Foreclosures in Most U.S. States Bypass Judges, Easing Way for Evictions

Two years before dementia forced her to move into a nursing care facility, Dorothy Halstien obtained a $73,000 loan from Washington Mutual Inc. secured by her house on Whidbey Island, north of Seattle.

In 2007, a year after she moved, the bank hired a trustee, Quality Loan Service Corp. of Washington, to foreclose. Halstien’s home was sold off for $83,000, even though her guardian had arranged a sale for about $150,000 more. The party that bought the house out of foreclosure later sold it for $235,000, according to a suit filed in state court in Seattle.

More than two-thirds of foreclosures occur in the 27 states where there’s no mandatory court supervision, according to Christopher Dodd, the chairman of the U.S. Senate Committee on Banking, Housing and Urban Affairs.

Halstien’s case illustrates what some homeowner advocates call a conflict of interest in states where trustees, hired by mortgage lenders and servicers, rather than the courts shepherd homes through the foreclosure process.

Trustees get paid by the loans they process and “the quicker they do it, the more business they get,” said Fred Corbit, an attorney at the Northwest Justice Project in Seattle who represents the Halstien estate. “Quality’s whole business model was pleasing these banks.”

The guardian sued, alleging that Quality wasn’t impartial as called for by Washington law, which requires that trustees act in good faith, and that it had filed a falsely notarized notice of foreclosure.

Jury Award

A jury in January awarded the estate of Halstien, who died in 2008, the difference between the foreclosure price and the final sale price, finding Quality had violated the state consumer-protection law. King County Superior Court Judge Barbara Mack added about $78,000 in interest and attorney fees in March.

Quality Loan, which didn’t return calls seeking comment, has appealed.

About 70 percent of foreclosures nationwide are in the 27 so-called non-judicial states, where banks and other servicing companies don’t need judges to sign off on foreclosures, Dodd, the Connecticut Democrat, said at a hearing last month.

“A judicial state is one where the lender/beneficiary has to file a lawsuit to foreclose,” said Bruce Neas, of Columbia Legal Services, in Olympia, Washington. In some non-judicial states, such as Colorado, a court order is needed to allow a sale, according to the National Consumer Law Center’s survey of foreclosure laws.

In some non-judicial states, including Washington, a bank hires a trustee to handle the foreclosure and courts don’t review documents.

‘Much More Vulnerable’

“It puts the borrower in a much more vulnerable position,” said Christopher Peterson, a University of Utah law professor who specializes in commercial and contract law. In the 23 judicial states, homeowners can bring complaints to the judge overseeing the foreclosure. “The only recourse in non-judicial states is to file a lawsuit,” Peterson said.

All 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. Attorneys general in non- judicial states, including Arizona, Texas and Washington, are conducting independent probes of mortgage foreclosure practices and examining the documents used to secure foreclosures.

“Washington’s foreclosure process frequently includes inaccurate documents, conflicts of interest, faulty chains of title and failures to provide the disclosures and conduct mediations required by law,” state Attorney General Rob McKenna said at a press conference on Oct. 13.

Letters Sent

McKenna sent out about 50 letters that day to trustees operating in the state, asking them to suspend all foreclosures where documents hadn’t been confirmed as legally signed, or where the chain of homeownership wasn’t clear.

“Our consumer-protection division has already begun investigations regarding several trustees,” he said.

Washington will have about 40,000 foreclosures this year, up from 31,000 in 2009, according to Statewide Poverty Action Network in Seattle. The state is ranked at 17th nationwide, said Danielle Friedman of the network, an advocacy group for the state’s poor.

“A handful of trustees do the vast majority of the foreclosures” in Washington, said Jim Sugarman, assistant attorney general. About 60 trustees operate in Washington, he said. Most are affiliated with law firms, he said. Trustees receive a set amount of money to handle a foreclosure based on the difficulty of the transaction, he said.

‘More Efficient’

The trustee system was set up as a “more efficient and less costly alternative for both the borrowers and the lenders,” said Lance Olsen, a Bellevue, Washington, attorney. In a judicial foreclosure state, the borrower “could end up with half of the default owed in attorneys’ fees in a few months,” said Olsen, who represents Northwest Trustee Services in Bellevue.

