University of Denver Sturm College of Law

Legal Research Paper Series Working Paper No. 13-22

Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures

John Campbell University of Denver Sturm College of Law

This paper can be downloaded without charge from the Social Science Research Network Electronic Paper Collection

Electronic copy available at: http://ssrn.com/abstract=2191738

Can We Trust Trustees? Proposals for Reducing Wrongful Foreclosures

John Campbell
ABSTRACT Over 10 million foreclosures have been initiated in the United States since 2008. In almost half of these, there is no court review. Instead, the only safeguard to ensure that foreclosure is merited is a trustee. As such, the trustee is a central figure in foreclosure and has the potential to serve as a true failsafe against reckless or overtly fraudulent foreclosures. There is one problem; the trustee is not neutral. Instead, the modern trustee is unregulated and almost always financially and legally tied to the banks that initiate foreclosure. These banks are known bad actors that created the worldwide economic collapse through non-existent underwriting, rampant and reckless securitization, forged documents, and sloppy payment collection leading to over $33 billion dollars in settlements to date. With these facts in mind, how is it that the law allows a bank to hand-pick a neutral? Who are these neutrals that are being picked? And what is the result of trusting the banks right-hand man to look out for homeowners? This article answers these questions by detailing the current role of trustees, telling the stories of real homeowners who are losing their homes despite being current on their payments, and analyzing the current systems flaws. It then proposes a detailed set of reforms that will transform the trustee from a potential shill for banks into a meaningful gatekeeper who guards against wrongful foreclosure.

John Campbell is a Lawyering Process Professor at the University of Denver Sturm College of Law. Id like to thank everyone who contributed to this piece, including: Chris Peterson, Elizabeth Renuart, Bruce Neas, Erich Vieth, Alicia Campbell, Justin Pidot, Nantiya Ruan, Nancy Leong, Justin Marceau, and Alan Chen.

Electronic copy available at: http://ssrn.com/abstract=2191738

TABLE OF CONTENTS INTRODUCTION .......................................................................... 1 I. THE FORECLOSURE CRISIS................................................. 10 A. Wrongful Foreclosures Abound ......................................... 12 1. Ron Meehow Loses His Home Despite Making All His Payments ........................................................................ 13 2. Rons Story Is Not Unique: Widespread Reports of Wrongful Foreclosure .................................................... 18 II. THE MODERN MORTGAGE ERA AND NON-JUDICIAL FORECLOSURE .................................................................... 21 A. How Things Have Changed ............................................... 22 1. The Modern Mortgage Era ............................................. 25 a. The Rise of Subprime Lenders ................................... 25 b. The Rise of Mass Loan Securitization ........................ 28 c. The Rise of Private Recording and the Resulting Loss of Transparency in Land Recordings: MERS ........... 30 d. The Rise of Foreclosure Rates and the Collapse of the World Economy ........................................................ 33 e. Conclusions Regarding the Modern Mortgage Era .... 34 III. NON-JUDICIAL FORECLOSURE AND THE ROLE OF TRUSTEES ............................................................................. 35 A. Non-Judicial Foreclosure .................................................. 35 B. The Current Role of Many Trustees in Non-Judicial Foreclosures .. .40 1. The Structural Dynamics that Prevent Trustees from Remaining Neutral ......................................................... 47 IV. RE-ENVISIONING THE ROLE OF THE TRUSTEE ........................ 52 A. Legislation.......................................................................... 54 1. A Six Prong Reform Proposal ........................................ 55 a. Require records ........................................................... 55 b. Insulate from other parties .......................................... 58 c. Prohibit foreclosure when legal or factual disputes arise ........................................................................... 58 d. Penalties ...................................................................... 59 e. Licensing .................................................................... 60 f. Educate ....................................................................... 61 2. The Promise of a Trustee Reform Statute and the Challenges that Must be Addressed ............................... 61

B. Using Litigation to Reform the Role of Trustees ............... 64 1. California........................................................................ 64 a. Could Ron Meehows Claim Survive in California?.. 66 2. Missouri.......................................................................... 67 a. Missouri Law .............................................................. 67 b. Could Ron Meehows Claim Survive in Missouri?.... 69 3. Washington..................................................................... 69 a. Washington Law ......................................................... 69 b. Could Ron Meehows Claim Survive in Washington.74 4. What Specific Factual Scenarios Are Ripe for Pursuit? .......................................................................... 74 C. Ethics Complaints Can Give Rise to Changes in Lawyer Behavior ...... ..75 1. Ethical Rules that Might Be Implicated ......................... 76 2. A Real Example to Build On.......................................... 80 3. How Would Ethical Decision Impact Ron Meehows Case? ...................................................................................... 81 CONCLUSION ............................................................................. 81

INTRODUCTION A homeowner sends a check to her mortgage company every month. Nonetheless, she receives a notice from the mortgage company that it is initiating a foreclosure proceeding. The proceeding does not require a judge, jury, or court. Rather, a designated trustee is the only neutral who stands between the homeowner and an illegal, wrongful foreclosure. There is one problem: as things stand today, the trustee is unregulated and almost always financially connected to the very bank who errantly initiated foreclosure. The result is almost always the same: the homeowner loses her home. This practice, sometimes referred to by advocates as housejacking, occurs when banks make mistakes and the existing foreclosure system provides no meaningful investigation into their claims. 1 It can occur when banks mishandle files, lose payments or even engage in mass perjury 2 to produce documents supporting illegal foreclosures. These occurrences are well documented. Yet, in the face of a history of gross negligence and outright fraud, over half of all states still allow banks to foreclose on homes without ever going to court or offering any proof that the foreclosure is valid. 3 In the majority of these non-judicial foreclosures, a trustee stands in for the judicial system and is supposed to act as a neutral in the transaction to assess the

Telephone Interview with Erich Vieth, Consumer Attorney, Simon Law Firm (Aug. 15, 2012) (on file with author). 2 See Pettey, infra note 12. 3 See JOHN RAO & GEOFF WALSH, FORECLOSE A DREAM: STATE LAWS DEPRIVE HOMEOWNERS OF BASIC PROTECTIONS, 12 (Natl Consumer Law Ctr. Inc. 2009), available at http://www.nclc.org/images/pdf/foreclosure_mortgage/state_laws/foreclosingdream-report.pdf. The article suggests 30 states are non-judicial; however, this depends to some degree on how states are counted and what the common practice actually is in the state. Some states are hard to count, such as Louisiana, that has multiple foreclosure processes that involve the court in varying ways. Id.

legitimacy of the banks claim. 4 This dependence on a trustee as the only potential safeguard to prevent wrongful foreclosures is currently a problem, not a solution, because trustees present no meaningful safeguard against wrongful foreclosure. 5
See generally id. I have not set out the law of the trustees in any detail at the outset. This article rests upon the idea that trustees should be neutral. The law generally recognizes this principle; however, this article does not rest upon a legal analysis of existing trustee law. Instead, it suggests that there is too little law about trustees and that the law that does exist is difficult to follow. To that end, my proposal section touches on legislative and litigation methods to alter the role of the trustee. However, to establish that at a minimum, most states already agree that trustees should, at least in theory be neutral, I see out some examples here. See e.g. Bonilla v. Roberson, 918 S.W.2d 17, 21 (Tex. App. 1996) (When exercising a power contained in a deed of trust, the trustee becomes a special agent for both parties, and he must act with absolute impartiality and with fairness to all concerned. . . .); Cox v. Helenius, 693 P.2d 683, 686 (Wash. 1985) ([A] trustee of a deed of trust is a fiduciary for both the mortgagee and mortgagor and must act impartially between them); Perry v. Va. Mortg. & Inv. Co., 412 A.2d 1194, 1197 (D.C. 1980) (In this jurisdiction a trustee under a deed of trust owes fiduciary duties both to the noteholder and to the borrower.); McHugh v. Church, 583 P.2d 210, 214 (Alaska 1978) (The trustee under a deed of trust generally is regarded as owing a fiduciary duty to both the trustor and the beneficiary and is required to perform his duties impartially.); Smith v. Haley, 314 S.W.2d 909, 913 (Mo. 1958) (The trustee sustains a fiduciary relationship to the debtor and the creditor. Reason and justice exact of him the most scrupulous fidelity in transferring one man's property to another.); Lake Hillsdale Estates, Inc. v. Galloway, 473 So. 2d 461, 465 (Miss. 1985) (In a deed of trust the trustee is under a duty to perform his duties in good faith and act fairly to protect the rights of all parties equally.). It is also worth noting that even in states that dont use the word neutral to describe the duty of a trustee, the language may still approximate this duty. See, e.g,. Russell v. Lundberg, 120 P.3d 541, 546 (Utah Ct. App. 2005) (While a trustee's primary duty and obligation is to the beneficiary of the trust, the trustee's duty to the beneficiary does not imply that the trustee may ignore the trustor's rights and interests.). There are, however, a few states that do not explicitly recognize a duty of neutrality, such as Arizona. However, even Arizona recognizes that a trustee can be named in an action if the trustee ran afoul of the statutory requirements for a trustee. ARIZ. REV. STAT. ANN. 33807 (2012). The law seems unclear in Arizona whether this could include proceeding with a sale in the face of evidence that there was no default. 5 There are two legal regimes in which foreclosure can occur. The first is lien theory and the second is title theory. It is unnecessary to discuss both at length in this article. What is essential to note is that in title theory states, a deed of trust is typically used. That document names a trustee who holds bare legal title, and
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This is especially troubling because of what is at stake. At the center of the American dream is the American home. The home is also the center of much of American jurisprudence. No piece of property is treated as more sacred or more worthy of protection from intrusion. In many states, homeowners can quite literally shoot someone who enters their home unlawfully, 6 and in all states, the police must behave differently if they wish to search a persons home. 7 How then, did it come to be true in America, that in over half the states, a bank can take persons home in

in the event of default, is called on to initiate foreclosure, provide notice, and carry out the foreclosure sale. See Elizabeth Renuart, Property Title Trouble in Non-Judicial Foreclosure States: The Ibanez Time Bomb, 4 WM & MARY BUS. L. REV. 111 (2013). There are 19 states and the District of Columbia that are both non-judicial and have a trustee. This article is most applicable in those states. Importantly, two of these states rank as the two most populous states in the country Texas and California. The others are Alaska, Arizona, District of Columbia, Idaho, Maryland, Mississippi, Missouri, Montana, Nebraska, New Mexico, Nevada, North Carolina, Oregon, Tennessee, Utah, Virginia, Washington and West Virginia. See Security Instruments, FREDDIEMAC.COM, http://www.freddiemac.com/uniform/unifsecurity.html (last visited Mar. 6, 2013), the Fannie Mae site that lists the standard security instruments for each state. Any state that allows a deed of trust at least has the potential for trustees to be involved. Together, these states account for roughly 125 million Americans, or about 40% of the population. U.S. Dept of Commerce, 2010 Census: United States Profile, UNITED STATES CENSUS BUREAU (May 30, 2012, 2:06 PM), http://www.census.gov/2010census/. 6 See, e.g., COLO. REV. STAT. 18-1-704.5. Many states have enacted Make my Day immunity laws providing an affirmative defense to a homeowner who shoots, or uses other physical force against, an intruder. See also Christine Catalfamo, Stand Your Ground: Florida's Castle Doctrine for the Twenty-First Century, 4 RUTGERS J.L. & PUB. POL'Y 504, 530 (2007) (describing the castle doctrine in Florida); People v. Tomlins, 107 N.E. 496, 497 (N.Y. 1914). Justice Cardozo wrote, [i]n case a man is assailed in his own house, he need not flee as far as he can, as in other cases of se defendendo, for he hath the protection of his house to excuse him from flying, as that would be to give up the protection of his house to his adversary by flight. Flight is for sanctuary and shelter, and shelter, if not sanctuary, is in the home. Id. (internal quotes omitted). 7 See, e.g., Steagald v. United States, 451 U.S. 204, 212 (1981) (holding that [i]n terms that apply equally to seizures of property and to seizures of persons, the Fourth Amendment has drawn a firm line at the entrance to the house. Absent exigent circumstances, that threshold may not reasonably be crossed without a warrant.).

foreclosure without ever going to court at all? 8 And how did it come to be that the only neutral in such an extrajudicial proceeding can actually be the attorney for the bank? These questions are especially salient in light of the behavior of national banks in the last two decades. 9 During that time, they have participated in, or in many cases caused, the subprime crisis, the worldwide market collapse due to mortgage securitization, 10 the creation of shell recording companies to avoid the cost of public recording of property ownership, 11 robo-signing 12 (which is simply perjury in relation to foreclosures), widespread servicing abuse leading to a $25 billion settlement with the United States, 13 and rampant questionable foreclosures - including in some especially egregious cases foreclosures on homes that never had loans at all. 14 These myriad of problems demonstrate that banks, at least as currently formulated, cannot police themselves. Yet these same banks have initiated in excess of 10 million foreclosures since 2008. 15
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Molly F. Jacobson-Greany, Setting Aside Nonjudicial Foreclosure Sales: Extending the Rule to Cover Both Intrinsic and Extrinsic Fraud or Unfairness, 23 EMORY BANKR. DEV. J. 139, 145 (2006). 9 Vieth, infra note 18, at 4:26. 10 Renuart, supra note 5 at 118. 11 Christopher L. Peterson, Two Faces: Demystifying the Mortgage Electronic Registration Systems Land Title Theory, 53 WM. & MARY L. REV. 111, 149 (2011). 12 For a description of the various actions the term robo-signing is used to describe see Louis S. Pettey, Ethics in Foreclosure, 26 PROB. & PROP. 47 (Nov./Dec. 2012). 13 David E. Woolley & Lisa D. Herzog, MERS: The Unreported Effects of Lost Chain of Title on Real Property Owners, 8 HASTINGS BUS. L.J. 365, 373 (2012). 14 Joshua Rhett Miller, Bank of America to Pay Florida Couple in Mistaken (June 6, 2011), Foreclosure Case, FOXNEWS.COM http://www.foxnews.com/us/2011/06/06/bank-america-pays-florida-couple-inmistaken-foreclosure-case; Harriet Johnson Brackery, Lauderdale Mans Home Sold Out from Under Him in Foreclosure Mistake, SUN SENTINEL (Sept. 23, 2010), http://articles.sun-sentinel.com/2010-09-23/business/fl-wrongfulforeclosure-0922-20100921_1_foreclosure-defense-attorney-foreclosure-casejumana-bauwens. 15 Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December, REALTYTRAC (Jan. 12, 2011), http://www.realtytrac.com/content/press-releases/record-29-million-us-

As mentioned, in many states, standing between these banks and the homeowner are trustees. 16 These private parties are the only neutral in a non-judicial foreclosure; they are on the only potential failsafe to prevent wrongful foreclosures. 17 Because of this vital role, it has been the role of courts to watch the proceedings [of trustees] with a jealous and scrutinizing eye, 18 in order to require of the trustee the most scrupulous fidelity. 19 Yet, this article reveals that in reality, this is not happening. Instead, the truth is that trustees are almost never held accountable for carrying out their functions. 20 This is despite the fact that trustees are routinely untrained, unregulated and many times closely tied to the banks that initiate foreclosures. 21 Indeed, states do not even provide minimum requirements for who may serve as a trustee, thereby allowing almost anyone to be named. 22 As a result, in the best cases, trustees are unprepared to handle the complex questions that securitization has created. In the worst, trustees are financially incentivized to push foreclosures through as fast as possible, regardless of what evidence there may be that fraud or negligence
properties-receive-foreclosure-filings-in-2010-despite-30-month-low-indecember-6309. 16 Peter W. Salsich, HomeownershipDream or Disaster?, 21 J. AFFORDABLE HOUSING & COMMUNITY DEV. L. 17, 33 (2012). 17 Vieth, supra note 1. 18 West . v. Axtell, 17 S.W.2d 328, 334 (Mo.1929). 19 See, e.g., Edwards v. Smith, 322 S.W.2d 770, 777 (Mo. 1959) (Trustees are considered as the agents of both partiesdebtor and creditorand their action in performing the duties of their trust should be conducted with the strictest impartiality and integrity. They are entrusted with the important function of transferring one man's property to another, and therefore both reason and justice will exact of them the most scrupulous fidelity.). 20 Vieth, supra note 1. 21 Erich Vieth, Mortgage Crisis in a Nutshell Presented by John Campbell, 26:06 (Apr. 21, 2012), YOUTUBE, http://www.youtube.com/watch?v=YBbwb6Sv4PM (This video was created by the author of this article, with the help of his colleague, Erich Vieth. In less than hour, it lays out the root causes of the modern mortgage crisis. Much of this information is summarized in this article; however, the video provides a more in-depth understanding to fundamental changes in the mortgage industry that make the role of the trustee even more vital. The video has been featured on the National Consumer Law Centers cite as well as on Public Citizens blog). 22 Vieth, supra note 1.

has occurred. 23 And in reality, these two problems, lack of regulation and financial ties to banks, combine to cause even more serious problems. 24 These problems are unique to our times. In the past, although the role of trustee was critical, it was not always complicated. In a typical lending situation, everyone knew who owed what to whom. 25 As such, the fundamental things that needed to be established in order for foreclosure to be legal - that default occurred and that the party foreclosing had standing to foreclose were not in question. Today, things are fundamentally different. The mortgage crisis has revealed that the world is awash in

My own experiences confirm that the trustee is often the attorney for the bank. Similarly, courts make reference to this fact, see, e.g., In re Vogler Realty, Inc., 722 S.E.2d 459, 460 (N.C. 2012), as do various law review articles cited herein. Finally, Ive interviewed Bruce Neas, who works for a legal services organization in Washington State. He explains that although the attorneys for the banks are not usually the trustees in Washington, the relationship is still very close. Interview with Bruce Neas, Legislative Coordinator, Columbia Legal Services (July 24, 2012). The firm that represents most banks who foreclose on homeowners in Washington also has ownership interests in the largest trustee company in the region, known as Northwest Trustee Corporation. Company Profile, Northwest Trustee Services Inc., http://www.northwesttrustee.com/profile.aspx (last visited Feb. 10, 2013) [hereinafter Northwest Company Profile]. 24 In this paragraph, Ive identified two potential problems with trustees. First, Ive suggested that they have a hard job, that they are untrained, and that they are unregulated. Second, Ive suggested that many of the trustees may be at least tempted to be unfair because they work for the banks and stand to profit by shoving foreclosures through. Although I considered structuring this article to address these problems separately, I ultimately rejected this idea. Instead, I chose to talk about both problems at the same time. I did this because, with the exception of public trustees in Colorado, I have not uncovered another trustee who is truly free of ties to the banks. As a result, although I dont mean that every trustee seeks to be unfair, I do believe that the lack of training and regulation, coupled with the gravitational pull of the banks, who pay the trustees a number of ways, means that the lack of regulation and the potential for bias work in concert and must be discussed together. 25 Id. at 35:30.

