey also said the foreclosure merged both the note and the mortgage, and that the independent cause of action terminated when the foreclosure went through, and consequently the deficiency action is separate and not based on the underlying mortgage. Consequently, there was no basis for the court to establish “long arm” jurisdiction over the couple.

The Bar News reached Conseugra, the attorney for Fannie Mae, but he said he was unable to comment because of an agreement with clients and referred questions to Fannie Mae’s Wilson. Dyck-O’Neal did not respond to an email inquiry from the News.

Wilson said he could not comment on questions of legal strategy.

“Dyck-O’Neal is the vendor we use, and they secure representation to secure these deficient judgments when authorized,” he said. “These kinds of deficiencies have been filed in state courts in this manner for a number of years. My understanding is this is not a new process.”

It’s not certain how many deficiency cases were filed. When his office first got an influx of the cases to defend, Parker said he surveyed about 60 percent of Florida counties. He estimated that Dyck-O’Neal pursued about 10,000 cases on Fannie Mae’s behalf and another 1,000 for MGIC.

Wilson thought that number was high for Fannie Mae. He originally estimated that Fannie had “thousands” of cases in Florida, and then refined that to about 3,000. He said there were about 10,000 deficiency cases overall filed statewide by all parties to beat the July 1 deadline.

Katie Monfre, a spokesperson for MGIC, was unable to provide an estimate for deficiency cases the company is pursuing. But she said they involved only final foreclosures, and 80 percent dated from 2011 or later — after the paperwork and robosigning problems in foreclosures were addressed. Like Fannie Mae, she said, MGIC did rush to file cases to beat the July 1 deadline in the new state law.


Monfre also said the company chose to file subrogation suits, rather than reopen the underlying foreclosure.

Whatever the actual number of deficiencies being sought, it’s only a small fraction of the number of foreclosures granted since the financial crisis began.

And that means Florida courts, now emerging from a backlog of foreclosure cases, won’t be freshly smothered with deficiency filings.

The Supreme Court, in its recent certification filing for new judges, noted that the state courts “continue to control for the foreclosure crisis in our judicial workload forecasts and certification requests, which currently suggest that this crisis will taper off with possible pre-recessionary filing normalization occurring in the summer of 2015, barring any unforeseen circumstances.”

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