Opponents of the system “want the outside independent review of a judge,” he said. “That’s a valid request, but it’s an expensive one for a review that’s most often not required.”

Borrowers in non-judicial states can still sue to stop a foreclosure, he said.

“The borrower still gets all of his rights, such as notice,” he said. “There is plenty of opportunity to reinstate and they can reinstate more cheaply.”

There’s no conflict of interest in lenders’ hiring the trustees, he said.

“Even if we’re retained by a lender, we can’t turn a blind eye to injustice, nor would we want to,” Olsen said.

$500 to $750

Fees are often about $500 to $750 a foreclosure, he said.

“If you’re not acting in accordance with the statute, you’re going to be sued,” he said. “It doesn’t take long that an entire profit margin could be eroded.”

Fees can add up, Corbit said in an interview. Quality Loan received $1.9 million in fees to handle foreclosures for WaMu in Oregon and Washington from Jan. 4, 2004, to April 30, 2008, covering 805 foreclosures, he said, citing evidence produced before trial. While the banks hire the trustees, “it’s actually the borrower who pays,” he said. The fees get added to the cost of the foreclosure.

Puget Sound Guardians, based in Redmond, Washington, and appointed to handle Halstien’s affairs while she was in the nursing home, sued Quality Loan Service after the foreclosure sale. When Halstien died in November 2008 at age 76, the case was pursued by her estate’s administrator.

‘Never in Jeopardy’

“WaMu was never in jeopardy of not being paid in full because Ms. Halstien had no other home loans and WaMu’s appraiser concluded on Jan. 18, 2008, that the house was worth $320,000,” the estate said in the trial brief. The final sale price was about one-third the tax-assessed value, according to the suit.

The estate said Quality rushed the foreclosure and wouldn’t stop the sale even after the guardian had arranged for a buyer. Quality said that only WaMu had the authority to postpone the foreclosure sale, “misrepresenting both the trustee’s duty and the trustee’s authority,” the estate claimed.

The estate said the guardian’s representatives called and faxed requests to WaMu asking that the foreclosure be delayed a few weeks. The bank didn’t respond, the estate said. Washington Mutual filed for bankruptcy in September 2008 and was dropped from the suit. Ronald Adams, a Portland, Oregon, attorney who represented WaMu, didn’t return a call for comment.

Estate Claims

The Halstien estate also claimed that “Quality predated and falsely notarized the notice of foreclosure,” according to the Jan. 4 filing. This helped the foreclosure sale to occur before the planned March 18, 2008, closing date on the transaction arranged by the guardian.

“During trial, Quality acknowledged that it predated notarizations,” the company said in its appeal. Quality said it stopped this practice in 2007.

Quality Loan said it didn’t violate the state’s consumer laws and it wasn’t authorized to stop the foreclosure unless the bank agreed.

The guardian could have stopped the sale by providing the purchase agreement at the time of foreclosure auction, the trustee said. The guardian also failed to inform Quality that the bank wasn’t responding to its e-mails and calls, the trustee said.

Quality was given details of the guardian’s higher purchase offer and was asked to halt the foreclosure sale, Corbit said.

“The guardian was twice told that it would do nothing and that the guardian should talk to WaMu,” he said, citing trial evidence.

‘Never Had Trouble’

If Puget Sound had informed Quality of communication problems with the bank, “Quality would have contacted the bank itself,” the company said in court papers. “Quality has never had trouble getting this bank to postpone a sale.”

Quality attorney Kenneth Masters in Bainbridge Island, Washington, didn’t return calls for comment.

Melissa Huelsman, a homeowners’ attorney in Seattle, said the system in Washington creates an “inherent conflict of interest” because the banks hire the trustees.

“The trustees won’t get the business if they don’t do what the creditor wants,” she said in an interview. “If you have a foreclosing entity being unreasonable, you need the trustee to step in.”

Bias shouldn’t occur, said Sugarman, Washington’s assistant attorney general. “But any trustee wants to please the lender.”

The case is Klem v. Washington Mutual Bank, 08-2-13989-1, Superior Court, King County, Washington (Seattle).

To contact the reporters on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

Bloomberg reserves the right to edit or remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.