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questionable foreclosures. 26 Indeed it is often unclear who owns the note, 27 who is secured, what is owed and whether it was paid. 28 One may at this point wonder why these problems are not being discussed more often, why courts are not carefully scrutinizing the work of trustees, and why legislators are not responding to these problems. There are a number of reasons the problem has gone largely unexplored. First, homeowners are often vulnerable when the foreclosure occurs. They spend energy packing up and finding a new place to live. They dont have time or money to wage a fight. 29 Second, there are very few attorneys who represent homeowners in such matters and since no court is directly involved, there is no oversight. 30 Third, the problem is new and complex, so a relatively small people in the country have pierced the veil of the modern mortgage era sufficiently to detail it and identify problems. Finally, implicating trustees as unregulated and often outright unfair actors is, by definition in most cases, an assertion that attorneys are engaged in wrongdoing. This is unpopular, as many attorneys believe it is uncouth to sue or otherwise criticize other attorneys. The result of the confluence of the modern mortgage era with ineffectual trustees is that at present the fox is in charge of the chicken coop; banks, that by any measure, have had their credibility called into question, are directing foreclosures with little to no supervision. To say that this is producing tragic results for homeowners is to understate the problem. In many cases, there is absolutely no certainty that the homeowner failed to pay nor is there certainty that the party who is foreclosing is the party with the legal right to do so. In the more egregious cases, the facts are even more troubling. In those cases there is solid proof that the homeowner was current on their payments but their house was

Aletra P. Williams, Foreclosing Foreclosure: Escaping the Yawning Abyss of the Deep Mortgage and Housing Crisis, 7 NW. J.L. & SOC. POLY 455, 457 (2012). 27 Tanya Marsh, Foreclosures and the Failure of the American Land Title Recording System, 111 COLUM. L. REV. 19 (2011). 28 Williams, supra note 26, at 467. 29 Id. 30 Vieth, supra note 1.

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taken anyway. 31 This is theft, plain and simple theft of the American dream. This article is a response both to the need for exposition of the problem and for constructive suggested solutions. It is meant to be a marriage of storytelling (about the real people who are suffering harm), investigative journalism regarding the role of trustees (because it draws from interviews with practitioners who are in the fray to reveal facts that dont appear in books or articles), diagnosis and analysis of the fundamental problems with the current trustee structure, and finally, a prescriptive piece that suggests meaningful and realistic reform To these ends, the remainder of this article unfolds as follows. Part I sets the table, providing background regarding the scope of the current foreclosure problem. It begins with the recounting of one story about one specific homeowner. That story is based on a detailed lawsuit on file at this time. It also tracks some of the media reports and scholarly literature chronicling the wave of wrongful foreclosures sweeping the country. Part II considers how the modern mortgage era differs from the way things used to operate. Part III discusses how the current non-judicial foreclosure regime works and the role of the trustee in this process. It concludes by identifying a number of specific problems that relate to the role, or non-role, of trustees. Part IV proposes solutions by reforming the role of trustees. It proposes effectuating these reforms through a combination of strategic legislation, litigation, and ethical inquiries and complaints. Part V concludes. I note at the outset that it is beyond the scope of this article to address every question and present every solution to what is a multifaceted, institutional failure. There is undoubtedly a need for true reform of home lending, the securitization process, and the record keeping that occurs both publicly and internally. There are also multiple solutions that can be tried to avoid wrongful foreclosure, including mediation programs such as the ones being carried out in a number of states today, including Massachusetts, New York, Washington, Nevada and Illinois. 32 Another
Brackery, supra note 14. See generally Geoff Walsh, The Finger in the Dike: State and Local Laws Combat the Foreclosure Tide, 44 SUFFOLK U. L. REV. 158 (2011) (discussing a
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interesting solution proposes a unified electronic recording system and the merger of the note and mortgage into one viewable document. 33 Finally, the proposed Uniform Nonjudicial Foreclosure Act (UNFA) contains some novel suggestions for addressing the hodgepodge of divergent state substantive and procedural rules relating to foreclosure. 34 These are all worthy of consideration. I also note that this article is not meant to endorse current lending practices, or even to endorse non-judicial foreclosure as the best way to carry out foreclosures. Instead, it is meant to recognize that homeowners are experiencing real harm right now, and there is a pressing need for solutions which can be implemented quickly within existing structures. As such, the remainder of this article presumes that nonjudicial foreclosure is unlikely to be abolished, and therefore works in the context of reforming non-judicial foreclosure in the simplest way possible. The article also rests upon the premise that it is far better to keep people in their homes and avoid wrongful foreclosures altogether than it is to attempt to remedy the problem post-foreclosure through judicial challenges, as some have suggested. 35 This article suggests that at least the most egregious
variety of state initiatives to curb wrongful foreclosure and foreclosures in general); see also Williams, supra note 19, at 458 (summarizing a variety of responses by state legislatures to the foreclosure crisis). 33 Alan M. White, Losing the Paper - Mortgage Assignments, Note Transfers and Consumer Protection, 24 LOY. CONSUMER L. REV. 468, 498 (2012). 34 Grant S. Nelson & Dale A. Whitman, Reforming Foreclosure: The Nonjudicial Foreclosure Act, 53 DUKE L.J. 1399, 1401 (2004). 35 There is a persistent meme from some critics of foreclosure defense that homeowners are simply trying to game technicalities in order to obtain free homes. See, e.g., Kelly Green McConnell, No Free Houses: Few Mortgages Have Fatal Flaws, IDAHO ST. B. ADVOCATE, Jan. 2012, at 30 (asserting that some homeowners are clearly just trying to win the free house lottery.). Although I disagree with the idea that it is common for homeowners to try to win free homes - and the implicit idea that lawyers are taking such cases in any significant numbers - my proposals should be palatable to those who share McConnells views. By involving the trustee prior to foreclosure in order to prevent wrongful foreclosures, there is no need for an action to quiet title to the homeowner or to challenge standing to foreclose. Instead the problem is averted; the homeowner remains in the home and continues to make payments in some cases, and in any case in which there is legitimate default, the trustee checks the bona fides and carries out a solid, enforceable sale.

foreclosure problems can be averted simply by making the trustee a true neutral with clearly defined duties. In doing this, the most troubling foreclosures would be routed to court, where facts could be considered fully, or if the foreclosing entity determined it was unwise to proceed to court, the likely result is that the note holder would have new incentive to work out new terms with the homeowner. The results are salutary for homeowners and for society as a whole - fewer wrongful foreclosures, more home loan workouts (modifications) and increased confidence that homes sold after foreclosure have clear title. I. THE FORECLOSURE CRISIS

Throughout the twentieth century, homeownership increased to the point that by 2000, over two-thirds of people owned their homes. 36 Homeowners took out larger loans because the rates were conducive to an affordable lifestyle; however, when home values began to drop, suddenly these homeowners had loans that far exceeded the value of the home itself. 37 In fact, the rate at which home values dropped when the housing bubble burst in 2008 was faster than the rate at which home prices dropped during the Great Depression. 38 At the same time, the rates on many of the loans began to ratchet up, consuming more and more of the homeowners income. 39 As a result, homeowners began to default on loans, but since their loans were "underwater, 40 they could not refinance. The results were, and continue to be, staggering. The percentage of homeowners who were seriously delinquent on their mortgage stood at 2.23% (about 980,000 loans) at the beginning of 2007. 41 This percentage rose to 9.67% (4.3 million loans) by the

Salsich, supra note 16, at 25. Id. at 28. 38 Id. at 24. 39 Vieth, supra note 18, at 8:45. 40 Salsich, supra note 16, at 20. 41 Renuart, supra note 5, at 116. The survey defines seriously delinquent mortgage loans as those that are ninety days or more delinquent or are in foreclosure; Id. at 2 n.3.
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end of 2009. 42 And by the end of the second quarter of 2012, the rate was still 7.58%. 43 These delinquencies are leading to a crushing number of foreclosures. In 2008 there were 2.3 million properties in foreclosure. 44 In 2009, as the mortgage crisis continued to build, there was an estimated 2.9 million properties in foreclosures. 45 In 2010 the number was roughly the same. 46 In 2011 there were 2.7 million more, and in 2012 there were roughly 1.8 million. 47 Although there may be some overlap in the properties that were in foreclosure from year to year, the number of completed foreclosures is equally shocking. There have been in excess of 3.4 million families who have actually been foreclosed and displaced. 48 The loss of these homes not only affected the families; the foreclosures impacted the global community. For example, foreclosures damaged the property value of nearby property, resulting in over $1.86 trillion in losses to property values during
MORTGAGE BANKERS ASSOCIATION, NATIONAL DELINQUENCY SURVEY: FOURTH QUARTER 2009 2 (2009), available at http://media.oregonlive.com/frontporch/other/NDS_Q409.pdf. 43 Mortgage Delinquencies Increase in Latest MBA Survey, MORTGAGE BANKERS ASSOCIATION (Aug. 9, 2012), http://www.mortgagebankers.org/NewsandMedia/PressCenter/81589.htm. 44 Foreclosure Activity Increase 81 Percent in 2008, REALTYTRAC (Jan, 15, 2009), http://www.realtytrac.com/content/press-releases/foreclosure-activityincreases-81-percent-in-2008-4551. 45 Record 2.9 Million U.S. Properties Receive Foreclosure Filings in 2010 Despite 30-Month Low in December, REALTYTRAC (Jan. 12, 2011), http://www.realtytrac.com/content/press-releases/record-29-million-usproperties-receive-foreclosure-filings-in-2010-despite-30-month-low-indecember-6309. 46 Id. 47 2011 Year-End Foreclosure Report: Foreclosures on the Retreat, REALTYTRAC (Jan. 9, 2012), http://www.realtytrac.com/content/foreclosuremarket-report/2011-year-end-foreclosure-market-report-6984; 1.8 Million U.S. Properties with Foreclosure Filings in 2012, REALTYTRAC (Jan. 14, 2013), http://www.realtytrac.com/Content/foreclosure-market-report/2012-year-endforeclosure-market-report-7547. 48 Chris Guldi, 3.4 Million Completed Foreclosures Since Sept. 2008, CoreLogic Reports, GULDI GROUP (Apr. 10, 2012), http://www.guldigroup.com/2012/04/34-million-completed-foreclosures-since-sept-2008-corelogic-reports/ (this number is low because it measured from 2008 until April of 2012).
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the recovery years. 49 These foreclosures also cripple peoples credit and can lead to bankruptcy. 50 The result is that homeownership is becoming increasingly difficult. 51 Meanwhile, communities are struggling to recover, the economy was crushed due to the burst of the housing bubble, 52 and the data suggests that millions of additional foreclosures are still to come. 53 In addition, the risky loans and predatory terms that are leading to foreclosure in many cases, apply for the life of the loan. Although some of these terms are being modified, modification has proven to be a far from perfect fix. 54 The result is that foreclosures are likely to remain high in the future. It is also likely that the underlying challenges that securitization present for identifying who can foreclose and who is in default will persist indefinitely, as all of the practices continue to remain legal and common place. This suggests that a solution which would curb wrongful foreclosures is needed immediately and will also pay dividends for decades to come. A. Wrongful Foreclosures Abound The data above is a reminder how vast the foreclosure crisis is. However, the problem becomes more real when put in human terms. The two sections below are intended to do just that in two different ways. The first section tells the real story of one homeowner and his family. The second section discusses a few media reports about foreclosures and reviews some of the scholarly literature that details the breadth of the current problem.

Alexander Bader, Truly Protecting the Consumer in Light of the Subprime Mortgage Crisis: How Generally Applicable State Consumer Protection Laws Must be a Key Tool in Keeping Lending Institutions Honest, 25 J. CIV. RTS. & ECON. DEV. 767, 768 (2011). 50 Williams, supra note 23, at 470 (noting the correlation between foreclosure filings and bankruptcy filings). 51 Salsich, supra note 16, at 21. 52 Renuart, supra note 5, at 117. 53 Williams, supra note 26 at 456. 54 Approximately 5.7 million loans have been modified since 2007. HOPE NOW BROCHURE (2012), available at http://www.hopenow.com/pdf/HN%20Brochure%20Final_spreads.pdf.

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I note at the outset that the media reports and scholarly work address both judicial and non-judicial foreclosures. I have not distinguished between the two because the same errors relating to record keeping, standing, and outright fraud exist in both settings. The only difference is that in judicial foreclosure states, the court has at least some opportunity to examine the bona fides of foreclosures. 55 Although this is far from perfect due to the massive number of such foreclosures, there is reason to believe that the involvement of a neutral makes a difference. For example, in Florida, some egregious foreclosures occurred due to fraudulent, robo-signed documents. 56 However, after courts caught wind of this through litigation, new rules were promulgated that required attorneys to verify the authenticity of documents supporting foreclosure. 57 It is my operating assumption, then, that 1) if wrongful foreclosures can occur under the watchful eye of a court, the problems in states in which there is no meaningful neutral are at least as bad, and probably worse, and 2) that much like Florida courts who began to require proof and in doing so slowed down robo-signing, interjecting a meaningful neutral in non-judicial foreclosure will not stop all wrongful foreclosures, but it will serve as a way to reduce that number. 1. Ron Meehow Loses His Home Despite Making All His Payments Ron Meehow obtained a refinanced loan from LoanQuest, a subprime lender who is now out of business. 58 Within months, he
Vieth, supra note 1. Brackery, supra note 14. 57 Vieth, supra note 1. 58 Ron Meehow and the other names used in this account are fictitious, but the story included below is based almost entirely on a case that is currently on file. The only part that has been added is the discussion of what happened after Rons home was foreclosed. I note that although I did not think it was necessary or appropriate to repeatedly use the name of the actors, the case is on file in St. Charles County, Missouri and with the author. See Rippy v. Chase Bank, 1111CV-06677 (St. Charles Cnty. Ct. Dec. 1, 2011) (St. Charles Cnty. Cir. Ct., Ct. File). The case is only one of countless others on file throughout the country that allege that a foreclosure was carried out in the absence of default and/or in direct conflict to the promises made by a bank to modify a loan. Id. These same
56 55

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received notice that he should begin making payments to National Bank and Trust, a servicer of the loan. 59 Ron did not know why he should pay someone who didnt make the loan, but he made the payments any way. He did not want to lose his home. Ron made his payments for six years, and he was never delinquent. 60 About a year later, he received a notice from yet another bank, American Bank, that he was behind on his payments. 61 Ron wondered what American had to do with his loan, but since they were the one sending the letter, he called them. 62 Ron was detail oriented. He had electronic confirmation of every single payment. He told American this fact. American could not explain its mistake, but it suggested that there would be no problem. It would fix it. A few days later Ron received a packet in the mail saying that Ron could refinance his loan. 63 He would have lower payments. Ron had not requested a modification, but the deal sounded fair. 64 Ron immediately signed the paperwork and returned it to American at the address on the letter. 65 About a week later he received a signed copy of the modification. 66 He began making the new payment. 67 Things seemed fine, and Ron quit worrying about his house and went back to his life. His wife, who had been stressed out about the notice of default, felt much better with a signed contract from American and a lower monthly payment. Then, three months into making the new payment, Ron received a letter from a law firm called Huck & Fole. The letter said that Huck was attempting to collect a debt for American. 68 It said that he was in default on his home loan and at risk of

allegations, along with many others, gave rise to the $25 billion settlement referenced throughout this article that was entered into between five of the largest national servicers and the United States. 59 First Amended Petition at 15, Rippy, 1111-CV-06677. 60 Id. at 16. 61 Id. at 17. 62 Id. at 18-19. 63 Id. at 20 64 Id. at 2. 65 Id. at 1. 66 Id. at 2, 22. 67 Id. 68 Id. at 28.

