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GO LAWYERS GO!!! — OHIO PRECEDENT TAKES HOLD AND SPREADS

Lawyers’ tactic slows rate of forfeited houses in New Jersey

Posted by kcocuzzo June 25, 2008 00:05AM

Aaton Houston/For the Star-LedgerBill Daddio and Theresa Scilla, who live in Matawan, avoided a sheriff’s sale of their home when their lawyer challenged the bank trustee’s right to foreclose.

Most home foreclosures being processed in New Jersey are illegal, a growing group of attorneys contends, because lending institutions cannot prove they own the debt they are trying to collect.
Judges in at least four New Jersey counties already have halted foreclosures, using a federal court ruling in Ohio as precedent. And with 48,000 foreclosures expected to be filed this year — twice the number filed in 2006 — some attorneys believe challenging foreclosures can become a large and potentially lucrative area of practice.
“This is starting to creep up all over the state and all over the country as people start to realize these banks don’t really know who owns the (promissory) note,” said Peggy Jurow, a senior attorney at Legal Services of New Jersey, which is teaching lawyers how to represent pro bono clients in these cases. “It’s scary to think how many people are losing their homes who shouldn’t be.”
Attorneys for the lending institutions say this wave of challenges is built on nothing more than legal technicalities and banks quickly will regain their footing.
“These lawyers are trying to grasp on the smallest legal issue, and they’re losing sight of the justice involved,” said Ralph Casale, a Denville-based attorney who has represented lenders in foreclosure for more than 30 years. “It comes down to this: Were you given the loan? Have you paid it? If you haven’t paid it, doesn’t the person who loaned you the money have the right to collect?”
There were 34,457 foreclosures filed in New Jersey in 2007. The vast majority, 96 percent, were processed by the State Office of Foreclosure with no answer from the defendants, resulting in the loss of their homes. Lawyers say 75 percent or more of those cases could have been successfully challenged.
“The rules have been there all along,” said Rob Napolitano of Community Financial Services in Keyport, which provides information to attorneys on how to help clients avoid foreclosure. “What’s changed is that people are finally making the banks follow the rules, and they can’t do it.”
The complexity of mortgage funding also has changed.
When home buyers receive a mortgage, they sign a promissory note — a legal IOU — with their lender. In simpler times, the lender remained in possession of that note for the duration of the loan. But that was before the surge in mortgage-backed securities, an investment tool in which loans are bundled into packages with thousands of others, sliced into thousands of pieces, and sold to investors around the globe.
Lawyers say in the midst of all that packaging and slicing, banks got careless with their paperwork.
In some cases, they lost track of who owned the original promissory note or couldn’t prove how they came to possess it. In other cases, lawyers say, the formation of the mortgage-backed security created a situation in which the banks failed to maintain ownership of the promissory notes.
“These transactions have become so complex, the banks can’t even keep track of what they own and don’t own,” said Linda Fisher, director of the Center for Social Justice at Seton Hall Law School, which succeeded in getting a foreclosure dismissed in Essex County last month.
The legal challenges are so new, it is unclear how the banks will ultimately answer them. Most foreclosures in New Jersey are brought by a handful of law firms, which process them by the thousand on behalf of major lending institutions.
Attorneys from those firms — Zucker, Goldberg & Ackerman of Mountainside; Fein, Such, Kahn & Shepard of Parsippany; Phelan, Hallinan & Schmieg of Mount Laurel, and Powers Kirn of Marlton — declined repeated requests for comment.
“The banks can get their i’s dotted and their t’s crossed,” Casale said. “The problem is, they can’t do it when that kind of issue is sprung on them at the last minute. The banks and their attorneys were caught shorthanded.”
The first legal challenge of banks’ ownership of loans came last October in Cleveland, where U.S. District Court Judge Christopher Boyko issued a stinging ruling.
“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance,” he wrote. “Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
According to the New Jersey Law Journal, which wrote about the issue last month, the first foreclosure overturned in Jersey on these grounds came in Passaic County. In subsequent months, judges in Essex, Monmouth and Ocean dismissed cases or reversed orders in existing cases.
Neither side argues that borrowers don’t ultimately owe money to someone. But homeowners fighting their foreclosures appear to have bought themselves time.
In the meantime, people like Theresa Scilla exist in a legal limbo, in default of their mortgages but staying in their homes. Scilla, a retired state worker, owns a home in Matawan. When her live-in boyfriend, Bill Daddio, was injured in a car accident and had to go on disability from his job as a carpet installer, they fell behind on her payments. She refinanced, but in filings to Monmouth County Chancery Court, she said she got hoodwinked into a signing for a loan she couldn’t afford.
Her attorney, David Kaplan of Tobias and Kaplan in Perth Amboy, succeeded in getting a sheriff’s sale on her house canceled on the grounds the bank trustee that filed the foreclosure was not the true lender. Kaplan is now moving forward with a civil claim that Scilla was a victim of predatory lending.
Where her case or similar cases go from here is unclear.
The State Office of Foreclosure has attempted to provide some guidance, informing attorneys for lending institutions that as of May 1, it no longer would process foreclosures unless the attorneys could prove their clients were the owners of the loan and had the right to collect on the debt at the time the foreclosure was filed.
Kevin Wolfe, chief attorney at the Office of Foreclosure, said it is too early to tell how the order will affect foreclosure filings. It takes several months for new filings to reach his office.
“A lot of this has yet to be fully tested in court,” Fisher said. “We don’t really know how this is going to turn out.”