Michigan Foreclosures-by-Advertising Catch Homeowners Off Guard

Chuck and Alicia Krantz fell behind on their mortgage payments last year and sought to modify the loan to save their three-bedroom ranch home in Westland, Michigan, just outside Detroit, from foreclosure.

Two payments in April brought them current, they said in a lawsuit filed in Detroit federal court. In May, CitiMortgage Inc., a unit of Citigroup Inc., told them they were in foreclosure and would be refunded the $3,129.96 they sent the month before. While the foreclosure proceeded, they continued to pursue a modification, Chuck Krantz said in an interview.

CitiMortgage sent a modification package in May, requesting documents. Even as they discussed the modification with CitiMortgage, an ad announcing the foreclosure was published, said Adam Alexander, the Krantzes’ lawyer. The home was sold at a sheriff’s auction in June.

“We sent all the paperwork via e-mail,” Chuck Krantz, 39, a disabled former casino dealer, said in an interview. “On the phone, they told us everything was all right.” He said he and his wife, who works for a transport company, were never formally denied a modification.

Homeowners nationwide claim that banks and loan servicers are pushing through foreclosures, or arbitrarily rejecting or ignoring loan-modification requests. As the auto industry crumbled, Michigan, with a jobless rate of 11.7 percent, saw its foreclosure rate climb to as high as second in the nation in 2007, according to RealtyTrac Inc., which compiles housing data.

Federal Program

CitiMortgage denied the Krantzes’ claims. The company “admits only that it sent plaintiffs a notice under the ‘Making Home Affordable’ Program on May 26, 2010,” its lawyers said in court papers. Making Home Affordable is the federal home-loan modification program.

After the Krantzes provided documents, they “were repeatedly advised that their modification application was incomplete,” the lawyers said in the Feb. 3 filing.

“We believe the case is without merit,” Robert Julavits, a Citigroup spokesman, said in an e-mail. “We plan to defend our position vigorously.”

“All of us at Citi recognize the hardship that can be suffered by a family losing its home,” Mark Rodgers, a Citigroup spokesman, said in an e-mail. “Since 2007, we have helped more than a million distressed borrowers in their efforts to avoid potential foreclosure.”

The company participates in the federal Home Affordable Modification program and has created “additional, proprietary Citi modification programs,” he said. “We actively identify eligible borrowers and conduct extensive outreach to contact them and guide them through the process of applying for trial modifications and obtaining permanent modifications.”

Newspaper Announcements

Michigan is one of 27 states where banks don’t have to get a court’s permission to seize a property, meaning homeowners have to bring their own lawsuit to halt a foreclosure. The state, where foreclosures are announced in newspaper ads, passed a law in 2009 to make it easier for homeowners to renegotiate mortgage terms. That law expires in July.

“There is no oversight,” said Karen Tjapkes, an attorney with Legal Aid of Western Michigan in Grand Rapids. “There has been an explosion of cases here, as a result of bad predatory lending practices, the bad unemployment rate and a bad foreclosure system.”

One in every 272 housing units in Michigan is in foreclosure, compared with a national average of one in 497, said Daren Blomquist, a spokesman for Irvine, California-based RealtyTrac. In January, the state ranked sixth-highest in the nation, he said. “It’s in the top 10 pretty consistently.”

Foreclosure Claims

Legal aid lawyers in the state have seen foreclosure claims rise to 3,642 new cases in 2009 from 203 in 2008, said Lorray Brown, director of the Michigan Foreclosure Prevention Project.

Michigan also differs from other states because it allows loan servicers to foreclose without providing documents, such as affidavits verifying who owns the mortgage or default details, Tjapkes said. “I spend every day telling homeowners that it’s different here.”

While all 50 U.S. states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures, Tjapkes said that bogus paperwork typically isn’t the focus of homeowner litigation in Michigan.

“There’s nothing even false to attack,” she said. “They don’t even have to lie.”

To deal with the crisis, the Michigan Foreclosure Task Force, an organization of lawyers, legislators, bank representatives and community leaders, was formed in 2007.

Homeowner Opportunity

“The average homeowner in a judicial foreclosure state has the opportunity to show up in court to contest the claim,” said Steve Tobocman, co-director of the task force.

The burden of proof is on the lender in judicial foreclosure states; it’s on the borrower in Michigan, said Tobocman, a Democrat who is a former majority floor leader in the Michigan House of Representatives. “It’s much more difficult to exercise your legal rights here.”