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foreclosure. Ron was furious, and, a little afraid. 69 He called American. When the first customer service representative couldnt help, he asked to be transferred to another representative. That representative couldnt help either, and transferred him to the foreclosure department. They couldnt help either. Ron, frustrated after two hours of calls, hung-up. He called several more days in a row, but no one could explain exactly what was going on. Some representatives suggested it was all a clerical error and that it would soon be resolved. 70 Then Ron got another letter from the Huck. 71 This one said that Huck was the successor trustee, and that it was giving him notice that his house would be sold at foreclosure in three weeks. 72 Ron didnt know what a trustee was, but after googling it, he learned that a trustee was supposed to be a neutral party who carried out a foreclosure if default occurred. Ron wondered how the firm that sent him letters saying they represented American could now be the neutral. Ron got a lawyer, and he gave the lawyer everything he had to show what he was supposed to pay and that he was paying it, on time, every month. 73 The lawyer didnt specialize in mortgage law, but said this shouldnt be too difficult. It seemed like a clear mistake. The lawyer called an attorney at Huck since it was the trustee. 74 Rons attorney didnt know a great deal about mortgage law, but he knew that a foreclosure couldnt occur if the homeowner was making his payments. He told them the story and offered to send proof of the signed modification and Rons payments. 75 He figured this would end the problem. Certainly, as soon as another lawyer heard how confused things were, reason would win the day. But he was wrong. The lawyer at Huck told him that we just do what American tells us to do. 76 The lawyer was shocked and pointed out that Huck was required to be neutral
69 70

Id. Id. at 29-34. 71 Id. at 35. 72 Id. at 43. 73 Id. at 36-37. 74 Id. at 41-44. 75 Id. 76 Id. at 44.

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and even had a fiduciary duty to Ron under state law. The lawyer at Huck reiterated that he could not stop a foreclosure unless his client gave him permission. He said that Rons lawyer needed to call American directly. 77 Rons lawyer did, and he wrote American too. It seemed to work at first. American suggested the modification just needed to be sent to the Fulfillment Center. 78 The foreclosure was cancelled. 79 But, then, new notice was sent that foreclosure would proceed. 80 Ron made more calls. 81 So did his lawyer. 82 The foreclosure was postponed again, but then a new date was set. In the end, no matter what Ron or his lawyer said or did, American continued to move forward with the foreclosure, and Huck helped them every step of the way. 83 The foreclosure took place, and Ron lost his home. 84 Ron never got to go to court to be heard because American didnt have to file anything in court, and Ron couldnt afford to pay the attorney to file a lawsuit of his own. The trustee that carried out the sale was the same law firm that ignored Ron and his lawyer. Under the law, Ron could be held responsible for the difference between what the house sold for at the sale and what he owed. This deficiency could bankrupt Ron. In an effort to reduce the deficiency, state law required the trustee, Huck, to get the highest price it could at the sale. Despite this, the trustee published the notice of default in a paper that had less than a thousand readers and that was specifically for lawyers only. This was despite the fact that there was a paper in town that had a circulation of over 500,000 people. Then, at the sale, Huck sold the house to the only bidder, Government Mortgage Corporation (Govie Mo). Govie Mo was also the trustees longtime client. Govie Mo bought the house for $120,000, about $30,000 less than what Ron owed.
77 78

Id. Id. at 46. 79 Id. at 47. 80 Id. at 56. 81 Id. at 50. 82 Id. at 51. 83 Id. at 48-49. 84 Id. at 60.

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Five days later, a notice was posted on Rons door. It said that Ron was living in Govie Mos house illegally and that he had get out of the house before the sheriff got involved. The notice was from Huck. Ron told his wife and son they had to move. Rons wife and son cried. Rons son asked if he would have to leave his friends and change schools. His wife asked what they would tell their family and friends. She wanted to know what the foreclosure would do their credit. How would they afford a deposit? Theyd spent the little extra money they had on an attorney. Ron felt like a failure, he felt powerless, and he felt enraged. He yelled at his wife when she kept asking questions, and she yelled back. Despite the notice, Rons family didnt move out right away because they had nowhere to go. A few days later they received some papers from the Sheriff. These papers said that since Ron didnt leave, he was unlawfully detaining his home. They said, as best Ron could tell, that he was being sued by Govie Mo and there was a court date in three weeks. Govie Mo wanted $1,000 in rent per month, and they were asking the court double that amount to punish Ron for illegally living in his home. Ron noticed that the attorneys who represented Govie Mo were from Huck, his former trustee. Ron went to court. It was over quickly, and he and his family were ordered out of their home a home on which they were making their payments. A month later he got an order from the court. It said he owed $4,800 in back rent. The foreclosure promptly appeared on Rons credit too. Less than two weeks later the sheriff showed up to tell Ron and his family to get out. Ron moved his family to a small apartment in a bad part of town where they didnt seem to care much about credit. Some of their stuff had to be thrown out. There wasnt room in the apartment. The kids had to change schools. Rons son was upset, but he was keeping his head up. Rons wife was crushed and embarrassed, and Ron wondered if she blamed him. Ron was depressed, really depressed, for the first time in his life. He kept going to work, but he stopped talking to friends. He didnt return calls from family. He was embarrassed and he felt like a failure.

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Then, Ron received notice that Govie Moe would be garnishing his wages. His boss asked him about it, and all Ron could do was despair. 2. Rons Story Is Not Unique: Widespread Reports of Wrongful Foreclosure As the number of home foreclosures rises, so does the number of wrongful foreclosures. 85 A few have brought media attention, but many often go unnoticed by the general public for an extended period of time, if not permanently. A couple of examples drive home just how bad things can go wrong. One of the most shocking foreclosures to receive press coverage involved a foreclosure on a home that was bought in cash. After purchasing a home in a short sale, a Florida man found out a few months later that Bank of America foreclosed on the home. 86 This was especially surprising because the individual had no loan at all from Bank of America. 87 The homeowner never learned of the foreclosure on his home until after it was complete. 88By then, title had been transferred to a governmentbacked agency. 89 The man ultimately got his home back, but it required a lawsuit to do so. 90 The story is especially troubling because it occurred in a judicial foreclosure state, where Bank of America had to file documents supporting its right to foreclosure. 91 How did Bank of America produce documents that, by definition, could not have existed? The answer appears to be robo-signing. 92 In a similar case in Florida, a couple purchased a foreclosed home and presumed that, because they had purchased the home in full, that there would be no further interactions with the bank. 93
85

Elizabeth Renuart, Toward A More Equitable Balance: Homeowner and Purchaser Tensions in Non-Judicial Foreclosure States, 24 LOY. CONSUMER L. REV. 562, 562-63 (2012). 86 Brackery, supra note 14. 87 Id. 88 Id. 89 Id. 90 Vieth, supra note 1. 91 Id. 92 Vieth, supra note 1. 93 Miller, supra note 15.

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However, a year after the purchase, the couple was notified of a pending foreclosure. 94 After taking the matter to court, Bank of America acknowledged that it had mistakenly foreclosed upon this home. However, the battle continued, as Bank of America was reluctant to pay the attorneys fees. 95 In a humorous twist, the ambitious attorney for the homeowners went to a Bank of America branch with law enforcement and enforced a lien, threatening to close down the branch by seizing the physical assets. Bank of America finally paid up. 96 Problems like those in Florida have also been chronicled by the Academy. Katy Porter examined some of the harms of abusive servicing in an article that examines various fraudulent practices relating to mortgage claims that occur in bankruptcy. 97 Porter writes: Two cases illustrate the problems that incorrect or inaccurate mortgage servicing imposes on borrowers. In Rawlings v. Dovenmuehle Mortgage, Inc.,49 the servicer repeatedly asserted that the homeowners had failed to make payments even though the servicer itself had erred by applying the payments to the wrong account. After the servicer sent notices of default and imposed late fees, the homeowners spent over seven months attempting to resolve the servicer's error. In another instance, Islam v. Option One Mortgage Corp., the borrowers refinanced, but the prior servicer continued to threaten to foreclose on the borrowers' home and to report adverse information to credit bureaus. This year, the Boston Globe reported that mortgage companies typically include projected foreclosure costs in payoff amounts given to borrowers in default. These fees are estimates for anticipated services, which may never be rendered. While a
94 95

Id. Id. 96 Id. 97 See generally Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 TEX. L. REV. 121, 131-32 (2008).

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consumer advocate described the practice as a license to steal from homeowners, an industry representative conceded that it was pretty much industry standard. 98 Porters reports are consistent with the writing of many others who study and report on the mortgage crisis. 99 In fact, interviews with attorneys, reviews of press reports, a review of the scholarly literature, and my own personal experiences as a practicing consumer attorney all point to the same conclusion: wrongful foreclosures happen every day. Porters conclusions, and the information relayed by attorneys in the trenches, are backed up by actions taken by the Federal government. On January 7, 2013, the Office of the Comptroller of Currency (OCC) reported that 10 servicing companies (those who collect payments on mortgages) have agreed to pay $8.5 billion to over 3.8 million borrowers to provide compensation for servicing errors. 100 This program emerged from a previous program, called the Independent Foreclosure Review, in which the OCC required servicers like Bank of America, Citibank, JPMorgan Chase, U.S. Bank and Wells Fargo to pay to audit every single foreclosure they carried out for a period of roughly two years. 101 This enforcement action is hard evidence that there are potential problems with
Id. (citing Rawlings v. Dovenmuehle Mortg., Inc., 64 F. Supp. 2d 1156 (D. M.D. Ala. 1999) and Islam v. Option One Mortg. Corp., 432 F. Supp. 2d 181 (D. Mass. 2006)). 99 See, e.g., Williams, supra note 26, at 467 (asserting that [i]rrespective of whether a jurisdiction is a judicial or non-judicial foreclosure system, the foreclosure process seems to be riddled with systemic flaws. Common foreclosure errors include: a) a mortgage servicer's inadvertent misapplication of a debtor's mortgage payments; b) failure to recognize a debtor's exemption from foreclosure under the Service members Civil Relief Act; c) failure to prove a foreclosing party's title to a promissory note; d) improper endorsements of mortgage notes; e) backdating paperwork or assignments; f) affidavits without signatures filed or personal knowledge of its contents; g) claiming inflated legal fees associated with foreclosure; or h) lost or missing promissory notes.).
100 98

Independent Foreclosure Review to Provide $3.3 Billion in Payments, $5.2 Billion in Mortgage Assistance, OFFICE OF COMPTROLLER OF THE CURRENCY, http://www.occ.gov/news-issuances/news-releases/2013/nr-ia-2013-3.html (last visited Mar. 6, 2013).
101

Id.

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millions of foreclosures in all states, including those that use trustees. The remaining parts seek to answer these foundational questions. Part III illuminates how the mortgage industry has changed. Part IV discusses non-judicial foreclosure and the role of trustees in non-judicial foreclosure and the role trustees currently play in the widespread foreclosure crisis. Part V provides what I believe are detailed and workable suggestions to improve the matter considerably. II. THE MODERN MORTGAGE ERA AND NONJUDICIAL FORECLOSURE

The mortgage industry has become immensely complex and operates vastly differently than it did in the past. The difference between the way things worked in America for close to 200 years, and the way they work now is astounding. 102 Understanding the differences is essential to understanding why the current nonjudicial foreclosure model, with its use of unregulated and untrained trustees, is ineffective. Specifically, the sections below detail the transformation of the mortgage industry from a transparent system with only a few moving parts to an immensely complicated system with more actors, more documents, more transfers of notes, more questions about record keeping, and as a result, far less certainty and transparency. 103 It is this increasing
102 Marsh, supra note 27, at 21 (describing the differences in recording in recent years). 103 For an interesting way to conceptualize the changes in the mortgage field, see generally James Charles Smith, The Structural Causes of Mortgage Fraud, 60 SYRACUSE L. REV. 473, 480 (2010) (suggesting that there is geographic distance, transaction distance and financial distance in the new home lending model). Put simply, loans are made by companies further away (geographical distance) and this limits appraisals and underwriting to paper reviews, making it far more likely the lender fails to understand property values and/or catch fraudulently high appraisals. Loans are also brokered by one party, made by another, and then held by yet another party (transactional distance). This reduces the incentives and ability of the original lender to ensure performance of the loan. Finally, the holders of loans have less incentive to research and resolve potential payment problems when they own fractional interests in loans (due to tranches from securitization) than they did when they held an interest in the

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uncertainty that requires trustees to be trained, careful, and most importantly, fair. A. How Things Have Changed Thirty years ago, almost every home loan originated from a local bank and was made to a local borrower. 104 The bank made the loan only if 1) it believed the borrower could repay; 105 2) the bank was convinced that the house that was being bought was worth more than the loan it was making; 106 and 3) the terms were favorable so that the bank could earn a profit over the life of the loan. 107 If the loan didnt work out, the banks only recourse was to foreclose. 108 This was not considered an especially profitable outcome, 109 as it meant the bank did not get to collect thirty years of interest, the bank inevitably incurred costs to foreclose, 110 and the bank became responsible for the property until it sold.111 As a result, banks typically investigated the ability of the borrower to repay by checking the borrowers credit and/or references, analyzing the borrowers debt to income ratio, etc. 112 The bank had the home appraised in order to ascertain its real value, or in some cases, a bank employee would actually walk through the home himself to assess the value of the property. 113 Then the bank would require 10% or more down on the home, just to make sure the loan was less than the house value. 114 Finally, the bank would
entire note (financial distance). These three distances lead to more fraud, more negligence, less work-outs, and more foreclosures. Id. 104 Vieth, supra note 1. 105 Vieth, supra note 18, at 46:00. 106 Vieth, supra note 1. 107 Id. at 47:05. 108 Vieth, supra note 1. 109 Vieth, supra note 18, at 47:05. 110 Sally Pittman, Arms, but No Legs to Stand on: Subprime Solutions Plague the Subprime Mortgage Crisis, 40 TEX. TECH L. REV. 1089, 1100 (2008) (noting that banks report the average cost of a home foreclosure is $60,000). 111 Vieth, supra note 1. 112 Juliet M. Moringiello, Mortgage Modification, Equitable Subordination, and the Honest but Unfortunate Creditor, 79 FORDHAM L. REV. 1599, 1600 (2011). 113 Vieth, supra note 18, at 45:30. 114 Id. at 46:10.

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contract for a reasonable interest rate that would result in payments the bank hoped the borrower could pay for the next thirty years. 115 The transaction was simple too. The borrower gave the bank security in the house in return for the loan. 116 The borrower knew exactly who to pay and exactly what would happen if he didnt. Payments were made to the bank, often in person or by mail. 117 If a payment was missed, the bank called the borrower. 118 If the bank was wrong, the borrower gave the bank proof of payment. 119 The borrower had an incentive to let the bank know if he or she experienced any problems or disruption in income, and the bank had an interest in working things out with the borrower if it could, to avoid foreclosure and keep the payments coming. 120 To make sure everything was crystal clear, the bank recorded its security interest at the recorder of deeds office. 121 The note was often attached to the deed. 122 The recording was public and accessible to anyone who cared. 123 In this setting, the interests of the borrower and the bank were largely aligned. If the borrower paid, the borrower and bank were happy. If the borrower didnt pay, the borrower and bank were unhappy. The bank had no interest in making a loan a borrower could not afford. 124 It had no interest in overstating the value of the home, and it had no interest in having someone else collect the money on the loan.
Vieth, supra note 1. Id. at 46:40; see also Renuart, supra note 85, at 565 (explaining that a mortgage loan consists of two distinct documents, a note and a security agreement). 117 Vieth, supra note 1. 118 Vieth, supra note 18, at 47:45. 119 Vieth, supra note 1. 120 Vieth, supra note 18, at 48:00; Sally Pittman, Arms, but No Legs to Stand on: Subprime Solutions Plague the Subprime Mortgage Crisis, 40 TEX. TECH L. REV. 1089, 1099 (2008). 121 Vieth, supra note 1. 122 Id. 123 Id. 124 Vieth, supra note 18, at 48:30; Roy D. Oppenheim and Jacquelyn K. TraskRahn, Deconstructing the Blackmagic of Securitized Trusts: How the Mortgagebacked Securitization Process is Hurting the Banking Industrys Ability to Foreclose and Proving the Best Offense for a Foreclosure Defense, 41 STETSON L. REV. 745, 751 (2012).
116 115

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This was how it worked not that long ago in America, and in large part, this is how it had worked for over 100 years. 125 It is worth noting it is still how it works at many local, community banks. 126 In fact, the first home loan I ever received was in 2002, and the process worked exactly as described above. The role of the trustee in this setting was often simple and did not present a conflict between the bank and the homeowner. The trustee was notified by the bank of default. 127 The trustee stood to gain only a nominal fee for overseeing the foreclosure and typically had a full-time job unrelated to foreclosures. 128 If the homeowner really was in default, the sale proceeded. 129 If the homeowner wasnt in default, the trustee had no desire to push a foreclosure through, and the bank, which was local and accessible, was similarly disinclined to foreclose if it could instead preserve the revenue stream. 130 If a sale occurred, the bank wanted the house to sell for as much as possible so it could recover the loan debt. 131 The homeowner wanted the same thing so she could avoid the potential deficiency. 132 The trustee owed a duty to both parties, but since there was no real conflict in those interests, the trustee could fulfill its duties. 133 As discussed below, this is no longer the case. The trustee should not rely upon the representations of the bank, the public records dont support the foreclosure in many cases, the trustee cannot assume the homeowner could work out errors with the bank, and the trustee is now financially interested in seeing as many foreclosures move forward as possible. As such, the role of the trustee is now a serious, complex and important one, 134 and the
Vieth, supra note 1. Id. 127 Id. 128 Id. 129 Id. 130 Id. 131 Id. 132 Id. 133 Id. 134 Timothy J. Peterkin, Getting to the Arguments: How Legitimate Defenses to Foreclosure are Raised, 3 CHARLOTTE L. REV. 253, 261 (2012).
126 125

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likelihood that the conflict between a duty to the homeowner and a duty to the bank will arise is exponentially higher. 1. The Modern Mortgage Era The modern mortgage era bears almost no resemblance to the way home lending used to work. Instead, subprime lending, mass securitization, opaque recording of transfers and the fractionalization of responsibilities for loan servicing and foreclosure have fundamentally altered how and when foreclosure occurs and what is required to ensure those foreclosures are appropriate. a. The Rise of Subprime Lenders The mortgage industry began to change dramatically in the late 1990s, and by the early 2000s, 135 the changes were everywhere. No longer were loans made only by traditional banks. Instead, some of the largest lenders in the country were non-traditional lenders. 136 Companies like Ameriquest, Countrywide and others got into the lending business. 137 They made loans in large part to subprime borrowers. 138 Loans were issued by the hundreds of thousands, and many loans were made by people with little to no experience in lending. 139 People were often steered to lenders by mortgage brokers, who cold called borrowers to entice them to either buy a house or refinance a loan they already had, and would continue to return to them to encourage further refinancing. 140 The mortgage brokers were paid commission based on the size of the loan, 141 and they often received kickbacks from the lender if they could steer
Vieth, supra note 18, at 4:26. Id. at 4:30. 137 Id. at 5:00. 138 Id. at 5:07; Pittman supra note 108, at 1092. 139 Vieth, supra note 1. 140 See Baher Azmy & David Reiss, Modeling a Response to Predatory Lending: The New Jersey Home Ownership Security Act of 2002, 35 RUTGERS L.J. 645, 656 (2004); see also Smith, supra note 2, at 200-01. 141 Id. at 653.
136 135

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their own customers into higher interest rate loans that the borrower qualified for. 142 Meanwhile the lenders were no longer local; instead, they operated national operations that were often headquartered in California or Illinois. 143 The lender appraised properties through desk appraisals 144 which consisted of running a list of comparable sales for the neighborhood and entering basic information about the age, condition and size of the home. 145 Underwriting was reduced to requiring lower credit scores and reliance upon no doc 146 or liars loans. 147 These loans no longer required proof of income. 148 And even if the loan did require income and borrowers income didnt pass the standards set by the lender, the agent would list a home business or other source of income to inflate the numbers. 149 The borrower often didnt see the final numbers until the time of closing. Since the loan was often being given by a company that, at best, had a local office, the loans were closed at restaurants, and in peoples homes. 150 In many cases, the loan documents were taken to the borrower by a notary with no knowledge of the documents. Loans were closed quickly, and consisted of dozens or even hundreds of pages. 151 All of this led to seriously flawed loans that were destined to result in increased foreclosures. But it wasnt just the underwriting or appraisals or sales pitches that were different. The loans were different too. Instead of fixed rates, or even adjustable rates that varied up or down with market forces, these new loans were what many now call exotic
Id. at 653. Smith, supra note 101, at 485-6. 144 Vieth, supra note 18, at 50:15. 145 Id. at 7:35. 146 Bader, supra note 49, at 773. 147 Smith, supra note 101, at 201. (chronicling a variety of loans, including what was referred to as the NINJA, a loan that required no assets, no income and no job); see also Vieth, supra note 18, at 6:40. 148 Azmy & Reiss, supra note 138, at 657. 149 Id. at 657; see also Smith, supra note 101, at 207-09 (chronicling the total absence of quality control for loans). 150 Vieth, supra note 18, at 9:20. 151 Vieth, supra note 1.
143 142

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mortgages. 152 Some had adjustable rates that could go up, but could never fall below the original rate. 153 The rates were scheduled to adjust in two or three years. 154 These were often called exploding ARMS, short for exploding Adjustable Rate Mortgages. 155 Other loans required the borrower to pay the interest only for the first two years, meaning that the payments were artificially low, and that the principal was not reduced for the first two years of payments. 156 Still other loans were negative amortization loans in which a person paid for two or three years, and at the end of that time, owed more than when they started. 157 All these loans, and many other types, had one thing in common. The payments could increase dramatically in only a few years. 158 This meant that even if a borrower could afford the first two years of payments, there was no guarantee they could afford the new payments when the adjustment occurred. 159 In Who Stole the American Dream, the Pulitzer Prize winning journalist, Hendrick Smith, quotes Kathryn Keller, a mortgage broker. In a few sentences she captures how loans changed, how dangerous the new loans are, and how they relate to the foreclosure crisis. She said: The banks are playing to brokers who specialize in driving people into loans that people dont understand . . . . They take a product that was
Smith, supra note 101, at 193. Vieth, supra note 18, at 8:45. 154 Smith, supra note 101, at 202-03 (explaining that these are often called 2/28 ARMs); see also Vieth, supra note 18, at 8:55. 155 Pittman, supra note 108, at 1090. 156 Id. at 1096. 157 Azmy & Reiss, supra note 138, at 662. 158 Pittman, supra note 108, at 1095 (identifying four common characteristics of predatory mortgage loans and suggesting that all predatory loans have at least one of the characteristics). The four characteristics are 1) the loans include higher interest and fees than required to cover the added risk of lending to borrowers with credit problems; 2) they contain abusive terms and conditions that trap borrowers and lead to increased indebtedness; 3) they fail to consider the borrowers ability to repay the loan, or 4) the loans violate fair lending laws by targeting women, minorities or the elderly. Id. 159 Peter W. Salsich, National Affordable Housing Trust Fund Legislation: The Subprime Mortgage Crisis Also Hits Renters, 16 GEO. J. ON POVERTY L. & POL'Y 11, 32 (2009).
153 152

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exotic and move it to the category of a weapon seriously. These loans go from being an exotic product to a hand grenade . . . . 160 As the loans explode, the foreclosure crisis grows, the casualties mount, and the need for neutral trustees is amplified. b. The Rise of Mass Loan Securitization Meanwhile, the non-traditional lenders were less motivated to make sure loans would actually pay for 30 years. 161 This was in large part due to an increase in mortgage securitization. 162 Mortgage securitization was a process by which notes on homes were bundled together, rated, and sold to investors. 163 From 1990 to 2007, most mortgage loans were securitized. 164 The lenders received a cash payment, often hundreds of millions of dollars, for the loans. Wall Street, for a variety of reasons beyond the scope of this article, gobbled up the notes and called for more. 165 The growth of securitization and its eventual scope are jaw dropping. In 1994, $11.05 billion worth of subprime loans were securitized. 166 In 2005 and 2006, the total value of securitized loans reached roughly $990 billion.167 This growth was facilitated by hungry investment banks and by the false sense that the investments were solid. In most cases, the rating agencies rated the bundles AAA, the highest score available, indicating that the bundles were safe investments. 168 The result was that non-traditional lenders had an incentive to make as many loans as they could, for as much money as they could. 169 This made making exotic loans attractive because such loans ensured
Smith, supra note 101, at 192-93. See Azmy & Reiss, supra note 138, at 653, 657. 162 Oppenheim and Trask-Rahn, supra note 122, at 752 (explaining the appeal to securitization as it eliminated risk from the lenders by selling the loans to investors). 163 Bader, supra note 49, at 774; see also Renuart, supra note 5, at 16-17. 164 White, supra note 33, at 471-72. 165 Woolley & Herzog, supra note 14, at 380. 166 Renuart, supra note 5, at 118 (citing Eggert, supra note 2). 167 Id. 168 Woolley & Herzog, supra note 13, at 380. 169 Bader, supra note 49, at 774-75.
161 160

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initial payments were lower so people could and would borrow more. 170 The lenders had no intention of collecting the loans for 30 years, the lenders agents had an incentive to play fast and loose with the little underwriting that remained, and even the loan brokers had a financial incentive to put people in expensive loans. 171 Wall Street came up with sophisticated ways to turn notes into securities, and these innovations led to new problems. 172 In order to avoid a variety of regulations that would limit what any one bank or company could earn, the responsibilities for bundles of notes were split. 173 The result of all of this was, in many cases, mass confusion. As Alan White chronicles, there is evidence that endorsements of notes were often mishandled, resulting in a number of practices, including the forgery of necessary assignments (robo-signing). 174 In fact, there is evidence that during the height of subprime lending between 2004 and 2007, many notes were neither endorsed or delivered to the parties who were supposed to hold the note.175 Other cases involve banks suing other banks because the first bank believes the second bank foreclosed on a property for which the first bank held the note. The net result was that mass securitization took a problem (risky loans made without underwriting) and exacerbated it by 1) reducing the likelihood anyone would look into the bona fides of the loan, and 2) making it more likely that problems would occur related to note transfers and collection of payments.

Salsich, supra note 16, at 19. Smith, supra note 101, at 222-23 (deftly explaining that When Risk Is Everywhere, Its Nowhere.). He explains that since the original lenders did not retain risk, they did not care about the risk of default. Similarly, since the investment bank who bought the loans sold the returns to investors, they did not care about the risk either. Id. 172 Vieth, supra note 18, at 12:00. 173 Renuart, supra note 5, at 118-9. In a traditional deal, the notes would be gathered together by a depositor who put the notes in a trust. The trust was managed by a trustee, often a large bank. A separate bank, the servicer, collected the payments, another bank, the trust custodian, held the notes. 174 White, supra note 33, at 474-75. 175 Id.
171

170

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c. The Rise of Private Recording and the Resulting Loss of Transparency in Land Recordings: MERS Securitization also affected how or if notes and deeds were recorded. 176 Whereas it was traditional to record the transfer of a deed from one party to another, this required a fee be paid to the local recorder of deeds office. 177 This fee, which averages about $35, 178 was never seen as much by local banks. However, when deeds could conceivably pass from a lender to a subsequent buyer to a depositor to a trust, this could cost hundreds of dollars per borrower. Also, since notes were pooled into bundles of thousands, or tens of thousands, and those loans could be from 30, 40 or even all 50 states, representing hundreds of counties, recording was not only expensive, but it was also complex. The result was that the industry commissioned studies to figure out how much could be saved if a private recording system was created. Financial industries began to save billions of dollars by using MERS. 179 Although a full discussion of MERS is outside the scope of this article, it suffices here to repeat what Christopher Peterson, Associate Academic Dean at S.J. Quinney School of Law, wrote in a recent article. 180 Peterson explains: In the mid-1990s, some mortgage bankers decided they no longer wanted to pay recording fees for assigning mortgages. Securitization-a process of pooling many mortgages into a trust and selling income from the trust to investors on Wall Streetdrove this decision. . . . To avoid the hassle and expense of paying county recording fees, these mortgage bankers formed a plan to create a single shell company that would pretend to own all the mortgages in the country. According to the plan, the mortgage bankers would never have to record
176 177

Peterson, supra note 11, at 116. Id. at 114. 178 Id. at 115. 179 See Peterson, supra note 11, at 114. 180 See generally id.

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assignments again because the same company would always own all the mortgages. They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc. . . . Because the new system cut out payment of county recording fees, recording was significantly cheaper for intermediary mortgage companies and the investment banks that packaged mortgage securities. Acting on the impulse to maximize profits by avoiding payment of fees to county governments, much of the national residential mortgage market shifted to the new proxy recording system in only a few years. 181 MERS is pervasive. About 60 percent of the nations residential mortgages are recorded in the name of MERS Inc. rather than the bank, trust, or company that actually has a meaningful economic interest in the repayment of the debt. 182 The use of MERS means that homeowners are unable to track who owns their mortgage in a public office; 183 instead that information is restricted to private members of MERS, and kept away from the homeowner. 184 People in the Northeast, for example, prior to MERS could often track their property back to the 1700s, but if they have a home they bought in 2007 or 2008, they probably cant even trace who holds the note today. 185 As Peterson points out, For the first time in the nations history, there is no longer an authoritative, public record of who owns land in each county. 186 The fact that MERS is not transparent is a serious problem, but it could perhaps be avoided in part if MERS private records were
Id. at 116 (original footnotes omitted). Peterson, supra note 11, at 1373. 183 Salsich, supra note 16, at 35. 184 Id. at 132. 185 Id. at 114-15 (noting that since the founding of the American Republic, each county in the United States has maintained records of who owns the land within that county. ). 186 Id. at 117.
182 181

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accurate. 187 Unfortunately, it is clear they arent. Both Peterson and White have studied MERS extensively. White surveyed 396 foreclosure cases in six judicial foreclosure states. 188 White found MERS was the mortgagee of record in 50% of the foreclosures, and in those cases, the plaintiff asserting the right to foreclose as the actual principal of MERS only matched MERS internal records 20% of the time. 189 In a separate study, it was revealed that MERS electronic records of who holds the note and deed of trust only match public records about 12% of the time. 190 In still another study conducted by the San Francisco Office of the Assessor-Recorder, it was revealed that the identity of the deed of trust beneficiary in the public records only matched the investor identified in the MERS database 42% of the time. 191 Peterson uncovers an explanation for why there is a disconnect between MERS internal records and the public recordings. 192 He notes that MERS does not actually gather and supervise its internal database. 193 Instead, it simply grants access to members to record transfers if they wish. 194
Marsh, supra note 27, at 24 (proposing a new system that encourages transparency in a new type of recording system). 188 White, supra note 33, at 486. 189 Id. 190 Id. at 502. 191 See LOU PIZANTE ET AL., FORECLOSURE IN CALIFORNIA: A CRISIS OF COMPLIANCE 13 (Aequitas Compliance Solutions, Inc. 2012), available at http:// aequitasaudit.com/images/aequitas_sf_report.pdf (finding that in 27% of sampled foreclosure cases, the mortgage assignment was signed by the servicer or trustee rather than the original lender, 11% of assignments were signed for the assignor by the assignee, and identifying other evidence of doubtful mortgage assignments). 192 Id. at 127. 193 Id. 194 Id. Compounding the problem is the fact that MERS private records are not only inaccurate, they are opaque. Although the MERS database can be searched, doing so often reveals the following message: Investor: This investor has chosen not to display their information. For assistance, please contact the servicer. 194 As a result, many of MERS records are truly private. Compounding the problem, MERS keeps no physical copy of any documents that support the entry. The result is an unreliable recording system. Interestingly, MERS doesnt really dispute this characterization. MERS gives the following disclaimer on all search results obtained from its system:
187

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All this information points to the same conclusion: the inclusion of MERS in the vast majority of loans leads to confusion regarding who has standing to foreclose. This makes the job of a trustee both more critical and more difficult. d. The Rise of Foreclosure Rates and the Collapse of the World Economy By now, the impact of reckless lending and poor record keeping is well-known. As the rates adjusted on the notes, fewer and fewer borrowers could repay. They were forced to 195 However, as home values stagnated, no lenders refinance. wanted to refinance, as it would have left them holding the bag on a property that was worth in many cases less than the note. These underwater notes became common, and defaults hit historic highs. 196 The results were crushing for more than just homeowners. By early 2008, the financial industry was particularly hard 197 hit. Morgan Stanley, Washington Mutual, UBS, Freddie Mac, Bank of America, Wachovia, Bear Sterns, Countrywide, Merrill Lynch and Wells Fargo all reported decreased earnings and record breaking write downs. 198 Since then, many of these companies
DISCLAIMER: MERS makes no representations or warranties regarding the accuracy or reliability of the information provided. MERS disclaims responsibility or liability for errors, omissions, and the accuracy of any information provided. MERS does not input any of the information found on the MERS System, but rather the MERS Members have that responsibility regarding mortgage loans in which they hold an interest. Users of this information have the responsibility to verify the accuracy, currency and completeness of the information. The information does not constitute the official legal record and is for informational purposes only. The servicer listed should be contacted for further information.
195 196

Vieth, supra note 18, at 18:45. Salsich, supra note 16, at 20. 197 Pittman, supra note 108, at 1103. 198 Id.

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have gone under completely. The broader markets collapse was historic. After the Dow Jones Industrial Average hit a record high of 14,164.43 on October 9, 2007, it fell to below 7,000 on March 2, 2009. 199 This decline, although not as deep as the Great Depression (which was a roughly 90% loss in value), was actually steeper, occurring in less than 18 months while the Great Depressions decline took over three years. The reasonable conclusion is that mortgage securitization coupled with subprime lending and poor analysis of risk by lenders and investors single handedly drove the global economy into recession. 200 As a result of the market collapse, the insurers who insured the mess often went under, several major banks and lenders failed, and those who didnt required a bailout to stay afloat. Meanwhile, millions of families faced foreclosure. 201 Despite government efforts to encourage modifications, foreclosures hit historic highs and continue to occur at staggering rates. 202 e. Conclusions Regarding the Modern Mortgage Era Due to the changes described above, there exists a multitude of potential problems with foreclosures, and all of them make the job of the trustee more difficult. Trustees are faced with loans that might have been fraudulent from the outset, lost documents, servicers who collect payments but are not note holders, opaque recording, and much more. 203 The result is that there are fundamental questions that should be asked about any foreclosure

DOW JONES INDUSTRIAL AVERAGE BROCHURE (S&P Dow Jones Indices LLC 2011), available at http://www.djindexes.com/mdsidx/downloads/brochure_info/Dow_Jones_Indust rial_Average_Brochure.pdf. 200 Renuart, supra note 5, at 115. 201 Id. at 4. 202 Vieth, supra note 18, at 19:35. 203 There is no reason to believe these problems are going away anytime soon. Instead, they have proven relatively intractable. Recently, the Consumer Financial Protection Bureau has created more rigorous standards for foreclosures, focusing on the servicers role, but if past governmental programs in the mortgage industry are any indication, the industry will struggle to comply and problems will persist.