Michigan law lets mortgage lenders or servicers foreclose after advertising a default in a newspaper for four consecutive weeks. The ad describes the property, including the address, names of homeowners and total balance of the mortgage. It also announces the date for a sheriff’s sale.

After four weeks, the bank formally forecloses, allowing the sale to go forward. After the auction, the homeowner has six months to attempt to rescind, or redeem, the sale.

Little Notice

Some homeowners first learn of a pending foreclosure from this advertisement, according to complaints in lawsuits filed in Michigan. Some say they didn’t know their homes were scheduled for auction until after the sale.

“You have very little information,” said Fred Miller of the United Auto Workers legal services plan in Detroit, which represents union members in foreclosure proceedings and other litigation. “It’s not an easy mechanism to find out who owns the mortgage, who owns the note or has the note been transferred? They say a certain amount is owed, but is it?”

A homeowner can sue to prevent foreclosure or rescind a sale, said Lansing, Michigan, attorney Paul Grant, who represents borrowers. “If they can’t pay the mortgage, how are they going to get money to pay a lawyer?” he asked.

In 2009, the state added a mandatory mediation period. Homeowners must be notified they’re in default and given 14 days to request a meeting with the lenders to begin negotiating a modification. The homeowner’s request for a meeting stops any foreclosure for 90 days, while a modification is considered.

Bank Option

After the 90-day period, the bank can run a foreclosure ad if a loan modification is rejected by either side, said Brown, of the Michigan Foreclosure Prevention Project, a partnership of legal aid offices and housing counselors.

The lender can opt out of the 90-day process, she said. A lender that doesn’t participate can’t foreclose by advertising, she said. “The bank would have to foreclose through the court.”

Legal services lawyers in Michigan filed multiple suits on behalf of homeowners, claiming lenders are foreclosing by advertising without giving a good-faith offer of modification, she said.

“The homeowners will get a proposal that’s unsustainable,” she said. “Sometimes the monthly payment has been increased.”

Fewer than half the homeowners in Michigan sent the 14-day notices asked for meetings with the banks, said Murray Brown, legislative consultant to the Michigan Mortgage Lenders Association. “Of those that responded, a significant number didn’t provide the proper documentation,” he said.

Homeowner Complaints

Homeowner complaints of problems with banks’ responses to loan modification requests have occurred in the federal Home Affordable Modification Program, Brown said. This hasn’t been a problem with Michigan’s foreclosure prevention law, he said. “I haven’t heard of those situations.”

The law allows banks to foreclose based on their own standards, Tobocman said. Banks are supposed to inform borrowers of their standards, he said. “The banks have ignored that.”

The 2009 law didn’t require banks to modify loans, said Professor Laura Bartell, who teaches bankruptcy and creditors’ rights at Wayne State University in Detroit. “Without a mechanism to compel banks to modify loans, the banks don’t feel compelled to do so,” she said. “The banks just have to wait a bit longer.”

The Krantzes said they were never offered a modification and never formally denied one before the sheriff’s sale was scheduled. CitiMortgage’s debt collectors are attempting to evict the Krantzes from the house, Alexander said.

They sued CitiMortgage in January seeking to rescind the sheriff’s sale, alleging violations of Michigan’s foreclosure law.

Worried About Home

“I am worried that if the court doesn’t hear us at this time, we will lose our home forever,” Chuck Krantz said in a Dec. 28 affidavit filed with the suit.

The 2009 law did increase the chances that homeowners would be offered loan modifications, Tobocman said.

The law expires in July. A bill to repeal the sunset provision was introduced in the state senate last year and referred to committee in September.

The bill died at the end of the last session and has to be reintroduced, said Brown, the Michigan Mortgage Lenders Association consultant. The industry doesn’t oppose renewal of the 2009 law and expects it to pass, he said.

“The expectation is that the law will be extended for another year or so,” he said. Lenders may seek a reduction in the six-month redemption period, feeling that this combined with the 90-day provision in the reform, delays foreclosures too long, he said. If a loan modification “is not going to happen, six months is too long,” Brown said. “It’s a contribution to neighborhood blight.”

“We’re hoping it will be renewed, given that the crisis hasn’t abated,” Tobocman said.

The lawsuit is Krantz v. CitiMortgage, 2:11-cv-10371, U.S. District Court, Eastern District of Michigan (Detroit).

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: John Pickering at jpickering@bloomberg.net.

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