199

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because of the likelihood that problems exist. 204 All of these problems have given rise to cases like Ron Meehows story and the Bank of America phantom foreclosure. III. NON-JUDICIAL FORECLOSURE AND THE ROLE OF TRUSTEES

This part first considers how non-judicial foreclosures are carried out in title theory states. 205 Understanding non-judicial foreclosure procedure highlights why the role of the trustee is important and why it is likely that the most egregious foreclosure abuses are occurring in non-judicial foreclosure states states in which literally no one is currently watching the shop. This is set out below. The second half of this part discusses how trustees currently operate in many states. A. Non-Judicial Foreclosure The first time borrowers learn that foreclosure might occur is usually in a debt collection notice. 206 The notice, usually a letter, states that the homeowner is behind on the loan and if they do not pay a specified amount, foreclosure will be initiated. 207 The actual foreclosure process begins with specific notice, as described under that states law, that the homeowner is in default and foreclosure proceedings are beginning. 208 The notice is often sent by the trustee. 209 The trustee is usually not the original trustee
Renuart, supra note 85, at 564. Renuart notes the non-exhaustive list of problems as including the failure to provide contractually or legally required notices; lack of authority to foreclose; fraud in the process; rigging the sale; grossly inadequate sale price; and other irregularity or unfairness. 205 For a far more detailed review of non-judicial foreclosure and its contrast with judicial foreclosure, see Renuart, supra note 5, at 139-41. 206 Jacobson-Greany, supra note 8, at 147. 207 Renuart, supra note 5, at 140. 208 Jacobson-Greany, supra note 8, at 147; see also Mark S. Pecheck & Kelsey M. Lestor, The ABCS of California Foreclosure Law, L.A. LAW., Jan. 2012, at 13 (although specific to California, the article provides an overview of how nonjudicial foreclosure that is comparable to non-judicial foreclosure in most states). 209 Renuart, supra note 5, at 140.
204

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named in a deed of trust. 210 Instead, the trustee is typically appointed by the lender pursuant to its power, also contained in the deed of trust, to appoint a successor trustee. 211 This handpicked trustee is then asked to initiate the foreclosure process. 212 The type of notice, and how much time must elapse after the notice before a foreclosure sale can occur, differs from state to state. Most states require some form of publication notice in addition to mailed notice to the borrower. 213 Notice periods differ drastically. 214 Depending on state law, notice can be provided and a foreclosure sale completed in twenty to one hundred twenty days. 215 California has one of the longest notice periods three months 216 while Missouri has one of the shortest notice periods in the country at twenty days. 217 Homeowners in every non-judicial foreclosure state struggle to find lawyers to represent them. 218 This is true both because of the financial realities of many homeowners and because there is a genuine deficit of consumer lawyers who can navigate foreclosure law. 219 The shorter the notice period is, the more likely it is that a homeowner will be unable to take any meaningful steps to stop a foreclosure. For example, in Missouri, where a 20 day notice is all that is required, 220 homeowners almost never obtain representation prior to the foreclosure sale. Even non-profit organizations are often forced to turn people away because by the time notice is received, read and the borrower realizes they need help, there may be ten days or less before the sale. It is not uncommon for homeowners to call or write trustees in order to ask for more time, contest the amount owed, or to inquire into who the party is that is foreclosing. 221
210 211

Vieth, supra note 18, at 25:30. Id. at 26:45. 212 Id. at 27:40. 213 Jacobson-Greany, supra note 8, at 148. 214 Id. 215 Renuart, supra note 85, at 564. 216 CAL. CIV. CODE 2924 (a)(2) (West 2012). 217 In re Hoffman, Bkrtcy.W.D.Mo.2002, 280 B.R. 234. 218 Vieth, supra note 1. 219 Williams, supra note 26, at 468. 220 In re Hoffman, Bkrtcy.W.D.Mo.2002, 280 B.R. 234. 221 Jacobson-Greany, supra note 11, at 148.

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The homeowner can stop foreclosure in only a few ways. 222 The homeowner can reinstate the loan by paying a specified amount that is owed, the homeowner can get a lawyer and seek a temporary restraining order or preliminary injunction, 223 the homeowner can file bankruptcy, 224 the homeowner can convince the lender to delay or cancel the foreclosure, 225 or the homeowner can get the trustee to delay the sale 226. If one of these things does not happen, the foreclosure proceeds to sale, often referred to as auction. 227 The precise type of auction most often used is sometimes referred to as an English auction in which people gather in a common, public place to bid. 228 At the sale, the trustee is charged with the duty of getting the highest price for the home. 229 In theory, it is in the best interest of both the bank who is foreclosing and the homeowner to do so. For the bank, a high sales price helps it recover most or all of what was loaned. For the homeowner, a high sales price avoid or limits a deficiency in states that allow them. 230 The trustee is charged with taking bids at the foreclosure sale and then ultimately entering a trustees deed that conveys the property to new buyer. 231 After this, depending on the state, the homeowner may have up to one year to attempt to redeem the property via statutory redemption.232 If the homeowner does not redeem, in many states, the homeowner is liable for the deficiency (the difference between the sale price

See also Pecheck & Lestor, supra note 185, at 13. Peterkin, supra note 132, at 261. 224 Williams, supra note 26, at 470-71 (describing the parallel between the rise in foreclosure filings and bankruptcy filings). 225 Peterkin, supra note 132, at 268. 226 See also Pecheck & Lestor, supra note 185, at 13. 227 Nelson & Whitman, supra note 34, at 1413. 228 Id. at 1416. 229 Jacobson-Greany, supra note 11, at 148. 230 Nelson & Whitman, supra note 34, at 1404-5. 231 Id. at 149-50. 232 A concept commonly termed statutory redemption allows the mortgagordebtor--and, in many states, junior lienholders--up to a year or longer to regain title after the foreclosure sale by paying the foreclosure purchaser the sale price plus accrued interest and other expenses. Nelson & Whitman, supra note 34, at 1404.
223

222

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and the amount owed), while other states prohibit deficiencies altogether. 233 In reality, the auction format is inefficient and homes are routinely sold for far less than what they are actually worth. 234 This is primarily because there is no real market created for the home. 235 The publication notice is often printed in obscure publications and contains a legal description of the property but does not even list the address, contain a photograph of the home or describe the home in anyway. 236 The home is not shown because the homeowner is often still living in it, and since notice periods are often relatively short, 237 there is little time for would-be buyers to consider purchasing or even learn of the propertys availability. 238 As a result, the bidders at foreclosures are almost exclusively professional homeflippers, or even more commonly, the very financial institutions that foreclosed in the first place. 239 A common sale might involve Chase Bank initiating foreclosure, the trustee offering the property for sale, Chase Bank placing the only bid, and the home being sold for significantly less than both what was owed and the fair market value of the home. 240 Chase is then free to clean the house, advertise it meaningfully by listing it with an agent, show it to prospective buyers, wait for an offer it believes is fair, and then sell the house at a profit. Meanwhile, the original foreclosure sale created a shortfall between what was owed and what was paid by the new buyer. 241 There are three ways this shortfall can be handled. In some states, the difference between the sales price and the amount owed on the note is a deficiency that can be collected against the
Id. at 1404-05. Id. at 1417-18 (explaining some of the reasons that auction sales do not get full value for homes). 235 Vieth, supra note 1. 236 Id. 237 For example, in Missouri, where Rons case is playing out, a homeowner has only 20 days from the time notice is published to the time of sale. Mo. Ann. Stat. 443.320 (West) 238 Vieth, supra note 1. 239 Vieth, supra note 18, at 28:40. 240 Id. at 28:50 (example compares to a concept drawn from the video). 241 Walsh, supra note 32 at 144.
234 233

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homeowner. 242 This truly adds insult to injury. 243 The homeowner loses his home, has his credit destroyed, and then faces crushing debt as he attempts to move on. Other states limit the deficiency to the difference between the fair market value (as opposed to the actual sales price) and the amount owed. 244 Still other states prohibit deficiencies entirely, ensuring that if homeowners are foreclosed upon, they can at least start over without debt hanging over their head. 245 After a foreclosure sale, a homeowner will often receive notice by mail or posted on their door that they just vacate. 246 If they do not, either because they do not believe the foreclosure was just or because they have nowhere to go, the new buyer (who is often the old lender) initiates an unlawful detainer action. 247 This is typically a summary proceeding in which the new owner asks a court to evict the homeowner and to award damages for the amount of time the homeowner held over. 248 As a result, in nonjudicial foreclosure states, the first time a homeowner who defaults on a loan is likely to deal with a court is when they are sued for living in what was once their home. 249 Unlawful detainers pose significant hurdles for homeowners. 250 In some states, homeowners are quite literally prohibited from asserting that the foreclosure was wrongful and therefore void. 251 In other states homeowners can challenge title, but this presumes the homeowner can find and afford a qualified lawyer. 252 The most common result is that homeowners are tossed from their homes by local sheriffs 253

242 243

Nelson & Whitman, supra note 34, at 1404-5. Nelson & Whitman, supra note 34, at 1429. 244 Walsh, supra note 32 at 144. 245 Vieth, supra note 1. 246 Id.; See generally Brief for Appellant, Wells Fargo v. Smith, (2013) (No. 92649). 247 Id. at 20. 248 Vieth, supra note 1. 249 Id. 250 See generally, Brief for Appellant, Wells Fargo v. Smith, (2013) (No. 92649). 251 Vieth, supra note 1. 252 Id. 253 Williams, supra note 26, at 472.

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under a court order that requires them to pay damages for living in what was once their home. 254 With this overview in mind, the role of the trustee in a nonjudicial foreclosure state is now considered. B. The Current Role of Many Trustees in Non-Judicial Foreclosures In many states, trustees are deeply imbedded in every step of the foreclosure process. The trustee is a sort of chameleon who takes on multiple roles, many of which are contradictory, all while the law requires the trustee to act as a neutral. 255 In any given transaction, it is not uncommon for the trustee to serve as a debt collector, the attorney for the bank, 256 the party with the power to appoint a successor trustee, the successor trustee, an agent for MERS who assigns mortgage documents during the foreclosure, the attorney who opposes the homeowner if he or she seeks to stop the foreclosure, the coordinator and direct or indirect provider of title services, the attorney who represents the new buyer after foreclosure in the lawsuit to remove the homeowner, and the coordinator of default services the process of removing the homeowner from the home, cleaning up the home, and preparing it for sale. 257 This is a staggering number of hats to wear, and one can probably already sense that the inherit conflicts are legion. 258 These conflicts are at the heart of some of the most egregious foreclosure problems and are precisely what this article seeks to highlight and then cure.

Vieth, supra note 1. Much credit is due to Timothy Peterkin. From my review of the literature, he is the only author who has clearly suggested that the trustee is a central part of the foreclosure problem. Peterkin undoubtedly discovered this fact in his practice at the Foreclosure Defense Project. Peterkin dedicates almost two three pages to the role of trustees. He proposes a mild solution to the problem: that borrowers should be informed of the role of the trustee as a neutral who may have conflicts of interest with the borrower because the trustee is also a representative of the foreclosing entity. See generally Peterkin, supra note 132. 256 Id. at 274. 257 Vieth, supra note 18, at 41:50. 258 Peterkin, supra note 132, at 275.
255

254

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The first time a homeowner hears from someone besides the lender/servicer about their loan is usually when the homeowner receives a debt collection notice. 259 This notice is often sent by a law firm who is either 1) a trustee too, or 2) owns a trustee corporation. 260 If the homeowner does not dispute the debt or reinstate, the next document the homeowner receives is often foreclosure notice from the trustee. 261 Ironically, in many cases, the trustee and the debt collector are the same law firm. How can the attorney for the bank possibly become the trustee? Things get even more bizarre. A deed of trust, which is created at the time a loan is made, lists a third party trustee. 262 That is the trustee that homeowner and the lender agreed to at the time of contract. However, that trustee almost never oversees the foreclosure. Instead, the deed of trust also contains a provision that allows the lender to appoint a successor trustee. 263 As mentioned, this power is often delegated to the banks attorney, who then appoints itself the trustee. 264 Accordingly, the successor trustee is almost always either 1) the foreclosure attorney for the bank who works for a foreclosure mill, 265 or 2) a trustee who works for a trustee company that is wholly owned by the attorneys for the bank. In either case, the conflict is obvious. But in the modern
Jacobson-Greany, supra note 11, at 147. Interview with Bruce Neas, Legislative Coordinator, Columbia Legal Services (July 24, 2012). 261 Vieth, supra note 1. 262 Renuart, supra note 85, at 575. 263 Brief for Appellant at 15, Wells Fargo v. Smith, (2013) (No. 92649). 264 Vieth, supra note 18, at 26:45. 265 Foreclosure mill is an increasingly common term. It describes large firms that handle foreclosures in bulk and who have been shown to regularly file or produce inaccurate or incomplete documentation to support foreclosures. See Renuart, supra note 5, at 122 (referring to foreclosure mills); see also, ADAM J. LEVITIN, ROBO-SIGNING, CHAIN OF TITLE, LOSS MITIGATION, AND OTHER ISSUES IN MORTGAGE SERVICING 18 (2010), available at http://financialservices.house.gov/Media/file/hearings/111/Levitin111810.pdf (statement of Adam J. Levitin, Professor of Law at Georgetown University Law Center, at a hearing before the Subcommittee on Housing and Community Opportunity of the House Financial Services Committee in which Levitin testified that in one survey of foreclosure filings in Pennsylvania (a judicial foreclosure state), the note was not filed with the complaint in over 60% of the cases. Levitin suggested this made the filings facially defective).
260 259

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mortgage era, things get even stranger. Not only does the bank hand pick the trustee who is supposed to be neutral in carrying out foreclosure, the bank in some cases provides the successor trustee the power to appoint itself. This is accomplished by giving the law firm a limited power of attorney which includes the power to self-appoint. The law firm then, as attorney for the bank, files a document appointing itself the successor trustee. Included in the footnote is an example of a document in which the successor trustee is self-appointed. In the document, the attorney in fact who signed for Wells Fargo is also an employee of Kozeny & McCubbin, the entity being appointed successor

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trustee. Coincidentally, Kozeny & McCubbin is also a regular attorney for Wells Fargo. 266 In preparing for the sale of a home in foreclosure, there is title work that is needed. Similarly, title work is required when the foreclosed property is deeded to the new buyer. There is at least some evidence that in some states, foreclosure mills who serve as trustees are involved in the title work too. For example, in Missouri, one of the largest foreclosure mills and successor
266

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trustees is Millsap & Singer. That firm is owned by Vern Singer. Another large foreclosure mill and successor trustee outfit in Missouri is South & Associates, owned by Allen South. A public records search reveals Allen South and Vern Singer own a title company together. 267 This company provides services relating to foreclosures. 268 If a homeowner believes that the foreclosure is improper either because the homeowner does not believe he or she is in default or because the homeowner does not believe the party foreclosing has the right to do so, they often raise these concerns to the trustee. 269 Yet, since the trustee works for the bank, the calls often go unreturned, letters are unanswered, and serious factual complaints are ignored. 270 In fact, in the case of Ron Meehow, it is alleged in the lawsuit that the trustee affirmatively told Rons attorney that they do what the bank tells them. This is a questionable statement from the only neutral in a non-judicial foreclosure. In even more extreme cases, trustees have actually advocated against homeowners who have filed for temporary restraining orders with courts. 271 The homeowners affirmatively assert that the foreclosure is wrongful, often because the homeowners assert that they were current on their payments or were promised a modification that they never received. In this setting, it is hard to understand how a trustee, who owes a duty of neutrality, would show up and oppose the temporary restraining order. But they do show up in many states.

267

See 2012 Annual Registration Report, MISSOURI SECRETARY OF STATE, available at https://www.sos.mo.gov/BusinessEntity (search for Continental Title Holding Co.). The report lists Vernon D. Singer as the secretary of the company and Alan E. South as the President. Similarly, searching the same cite for Millsap & Singer reveals that Vern D. Singer is the President of Millsap & Singer, P.C., one of the largest foreclosure mills in the Midwest. And a search of South & Associates, another foreclosure mill in Missouri, reveals that Alan E. South is the President. Id. 268 Information for Borrowers, MILLSAP & SINGER, LLC, http://web.archive.org/web/20101218074117/http://msfirm.com (last visited Jan. 25, 2013) [hereinafter Information for Borrowers]. 269 Vieth, supra note 1. 270 Id. 271 Peterkin, supra note 132, at 261.

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If the foreclosure sale goes forward, the trustee carries out the sale. The trustee has a legal duty to get the highest price for the property. But it is entirely common for there to be only one bid at the foreclosure sale, and that bid is placed by the bank that foreclosed, the trustees client. 272 In fact, that bid is often placed by the trustee on behalf of the bank; the bank doesnt even send a representative. 273 In still other cases, the home is bought by Fannie Mae or another large institution. 274 Fannie Mae is also often a client of the trustee law firm. 275 These sorts of conflict call into question whether the trustee would ever postpone the foreclosure sale in order to get a higher price, as allowed by most state laws. 276 It also calls into question whether the trustee, who has discretion in where and how publication notice of the sale will be made, will actually work to obtain the highest price, which likely involves bringing in bidders who would compete with the trustees own clients. Once the home is sold, the trustee files a trustees deed. 277 This deed affirms that the underlying conditions for foreclosure, as set out in the deed of trust, were met. 278 It affirms that the property was sold at sale and vests title in the new buyer. 279 The trustees affirmative attestation that the homeowner defaulted and the proper party foreclosed is potentially improper, given that it is likely the trustee has no actual knowledge of whether default occurred or not. And, in cases liked Rons, the trustee has ample reason to question default. As part of wrapping up the foreclosure, the trustee charges a trustee fee that is paid by the homeowner. 280 This is sometimes in addition to attorneys fees that are charged to the homeowner. 281

272 273

Vieth, supra note 1. Id. 274 Id. 275 Id. 276 Id. 277 Jacobson-Greany, supra note 11, at 149. 278 Id. 279 Id. 280 Vieth, supra note 1. 281 Id.

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The result is that the homeowner is sometimes paying the trustee for being both an attorney and for being the trustee. After foreclosure, the new buyer of the foreclosed property typically retains a law firm to file a lawsuit to evict the homeowner. 282 It isnt difficult to guess who is routinely retained. The new owner, often a large bank and sometimes the same bank that foreclosed, hires the same attorney that served as the trustee (or in some cases just owned the trustee company). 283 The result: the trustee who owed a duty of neutrality to the homeowner is now representing the new buyer (often the old lender) against the homeowner. The former trustee turned new buyer attorney shows up in court, seeks to evict the homeowner, and then asks the court for damages against the homeowner for living in the home. This routinely occurs despite the fact that the homeowner may have complained to the trustee, prior to foreclosure, that the foreclosure was unjustified and illegal. It occurs even if the trustee was given affirmative information that should have called any number of fundamental of foreclosure into questions, including whether default occurred, whether the lender induced the default, and whether the lender has standing to foreclose at all. When the court orders the homeowner to vacate, some foreclosure firms then provide default servicing which involves coordinating with companies who remove any remaining belongings from the home and prepare the house for sale. 284 This often includes throwing out whatever the homeowner did not have the time or money to remove.

282 283

Vieth, supra note 1. See, e.g., Eviction, MILLSAP & SINGER, LLC, http://web.archive.org/web/20101218074434/http://msfirm.com/EvictionMO.ht ml (last visited Feb. 10, 2013) (detailing that Millsap & Singer, LLC routinely handles eviction related matters for mortgage lenders after foreclosure.). These are the same mortgage lenders that appoint Millsap as a neutral trustee. 284 Vieth, supra note 1.

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1. The Structural Dynamics that Prevent Trustees from Remaining Neutral The current behavior of trustees reveals that they are both unregulated by any governmental agency and, even under the existing law, potentially unfair because courts have rarely been asked to consider their behavior. At a minimum, the current structure makes it highly unlikely that trustees will serve as any sort of true neutral that provides a check on the sometimes unreliable representations of the banks. There are several reasons the trustee is ineffective. First, there is the repeat player effect. Trustees, even if they didnt work for banks, regularly see the banks and deal with them. For the homeowners, their relationship with the trustee is one and done. It is widely accepted in cognitive science that repetition builds trust. 285 Second, trustees are unregulated and untrained. Since no law describes what they must review in order to proceed with a foreclosure, since no one is watching what they do, and since they are not formally trained, it is unlikely that even a well-meaning trustee could or would ask the right questions. As documented in the sections describing the modern mortgage era, foreclosure is no longer a simple matter. It involves complex transfers of notes and deeds of trust, 286 complicated servicing records, and a variety of other matters. Third, the economic structure as it exists today does not encourage careful work as a trustee. It doesnt encourage fair work either. Instead, all the economic incentives encourage down-anddirty foreclosures in the absence of documented proof. 287 All the incentives encourage ignoring complaints from homeowners and

This is true even for words and phrases. As Daniel Kahneman explains, repetition induces cognitive ease and a comfortable feeling of familiarity. . . The link between positive emotion and cognitive ease . . . has a long evolutionary history. Daniel Kahneman, Thinking, Fast and Slow, 66-67. 286 For perhaps the most comprehensive footnote in history regarding the significant number of cases that have revealed problems with the transfer of notes and/or the security instrument, see Renuart, supra note 5, at 7 n.17-18. 287 Peterkin, supra note 132, at 275-76.

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the obvious conflicts that arise when one firm tries to be all things to all people. There are both external and internal financial pressures. Externally, the bank is paying the foreclosure firm. The bank wants fast, easy foreclosures. It wants to reduce cost. It also knows that there are often a number of foreclosure firms available. It has the option of firing one and hiring another. In addition, the bank pays the foreclosure mill for the debt collection work, the appointment of successor trustee work, the trustee work itself, and for unlawful detainer work. In addition, the foreclosure mill may be receiving payment for title work and default servicing. All of this is built on a model that requires volume. Foreclosure mills openly advertise bulk rates for foreclosures. These costs are surprisingly low. For example, a conventional foreclosure was quoted as costing $650 and an unlawful detainer might cost $350. 288 The attorneys wont get rich doing one foreclosure, but they are getting rich doing thousands. If the firm were to start asking hard questions of banks, such as, Where is the proof that this note was transferred to you, or Why is the homeowner providing payment records that dont match yours, or Why arent you the party that appears in the recording records, or Are you sure that using MERS is appropriate, they would risk losing the repeat business that is making them millions. As a result, their interests align with the banks at the expense of homeowners. Internally, there are additional pressures. Foreclosure firms, often called foreclosure mills because of their bulk work, 289 function on a model that has a relatively low number of attorneys and a larger support staff. 290 The foreclosure process is meant to
288

Fees and Expenses Schedule, MILLSAP & SINGER, LLC, http://web.archive.org/web/20101218074634/http://msfirm.com/FeesAndCosts.h tml (last visited Feb. 11, 2013). 289 Woolley & Herzog, supra note 14, at 372. 290 Millsap & Singers structure is instructive for this too, and based on the authors experience, is representative of a typical foreclosure mill. Before the webpage was taken down, Millsap provided a directory of its staff. Directory, & SINGER, LLC, MILLSAP http://web.archive.org/web/20101218074901/http://msfirm.com/Directory.pdf (last visited Feb. 10, 2013). The directory lists 16 attorneys and 80 support staff. Id. The titles are also interesting, as people at a firm that provides trustee services along with representation to banks are identified under categories such

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be form driven and the unlawful detainer work is largely a matter of taking defaults. Many foreclosure firms hire attorneys with limited experience in other fields of law, and young attorneys hungry for work, are often assigned to attend the bulk docket calls 291 related to evictions. These attorneys lack the time, inclination, incentives, and resources to investigate each foreclosure and to consider factual disputes raised by homeowners. 292 In fact, based on personal experience, these attorneys often lack the time and inclination to even return calls to homeowners or their attorneys when foreclosure is imminent. I have chronicled the third party evidence that suggests bias exists in some cases. I now turn to what some might view as admissions by the foreclosure firms themselves. Some foreclosure mills make no secret of the fact that they are bulk practices which seeks to expedite foreclosures for banks. As an example, included in the footnote is the former homepage of Millsap & Singer 293, one of the largest foreclosure mills in the Midwest. 294 Note that the

as sales, evictions, and title, revealing the true one-stop-shop nature of many foreclosure firms. Id. 291 Bulk dockets are court dockets that can contain hundreds of cases, all set for the same time. The docket works because most of the defendants dont show up or they are talked into consent judgments by the attorneys who represent the plaintiffs. These are especially common in debt collection cases and unlawful detainers because one plaintiff, such as a large bank that buys homes at foreclosure, might have dozens of cases on the docket that relate to the same subject matter but different defendants. These cases are filed all at once so that they will be set on the same day, thereby reducing the expense to the plaintiff since one attorney can cover them all. 292 Peterkin, supra note 132, at 275-6. 293 In fairness to Millsap, I note that there is a Millsap & Singer, P.C. and a Millsap & Singer, LLC. These firms may claim to be distinct, with one handling foreclosures and one being a trustee. However, research indicates that the firms have the same website, the same leadership, the same address, the same employees, and the same phone numbers. As such, at a minimum, the firms are closely affiliated. 294 Information for Borrowers, MILLSAP & SINGER, LLC, http://web.archive.org/web/20101218074117/http://msfirm.com (last visited Jan. 25, 2013) [hereinafter Information for Borrowers].

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homepage proudly asserted that Millsap provides comprehensive default servicing and has done so for the mortgage banking industry since 1970. 295 The website goes on to note that Millsap actively and aggressively pursu[es] all possible avenues to reduce timeframe and expenses 296 when foreclosing or removing people from their homes. The website also contained prices for many of the services the firm engaged in and included reference to the firms captive title company, owned by Vern Singer, the Singer of Millsap and Singer. 297 The Millsap story is not unique. In the American West, Northwest Trustee Services, Inc. is a separate trustee company that conducts foreclosures in Alaska, Arizona, California, Idaho,

295 296

Id. Id. 297 Id.

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Montana, Nevada, Oregon and Washington. 298 It has close ties to a large foreclosure law firm. The website of Northwest, although not quite as egregious as Millsaps, is similarly telling. For example, Northwest openly states on its website that it is in alliance with Routh Crabtree Olsen, P.S. 299 . Northwest makes the relationship even more explicit on another page, stating that it is Associated with sister law firm, Routh Crabtree Olsen, P.S., which conducts judicial foreclosures in our coverage area . . . . 300 These statements make neutrality hard to imagine, given that Routh Crabtrees website identifies the firm as a full service mortgage banking law firm dedicated to representing creditors rights. 301 Northwests website also advertises that Northwest Trustee Services, Inc. is a full-service trustee company providing default services to mortgage lenders in the Western United States. 302 And it promises to provide a fee schedule to anyone who fills out the form which requires a listing of the financial institution with which the person is affiliated. 303 Interestingly, Northwests site does not contain promises to be neutral to borrowers or proudly announce an alliance with a consumer rights law firm. 304
Home, NORTHWEST TRUSTEE SERVICES INC., http://www.northwesttrustee.com/ (last visited Feb. 10, 2013) [hereinafter Northwest Home]. 299 Home, NORTHWEST TRUSTEE SERVICES INC., http://www.northwesttrustee.com/ (last visited Feb. 10, 2013) [hereinafter Northwest Home]. 300 Northwest Company Profile, supra note 8. 301 RCO: A MORTGAGE BANKING LAW FIRM, http://www.rcolegal.com/# (last visited Feb. 10, 2013). 302 Northwest Home, supra note 228. 303 Fee Schedule, NORTHWEST TRUSTEE SERVICES INC., http://www.northwesttrustee.com/FeeSchedule.aspx (last visited Feb. 10, 2013). 304 For an interesting commentary on Northwest, see The Face of Evil: Northwest Trustee Services-The Wests David J. Stern, SOCIAL APOCALYPSE (Jan. 18, 2013), http://theresalbaker.typepad.com/social_apocalypse/2013/01/the-face-of-evilnorthwest-trustee-services-the-wests-david-j-stern.html [hereinafter The Face of Evil]. The author, referred to only as Social Apocalypse, notes that Steven Routh, the CEO of Northwest, is actually buying and creating newspapers so that he can publish foreclosures. Id. The author also notes that Routh seems to brag about the money he can make from working all angles of the foreclosures.
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With all this information about trustees, it should be clear that the current system is inadequate to protect homeowners and to ensure society as a whole that rule of law is governing foreclosures. The bad news is that the problem is immense, but the good news is that there are some simple solutions that can immediately improve things. Because the trustee is essential and has the potential to be a true neutral who weeds out offensive foreclosures, the final section of this article presents real-world solutions that could convert trustees from being a significant part of the problem to an integral part of the solution. IV. RE-ENVISIONING THE ROLE OF THE TRUSTEE

In this part, I propose changes and clarification to the existing role of the trustee in order to make the trustee a meaningful neutral that can prevent many wrongful foreclosures. I suggest these changes can be brought about in three separate, but not mutually exclusive ways. I propose detailed legislative reform, impact litigation to define the role of trustees in the modern mortgage era, and ethics inquiries when appropriate to curb the potentially abusive behavior of some attorneys/trustees. The role of the trustee in non-judicial foreclosures is central, but almost no cases or literature examine it in the modern mortgage context. This is probably because until recently, foreclosures were rarely controversial. Given the realities described herein, it is time to rethink the current role of a trustee. The trustee is a gatekeeper who, if marshaled for the cause, can serve as a stop-gap for the current abuses that occur. This will not replace the need for pre-foreclosure mediation 305 or the need to
Id.; see also Jeff Manning, Northwest Trustee Services Squeezes More Profits From Home Foreclosures with One-stop Model, OREGON BUSINESS NEWS (Jan. 14, 2012), http://www.oregonlive.com/business/index.ssf/2012/01/northwest_trustee_squee zes_mor.html. Interestingly, the author of the blog criticizing Routh and Northwest includes a simple declarative statement that has some implications for the role of trustees. It reads: Foreclosure should not be able to be initiated, facilitated, perpetuated or adjudicated by ANY entity who PROFITS from it. Period. The Face of Evil, supra. 305 Renuart, supra note 85, at 576; Renuart, supra note 5, at 166-67.

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reform and regulate the bad loans, sloppy recording keeping 306 and robo-perjury that are creating the foreclosure crisis, but it will provide immediate relief for people like Ron Meehow. Empowering the trustee to verify the bona fides of foreclosures is also valuable because it enlists an already existing third party, thereby answering the concerns of some critics who suggest that existing programs that require a foreclosing entity to talk with homeowners about modification before foreclosure, but do not require a third party to be involved, leave homeowners vulnerable. 307 Put more concretely, in the case of Ron, who lost his home despite making payments, the trustee could have stopped the entire problem by asking basic questions about who had the right to foreclose, what evidence of default there was, and by listening to Ron. My proposals are aimed at requiring and empowering the trustee to do those things. Reforming the role of the trustee can be accomplished in three ways that are distinct, but can be combined when appropriate. These methods are: 1) legislative reform, 2) impact litigation and 3) ethical complaints. Legislation can be introduced and passed that would make trustees real gatekeepers who require essential proofs, ask basic questions, and when factual disputes arise between the foreclosing party and the homeowner, refer those questions to courts. The challenge is that legislation in some states is simply not an option. This does not mean there isnt a solution. There are select states in which the courts may be ready to consider legal arguments that challenge the current behavior of trustees. Such cases would be aimed at providing courts factual scenarios like Rons, and asking them to apply the existing law to these new, challenging modern mortgage dilemmas. Finally, even in states in which legislation and litigation might not work, the ethical concerns that arise when an attorney
Renuart, supra note 5, at 173. For example, Walsh mentions that programs in California, Michigan, Massachusetts and Oregon do not involve third parties and are therefore insufficient. Walsh, supra note 32, at 160.
307 306

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represents a bank versus a homeowner can be addressed. They can be considered by the states legal ethical bodies, both through advisory opinions and, when appropriate, specific complaints about attorneys who have engaged in potentially unethical behavior. A. Legislation Legislation is the most comprehensive and desirable way to change the role of the trustee. It would allow for clear standards, clear regulation, and clear penalties for violators. Outlined below are the central tenets that are necessary in any legislation that is passed. The specific language of any bill would need to be crafted to fit the nuances that exist state to state. It is my position that legislation relating to trustees would create a ripple effect in the foreclosure world, causing banks to more carefully consider when they should initiate foreclosure and providing homeowners meaningful rights to raise questions when a foreclosure is suspect. 308 In the end, every valid foreclosure would still proceed, as the proposal provides a mechanism from resolving difficult cases in which homeowners and banks disagree. It is only the inappropriate foreclosures that would be avoided - those that cannot be documented, do not involve legitimate default, or in which the party seeking to foreclose doesnt have standing. In these situations, and in close calls, banks would have an incentive to carefully consider whether a loan modification or dropping the matter entirely is both more appropriate and more profitable. 309
It should be noted that one state, and only one state, already has some of the framework in place to provide truly neutral trustees who have no financial incentive to obey the bank and who have the training and oversight necessary to ensure they can do their jobs. This state is Colorado, the only state with a public trustee system. In a future article, I plan to study how effective the Colorado public trustee system is at reducing wrongful foreclosures and use it to continue to flesh out the legislative solution I propose in this article. For a detailed discussion of how the Colorado public trustee system came to be and an overview of how it works, see Willis Carpenter, A Brief History of Colorados Public Trustee System, COLO. LAW., Feb. 2002, at 67. 309 The National Conference of Commissioners on Uniform State Laws is currently developing a Proposed uniform body of law for foreclosures. The document is currently a draft titled Residential Real Estate Mortgage
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1. A Six Prong Reform Proposal In the sections that follow, I describe each prong of my proposed trustee reform statute. After working through the prongs, I discuss the predicted improvements that will result. a. Require records As discussed in Part II, relating to the modern mortgage era, there are multiple problems relating to records that can give rise to questionable or overtly illegal foreclosures. The first problem relates to sloppy record keeping when notes were transferred into securitized trusts. 310 In some cases, original notes were destroyed, in other cases the transfers were botched, giving rise to real questions about who has the right to foreclose. 311 In thousands of other cases, documents were falsified. 312 In these cases, documents that were missing from files were often created, and affidavits attesting to the fact that all the documents were in order were signed by employees with no training and no personal knowledge. 313 Second, in addition to the systemic internal document problems that exist, there are also the public recording problems relating to MERS. 314 Similarly, even when MERS was not involved, the pace of foreclosures has led to a multitude of troubling fact patterns. 315 It is not uncommon for the party foreclosing to magically appear in
Foreclosure Process and Protections. The committee consists of a variety of individuals including consumer advocates, lender advocates and others. The proposed reforms are under discussion and a current draft is available at http://www.uniformlaws.org/shared/docs/Residential%20Real%20Estate%20Mo rtgage%20Foreclosure%20Process%20and%20Protections/2013feb4_RREMFP P_MtgDraft.pdf. However, a review of the draft indicates that the trustee problem is currently not being addressed. Draft Section 601 also states that a borrower in a non-judicial foreclosure state would need to seek an injunction in order to stop a sale. It does not utilize the trustee as a gatekeeper. 310 Renuart, supra note 5, at 119. 311 See generally Renuart, supra note 85, at 564. 312 Woolley & Herzog, supra note 13, at 373. 313 Id. at 372-73. 314 Vieth, supra note 1. 315 Id.

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the land records, with no chain of title explaining how they came to be the secured party. 316 In other cases, the records themselves reveal inconsistencies. In some cases, the appointment of the successor trustee has occurred after the foreclosure was carried out. 317 In still other cases, there are serious concerns that the trustee who is self-appointing had no power of attorney to do so. 318 These problems, and thousands more, mean that in some foreclosures, there are no records indicating that the party who is seeking to foreclose actually has standing to do so. 319 Nonetheless, trustees rarely if ever ask for any proof at all. They simply take the banks word for it. 320 Finally, in addition to internal and external record problems relating to who has standing to foreclose, there are also serious problems with record keeping relating to payments. As mentioned, the federal government recently alleged the largest servicers were engaging in negligent and unfair practices that included losing payments, refusing to provide information about how much was owed, dual-tracking (in which on department promises a modification while the other forecloses) 321 and failing to follow through on valid modification requests, just to name a few. The servicers agreed to pay $25 billion to settle the claims. 322 However, no one believes that this will resolve all the problems. As a result, there are still grave questions about whether people the bank says are in default actually are. In some cases, they were promised modifications, made the trial period payments, then were not offered the permanent modification they were promised. In other cases, the party may be current on payments, but due to changes in servicers, the current servicer may not have the payments or the records. As a result of the myriad of problems relating to who can foreclose and whether payment is owed, the first thing a trustee reform statute must do is explicitly require trustees to receive
316 317

Id. Id. 318 Id. 319 Id. 320 Id. 321 Williams, supra note 26, at 468 (generally describing the dual-track process). 322 National Mortgage Settlement, supra note 171.

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physical records that verify these essential facts. Specifically, a statute would require: 1. Proof of the transfer of the original note from the original lender to the current party who seeks to foreclose, including any and all intervening assignments. The foreclosing party should be required to produce a copy of the original note and attest in a sworn affidavit that the original note exists in its original form. 323 2. Proof that the party who seeks to foreclose is the party who is recorded in the public records as the secured party, along with all the recordings that show how that party came to be secured. 3. Detailed financial records that show when default occurred and precisely how much money the homeowner currently owes. 324 4. Documents detailing any modification discussions that occurred and documents showing the results of each modification review. 5. Documents proving that the bank had the power to appoint the successor trustee. If the trustee were required by law to demand these documents, it would be a simple task. Trustee firms could train employees to review document packets presented by the party seeking to foreclose. If they are deficient, they would be sent back to the lender with instructions to cure. This simple requirement would stop the most egregious foreclosures. Ron, discussed earlier in the article, would still be in his home because the bank could not have produced records of missed payments, given that Ron made each payment. Two things
Nevada has enacted a law that has similar requirements. It provides for voluntary pre-foreclosure mediation. If the mediation is demanded by the homeowner, the foreclosing entity must provide 1) the original or certified copy of the deed of trust, the loan note and each assignment or transfer of the deed of trust and the note. Renuart, supra note 85, at 576 (citing Nev. Foreclosure Mediation R. 11 and listing the documentation requirements). 324 This would be similar to the data the CFPB has recently indicated it will soon require servicers to provide to homeowners. Consumer Financial Protection Bureau, 12 C.F.R. 1070.40 (2013).
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would have happened: either the trustee would have rejected the banks paperwork, or as the bank learned the system, the bank would never have initiated foreclosure in the first place. b. Insulate from other parties The checklist described above is most effective if the party acting as trustee is truly neutral. Otherwise, close questions (which could always arise), will be resolved in favor of the banks. Insulation is relatively easy to achieve. A trustee reform statute should prohibit any attorney who has served as counsel for either party in the foreclosure from serving as trustee. This ensures that the party who serves as trustee does not have a dog in the fight. It leaves a vast array of attorneys who can do the job. This statutory requirement could well give rise to trustee firms who make solid livings overseeing foreclosures. They could still handle them in bulk, but they would now have clear requirements for what documentation is required. c. Prohibit foreclosure when legal or factual disputes arise Requiring trustees to cease foreclosure activity when legal or factual disputes arise should be common sense, but there are very few cases, and no statutes, that explicitly require this result. Trustees are not trained to resolve disputes that arise between the parties, but in reality, trustees do it every time they select the banks version of the story over the borrowers. 325 In a common situation, a homeowner states they were promised a modification and that they made the requisite payments, but the bank says it has no records of it. This presents both a legal question (is the promise to modify a binding contract) and factual question (did the bank even make the promise and did the homeowner accept). If the bank breached its promise to the homeowner and that promise was binding, foreclosure is inappropriate. Conversely, if the homeowner is wrong, foreclosure is appropriate. What currently happens in most cases is that the trustee proceeds with the foreclosure, ignoring the homeowners
325

Vieth, supra note 1.

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complaint. In response to criticisms about this behavior, trustees often say they have no duty to investigate. 326 This too may be true, but the minute one partys story is believed over the other partys story, the trustee has certainly ceased to be neutral. Thankfully, there is an easy fix. A trustee reform statute should require that if there is a dispute between the parties as to the right to foreclose, the trustee must file a document in the public record stating that the foreclosure cannot proceed non-judicially because it would require the resolution of disputes. The bank retains the right to foreclose, as a foreclosure can always be carried out judicially even in non-judicial states. The bank will be forced to consider whether its claim is valid, as will the homeowner. If the bank determines it has a legal right to foreclose, it can file in court. If the bank prevails, the statute should allow the bank to recover damages for the time the homeowner remained in the home. This will discourage frivolous claims from homeowners filed only to cause delay. This solution puts legal and factual disputes where they belong: in courts who have considerable expertise in deciding such matters. 327 d. Penalties The first three prongs of the trustee reform statute carefully prescribe and proscribe what a trustee must and must not do. Prong two also insulates the trustee from the other parties. However, there is always the potential for a rogue trustee. As a result, a trustee reform statute should include a provision that provides for statutory penalties for any violation of the statute.328 The statute should also allow the recovery of attorneys fees to a prevailing homeowner, for actual damages and for punitive
Id. This portion of my proposal bears some resemblance to one of the more interesting rescue measures put in place during the Great Depression, an era in which many state legislators sought to curb foreclosures. In some states, homeowners were given the power to convert non-judicial foreclosures to judicial foreclosures. In my proposal, the trustee triggers this change in order to avoid factual disputes about a persons home being resolved extra-judicially. Walsh, supra note 22, at 140.
327 326

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damages. 329 In this way, the statute would largely mirror a number of consumer fraud statutes, such as the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA) and many state consumer fraud acts (sometimes called UDAPS). 330 The law should also provide for statutory damages so that any infraction may be pursued. This is common in the FDCPA and FCRA. Finally, the statute should allow for actual and punitive damages when appropriate. The statute should also explicitly state that if the rules for a class action as set out in that states civil procedure are met, a class action would be appropriate under the trustee reform statute. e. Licensing In states with the political will to wholly reform the trustee system, a trustee reform statute should also contain a provision for how trustees are licensed, then regulated. The contours of this program would depend on the state. At a minimum, it would be wise to require trustees to be bonded 331 and to attest to basic things such as 1) they are not affiliated with any commercial lender, 2) they do not represent consumers or homeowners, and 3) they understand the statutory requirements and can comply with them. In a perfect world, a basic test would be developed for trustees. The state would administer it and issue renewable licenses. The state would put the oversight of trustees under a particular entity, perhaps the division of finance or its equivalent, and trustee files would be inspected annually for compliance. Regulatory penalties could also be imbedded in the statute. However, no matter how
A similar suggestion has been made by other people who suggest reform. For example, one author suggests allowing attorney fees under general foreclosure statutes for any cause of action related to foreclosures. Timothy A. Froehle, Standing in the Wake of the Foreclosure Crisis: Why Procedural Requirements Are Necessary to Prevent Further Loss to Homeowners, 96 IOWA L. REV. 1719, 1743 (2011). 330 See Fair Debt Collection Practices Act, 15 U.S.C. 1692k (2012); Fair Credit Reporting Act, 15 U.S.C. 1681n, o (2012). 331 A bond provides some guarantee that if the trustee breaks the law, the injured party can recover. It also requires the trustee to have a skin in the game and helps make sure the state is aware of each trustee.
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much state licensing and regulating is built into a particular trustee reform statute, the private right of action should be preserved. It is the authors experience that a combination of public and private enforcement is critical to enforcing statutes. This is played out in fields as varied as employment law, debt collection, environmental protection and securities. f. Educate Education applies both to trustees and to the public. When states create minimal requirements for trustees, and preferably licensing structures, the market will almost certainly create classes and courses to train trustees. The education of trustees is essential. This education can be measured, as discussed above, by requiring licensing through a basic test. The more important education piece relates to public education. A trustee statute will only be effective if homeowners understand their rights. An ideal trustee reform statute would specifically provide for the implementation of basic public education campaigns to let homeowners know of their new protections. 2. The Promise of a Trustee Reform Statute and the Challenges that Must be Addressed A trustee reform statute like the one described above would almost immediately alter the landscape of foreclosures. The minute that banks could not hand pick a trustee to ram foreclosures through, things would improve. When trustees act as true neutrals, disputed foreclosures will no longer be decided in the shadows by a trustee who is untrained and/or unfair. Instead, the dispute would be sent to court, where we have developed sophisticated mechanisms for resolving factual and legal disputes. Similarly, if a trustee requires from the banks the essential documents that allow it to foreclose, it keeps banks honest. If the bank has a problem with its records, it will need to correct the error (if it can) or contact the homeowner and try to work out a modification. And to make sure the statute works, it builds in public and private and

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enforcement as well as a licensing and education system meant to make sure all the concerned parties understand the law. There is little doubt that the statute would reduce the number of illegal foreclosures, and in some cases, it would cause foreclosures to take longer. I suggest this is a good thing. Government programs, lawsuits, and any number of other efforts have been aimed at keeping people in homes. This is good for the homeowner, but it is also good for the broader economy. Home prices plummeted due to a market meltdown and due to a surplus of empty homes due to unprecedented foreclosures. Requiring the banks who caused the problem in the first place to carefully consider whether they should remove people from homes, instead of allowing them to use their own attorneys to do it quickly, is a fair result. And when the bank is right and the homeowner isnt paying, the courts can resolve the matter and provide damages to the bank. As a result, there is no downside to making trustees true neutrals. The only possible result is a reduction in wrongful foreclosures, an increase in modifications, and overall increase in the certainty that property rights are being appropriately protected. Going forward, the challenges to a trustee reform statute are many. First, educating lawmakers about the problems that currently exist is essential. It is my hope this article helps with that task. Second, the ability to attract competent trustees to the job must be considered. Currently, trustees are compensated in most states by receiving a percentage of the sale price. 332 This structure
One might think that since trustees are paid based on the sales price at the foreclosure sale, there would be incentive to sell the house for the highest price. First, as discussed, the problems with the auction system discourage competition and thereby reduce the sales price. Second, trustees make far more for the other services they provide the bank than they do for selling the home. For example, a trustee in Missouri receives a commission on the amount of sales not exceeding two percent on the first one thousand dollars, and one percent on all sums over that amount and under five thousand dollars, and one-half of one percent on all sums over that amount. MO. ANN. STAT. 443.360 (West). In other words, a home that sells for $100,000 at a foreclosure sale would produce a return of $535. This law also creates another problem discouraging a trustee from seeking to maximize the sales price. Namely, as the bid goes up, the return to the trustee is proportionally less, so that increased effort results in decreased gains. For example, if the trustee made a special effort, and sold the house for $150,000
332

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rewards foreclosing and discourages asking real questions. One possibility would be to establish a trustee pay structure that requires trustee compensation by the bank any time a foreclosure does not proceed but is initiated, and requiring payment by the homeowner (from the proceeds of the sale) anytime the foreclosure does proceed. The rates of pay would need to be established state by state, based on what the market requires. I suspect it will mean that trustee fees will need to be increased some since trustees will no longer double, triple or quadruple dip as todays trustees do. A final possibility is to have trustees become public employees, as they are in Colorado. It is beyond the scope of this article to examine all the possible payment structures. It is my hope that 1) others will begin to write about this possibility and to examine it more closely and 2) that I can, in a future article about the Colorado system and my proposed legislation, examine creative options or for enticing true neutrals to serve as trustees. Finally, some may argue that my proposals will increase the length of foreclosure and the overall costs to banks. A critic might argue that these costs will be passed onto consumers. I suggest in response that currently banks are not fully internalizing the cost of the system, and instead, are foreclosing haphazardly, thereby skirting costs they should bear. At a macroeconomic level, the glut of foreclosed homes, the ever present specter of litigation over the foreclosures, and the economic harm foreclosed families experience have proven devastating to the economy. 333 Reducing wrongful foreclosure could have a number of positive impacts on the economy as a whole.

instead of $200,000, the increased return would be $250. This same effort could instead be invested in taking on another case for a bank, in which the trustee would be paid for debt collection, for the foreclosure (as an attorney), for unlawful detainer work (after the sale) and, in some cases, for default servicing, title work, and the profits from the publication of notice. For all these reasons, the current system is not incentivizing trustees to seek the highest bid, especially if doing so would risk a steady, lucrative stream of businesses from banks. 333 Pittman, supra note 108, at 1104.

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B. Using Litigation to Reform the Role of Trustees In many states, the possibility of passing a trustee reform statute is slim. However, those same states may have law and courts that would allow for partial reform through litigation. It is beyond the scope of this article to document the law of every state; however, considering the law of a few different states is helpful. To that end, the basic laws of California, Washington and Missouri are reviewed below. These states were chosen because they represent some of the different positions states have taken regarding trustees. I conclude that California and Missouri, to differing degrees, are ripe for litigation to define the role of the trustee and curb abuse. I conclude with Washington because it is the only state that, as of February 2013, has law that specifically requires trustees to be truly neutral, exercising independent discretion and as a real third party. Washington provides a model for future litigation, and the Washington Supreme Courts recent holding supports many of the fundamental assertions made in this article. 1. California Of the four states surveyed, California demands the least of trustees. It is unique because it 1) doesnt hold that a trustee has a fiduciary duty to both parties, and 2) because it has provided limited statutory immunity for trustees. 334 One case in particular, demonstrates the limited claims that can be pursued against trustees in California. The case is also illustrative because it reveals that there is still a window for claims, especially those that indicate genuine bias by the trustee. The case is Kachlon v. Markowitz, 335 a case in which a homeowner sued the trustee and the note holder, alleging that the trustee recorded of notice of
Arizona has a similar limited immunity statute. See ARIZ. REV. STAT. ANN. 33-807 (2012). If the trustee is joined as a party in any [action other than one alleging the trustee breached its duties under the statutory scheme] the trustee is entitled to be immediately dismissed and to recover costs and reasonable attorney fees from the person joining the trustee. Id. 335 Kachlon v. Markowitz, 168 Cal. App. 4th 316 (Cal. Ct. App. 2008).
334

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default when no default existed. 336 The homeowners further alleged that they provided proof to the trustee that the $53,000 promissory note at issue had been satisfied. 337 In response, the trustee refused to proceed with the foreclosure and refused to withdraw the notice of default. 338 In essence, the trustee froze, refusing to take sides. 339 The Plaintiffs brought a slander of title claim and a negligence claim. 340 The Court ultimately upheld a directed verdict in favor of the trustee. 341 In reaching it conclusion, the Court laid out the current status of California law. It began by discussing the duties of a trustee. The trustee in nonjudicial foreclosure is not a true trustee with fiduciary duties, but rather a common agent for the trustor and beneficiary. The scope and nature of the trustee's duties are exclusively defined by the deed of trust and the governing statutes. No other common law duties exist. 342 It then explored the statutory privilege that was granted to trustees by CAL. CIV. CODE 2924 (West 2012). The section provides at least some privilege for trustees when they engage in their ordinary duties, such as mailing, publication and the delivery of notice. 343 After wrestling with the nature of the privilege or immunity, the Court concluded that it provided a limited privilege that did not reach to malice. Obviously, the 1996 amendment was intended to give trustees some measure of protection from tort liability arising out of the performance of their statutory duties. The overall balance of interests reflected in the statutory scheme, however, favors protection of trustors' property rights, thus suggesting that trustors should not be entirely deprived of the ability to vindicate their property
336 337

Id. at 343. Id. 338 Id. at 344. 339 Id. 340 Id. at 343. 341 Id. 342 Id. at 335. 343 CAL. CIV. CODE 2924 a-f (West 2012).

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rights if wrongfully violated by the trustee. Granting absolute immunity from such wrongdoing would wholly sacrifice the trustor's interest in favor of the trustee. The qualified common interest privilege, on the other hand, would provide a significant level of protection to trustees, leaving them open to liability only if they act with malice. At the same time, it preserves the ability of trustors to protect against the wrongful loss of property caused by a trustee's malicious acts. 344 The Court also concluded that mere negligence in making a sufficient inquiry into the facts on which the statement [about default] was based does not, of itself, relinquish the privilege. 345 The Courts decision is instructive. Although it makes clear that a trustee will not be held liable for negligence, it leaves open the possibility that a claim in California against a trustee who is clearly working for the bank, and who is clearly disregarding any information provided by the homeowner, may state a claim. As such, although a claim in California to curb the practices by some abusive trustees may be difficult, it does not seem impossible. a. Could Ron Meehows Claim Survive in California? In Kachlon, the court noted that the trustee stopped the foreclosure procedure when provided some evidence that default did not occur. The court relied heavily upon this behavior to find the trustee did not act with malice. In Rons case, despite evidence that default did not occur, the trustee plowed ahead. The trustee even affirmatively explained its behavior, suggesting it was because it worked for the bank. This statement, coupled with proceeding with foreclosure, would likely be sufficient to establish malice in California. As a result, California law leaves room for claims like Rons. Such claims would serve the high purpose of defining the parameters for trustees and curbing some of the behavior discussed in this article.
344 345

168 Cal. App. 4th 316, 340 (Cal. Ct. App. 2008). Id. at 344.

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2. Missouri Missouri is an example of a state that is ripe for litigation. Claims against trustees could clarify the role of the trustee and prevent some of the abuses discussed in this article, and Missouri has law that is almost identical to Washington law, which, as discussed in the next section, has held trustees liable for a breach of their duties. a. Missouri Law Missouri also meets the second half of a test to determine if litigation is wise. The law relating to trustees in Missouri is also ripe for a claim. Although trustees have only rarely been held accountable for illegal behavior, this is in large part because cases have not been pursued in the modern mortgage era. The law itself is similar to the law of many states, and it provides language that should support claims against trustees like the ones described in this article. For example, Missouri case law contains the following: An early, typical Missouri case describes the role of the trustee as follows: Trustees are considered as the agents of both parties-debtor and creditor-and their action in performing the duties of their trust should be conducted with the strictest impartiality and integrity. They are intrusted with the important function of transferring one man's property to another, and therefore both reason and justice will exact of them the most scrupulous fidelity. Courts of equity have always watched their proceedings with a jealous and scrutinizing eye; and where it is clearly shown that they have abused their trust, or combined with one party to the detriment of the other, relief will be granted. Not that a sale made by them will be set aside on slight and frivolous grounds; but where it appears that substantial injury has resulted from their action, where, in pursuance of their powers, they have failed or neglected to exercise a wise and sound discretion, equity will

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interfere. It is impossible in the very nature of things to lay down any precise rule applicable alike to all cases which may arise, but every case must be decided on the especial facts and circumstances which surround it and upon which it is founded. 346 Other Missouri court opinions seem to suggest that a trustee has, at least in some cases, a duty to conduct a reasonable investigation into default. 347 And since at least 1846, Missouri courts have roundly denounced allowing a trustee to act as the mere agent of the lender, to the exclusion of the trustees duties. Neither the law nor the parties intend that the trustee shall be a nose of wax, a mere figure-head, in the hands of the creditor and of the auctioneer. He is placed in a position to act fairly by all interested, and when he fails in his duty in this regard, the sales he makes will be set aside . . . . 348 All of these cases, and many more, describe the role of the trustee as a sacred one. These descriptions of duties line up closely with my suggestions about what a trustee should be in the modern mortgage era. The language of the decisions seems to suggest that a trustee could never openly promote itself as an agent for the lender nor could a trustee choose to ignore information from the homeowner regarding fraud or negligence by the lender. This suggests that if a claim is pursued against a trustee who has done these things, liability should exist.349 But whether or not the law will produce these results remains to be seen.

Axtell, 17 S.W.2d at 334. Smith, 322 S.W.2d at 777 (noting in that case that there was no evidence that a reasonable investigation would have turned up a reason not to foreclose, but seeming to suggest that the trustee could have been liable had such evidence existed). 348 Vail v. Jacobs, 62 Mo. 130, 133-34 (1876). 349 Because I continue to work Of Counsel in Missouri, I am aware of several such claims that will be making their way to the Missouri Court of Appeals and perhaps the Missouri Supreme Court. These cases put in action my theory that litigation can be used in some states to curb the harmful behavior of some trustees.
347

346

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b. Could Ron Meehows Claim Survive in Missouri? As discussed, a case very similar to Rons was filed in Missouri. It survived a motion to dismiss. This is appropriate under Missouri law and suggests that Missouri is ripe for claims against trustees when those claims contain facts that demonstrate overt bias. These claims would be beneficial to Missourians facing foreclosure because they would define the parameters of the trustee and serve to curb some of the more offensive and troubling behaviors. 3. Washington Washington law provides an unusual amount of detail and precedent regarding trustees. However, there are few cases that have tested that law in the modern mortgage era. This fact, coupled with the fact that Washington is home to Northwest Trustee Services, a company that raises serious questions about the relationship between trustees and foreclosure attorneys, mean that claims in Washington might be especially effective in defining the role of the trustee more fully and preventing some of the problems described in this article. a. Washington Law Washington is unique because it has clear precedent about what principles should guide the interpretation of its deed of trust statute and because it has two cases, separated by over 20 years, that hold trustees liable for breaching their duty of neutrality. The guiding principles established for interpreting the deed of trust state can be summarized as follows: Washington's deed of trust act should be construed to further three basic objectives. First, the nonjudicial foreclosure process should remain efficient and inexpensive. Second, the process should provide an adequate opportunity for interested parties to prevent wrongful foreclosure.

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Third, the process should promote the stability of land titles. 350 In keeping with this, Washington law makes clear that a trustee is a fiduciary to both the lender and the borrower. Washington courts do not require a trustee to make sure that a grantor is protecting his or her own interest. However, a trustee of a deed of trust is a fiduciary for both the mortgagee and mortgagor and must act impartially between them. 351 Based on these principles, Washington has developed a body of law that requires trustees to be truly neutral. These cases establish that if the trustee is merely an agent for the lender, the trustee can be individually liable for the breach of its duties. For example, in Cox v. Helenius, a trustee was also the attorney for the foreclosing bank. The court held that: The trustee breached his fiduciary duties by initiating foreclosure proceedings and holding a nonjudicial foreclosure sale of the home of the grantors of the deed of trust, where trustee knew that an action for damages and reconveyance of the deed to grantors was pending against the grantee and knew that the grantors believed such action had halted foreclosure proceedings. 352 Interestingly, the Court noted that the breach may have been as a result of the dual role of the trustee as both trustee and attorney for the bank. And the court went further, suggesting that when such a conflict arises, the party should either be the trustee or the attorney, but not both. The Court wrote: It appears that the dual responsibility of trustee and attorney for the beneficiary precipitated at least some of the trustee's breaches. Although the dual role this trustee had troubles us, the Legislature specifically amended the statute in 1975 to allow an employee, agent or subsidiary of a beneficiary to also be a trustee. The amendment furthers the
350 351

Helenius, 693 P.2d at 685-86. Id. at 686. 352 Id. at 684.

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general intent of the act that nonjudicial foreclosure be efficient and inexpensive, and in the ordinary case would present no problem. However, the statute may not allow attorneys to do that which the Code of Professional Responsibility prohibits. The spirit of CPR DR 5105(B) would seem to condemn action of the nature that occurred here. Where an actual conflict of interest arises, the person serving as trustee and beneficiary should prevent a breach by transferring one role to another person. Although some wondered if Cox was still good law, the question was answered in February 2013 in Klem v. Washington Mutual Bank. The facts and law of the case are related in detail below because the case is 1) representative of the types of claims that could be pursued in other states, and 2) is the most explicit judicial support for many of the positions asserted in this article. In Klem v. Washington Mutual Bank , Ms. Halstien, through her legal guardian, filed claims for negligence, breach of contract, and violation of Washingtons Consumer Protection Act (CPA.) 353 The jury returned a verdict for the plaintiff on all three counts.354 The facts established at trial are discussed below, followed by the Washington Supreme Courts consideration of whether the law supported the verdict. Dorothy Halstien suffered from dementia. She owned a home worth approximately $235,000 on which she owed roughly $75,000. 355 Due to the cost of her care, her guardian was unable to pay her mortgage. 356 Washington Mutual (WaMu) held the note and Quality Loan Services was the trustee (Quality). 357 WaMu instructed Quality to initiate foreclosure. 358 It did, and on the first day the law allowed, sold the home for $84,087.67, a dollar more than Ms. Halstien owed in principle, fees and costs. 359 To accomplish the sale, a notary employed by Quality false notarized
353 354

Klem v. Washington Mutual Bank, No. 87105-1, 1 (Wash. Feb. 28, 2013). Id. 355 Id. 356 Id. 357 Id. 358 Id. at 2. 359 Id.

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the notice of sale by predating it. 360 This allowed the sale to occur earlier than it should have. 361 Before the sale, Halstiens guardian secured a signed purchase and sale agreement for the home from a buyer who committed to pay $235,000. 362 The sale could not be closed prior to the scheduled foreclosure sale. 363 The guardian requested a 364 postponement of the sale. Washington law gave the trustee authority to postpone the sale without consulting with anyone.365 However, the trustee declined, stating that it would not postpone the sale without WaMus permission. 366 Evidence revealed the trustee, in confidential document between it and WaMu, promised never to postpone a foreclosure unless WaMu agreed. 367 And the COO of Quality confirmed that Quality did what WaMu told it to do . . . . 368 The Washington Supreme Court considered whether the law supported the claims pursued and won by Halstiens guardian. 369 It concluded that the Washington Consumer Protection Act applied to trustees and that a trustee could be held responsible for acting unfairly. 370 It also affirmed the intermediate appellate courts holding that a trustee could be liable for negligence. 371 In reaching its conclusions, the Washington Supreme Court explicitly endorsed a number of the premises in this article and established a solid rationale for why states should hold trustees accountable. The Court noted that the power to sell another persons property, often the family home, is a tremendous power to vest in anyones hands. 372 As a result, common law and equity require[] [a] trustee[] to be evenhanded to both sides and to strictly
360 361

Id. Id. 362 Id. 363 Id. 364 Id. 365 Id. 366 Id. 367 Id. at 5-6. 368 Id. at 6. 369 Id. at 11. 370 Id. at 22. 371 Id. at 2. 372 Id. at 19.

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follow the law. 373 The Court also noted that lenders, servicers and their affiliates routinely appoint trustees. 374 And that trustees have considerable financial incentive to keep those appointing them happy and very little financial incentive to show homeowners the same solicitude. 375 The Court noted that trustees sit in place of courts, as a neutral, and that nothing in the law of Washington allows the theft of a persons home by a lender under the guise of nonjudicial foreclosure. 376 The Court explicitly rejected the trustees argument that there was nothing wrong with following the beneficiarys direction. 377 It held that, if the trustee acts only at the direction of the beneficiary, then the trustee is a mere agent of the beneficiary and a deed of trust no longer embodies a three party transaction. 378 Finally, the Court made clear that a trustees failure to exercise independent discretion as an impartial third party is an unfair or deceptive practice. 379 To support its conclusion and to prevent further abuse, the Court also held that an injunction was appropriate and remanded to the trial court to fashion an appropriate injunction to stop Quality from violation Washington law. 380 The takeaway from Washingtons two leading trustee cases is important. The cases lay out fundamental principles that, if accepted in other states, would change the way foreclosures happen. The most important principles are 1) the deed of trust laws should be construed in favor of the borrower, 2) trustees are required to exercise independent discretion as a true third party, and 3) a trustees close ties to the lender give rise to serious concerns about impartiality, requiring careful scrutiny by courts. Together, Klem and Cox support the assertions throughout this article, and in particular, lend credence to the conclusion that courts will begin to establish real limits on what trustees can do if attorneys bring compelling factual claims.
373 374

Id. Id. 375 Id. 376 Id. at 20. 377 Id. at 21. 378 Id. at 22. 379 Id. 380 Id. at 27.

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b. Could Ron Meehows Claim Survive in Washington? Although the ultimate question of whether Rons claim would survive turns on a multitude of factors, including the venue, the judge and the attorneys, it seems almost certain that Rons claim would survive in Washington. The Washington Supreme Court explicitly concluded that failure to act as an independent decision maker exposes a trustee to liability. Like the trustee in Klem, Rons trustee explicitly asserted it does what the bank tells it to. This is a breach of the trustees duty. Overall, Washington stands as the clearest example of the value of bringing claims against trustees who are tethered to banks and unwilling to act as a true third party. If advocates bring similar claims in other states that have similar law, such as Missouri, it is likely that courts can play a role in curbing the harmful behavior of many modern day trustees. 4. What Specific Factual Scenarios Are Ripe for Pursuit? Lawyers in trustee states will have a better sense of what fact patterns would best invite courts to consider the role of the trustee in the modern mortgage era; however, there are some basic issues I suggest are ripe for consideration. They include: close financial ties between trustees and banks, including potential indemnity agreements; the conflict between advocating zealously for a bank (required under most ethical rules) and the legal duty to be completely neutral a trustees willingness to actually advocate against a homeowner in a TRO setting or bankruptcy the trustees failure to require any actual proof of the right to foreclose, including documents that would prove standing, security, and default; a trustees decision to resolve factual or legal disputes about standing or default in favor of the bank; a trustees refusal to talk with a homeowner; a trustees decision to provide advice to homeowners, which could create an attorney/client relationship.

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Pursuing these types of issues will have a number of salutary effects. First, it will provide much needed guidance and answers. Second, to the extent that some of the common practices by trustees run afoul of the law, it will curb that behavior. Third, it will allow for discovery that could better illuminate the relationship between banks and trustees. And fourth, it will likely cause those who are acting as both attorneys for the banks and as trustees to more carefully scrutinize their own practices. I note that this process is already beginning. In the real case of Ron Meehow, the trustee was named, and the claim survived a motion to dismiss. That case, and others like it, could provide much needed answers about what a trustees duties really are in the modern era. 381 In sum, pursuing claims against trustees can achieve much of the reform that a trustee reform statute would produce. Successful lawsuits could produce holdings that prohibit attorneys for the banks from serving concurrently as a trustee. Decisions could give rise to prohibitions on the trustee picking sides in factual disputes, and as trustees begin to be held liable for their behavior, the lawsuits could quickly cause foreclosure mills to rethink their approach. One class action verdict or settlement could undue all the profiteering that occurred in the past, and in doing so, remove the primary driving force that leads to attorneys disregarding common sense, decency and their own ethical duties. C. Ethics Complaints Can Give Rise to Changes in Lawyer Behavior Because most trustees are also lawyers, they are subject to the Rules of Professional Conduct in their state. In addition, most states allow for attorneys to seek advisory opinions about potential unethical situation. These two facts make filing appropriate ethical complaints and ethical inquiries a last resort that may be necessary to curb the most overt forms of abuse by trustee attorneys.
As a matter of full disclosure, I am putting into practice the litigation strategy laid out in this article. Along with my colleague Erich Vieth, I filed a class action against the largest foreclosure firm in Missouri. It is our hope that either through the trial court or the appellate courts, the trustee issue can be considered by a thoughtful court on a complete record.
381

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1. Ethical Rules that Might Be Implicated The Cox decision from Washington State hints at one of the potential problems. The Court points out that although Washington allows attorneys for banks to also serve as the trustee, the statute may not allow attorneys to do that which the Code of Professional Responsibility prohibits. 382 The Court suggests that the trustee in that case, who seemed to put the interest of the bank above a debtor who believed that the foreclosure sale had successfully been stopped when it had not, may have run afoul of the ABA Model Rule of Professional Conduct 5-105. That section addresses when a lawyer must refuse to accept or continue employment if the interests of another client may impair the independent professional judgment of the Lawyer. Specifically, 5105(B) states: A lawyer shall not continue multiple employment if the exercise of his independent professional judgment in behalf of a client will be or is likely to be adversely affected by his representation of another client, or if it would be likely to involve him in representing differing interests . . . . The Courts language and reference to the section above suggests an interesting possibility. The Court implies that when an attorney elects to become a trustee, and thereby takes on a legal fiduciary duty to a borrower, the attorney enters into representation of the borrower. Although the Courts analysis stops short of explaining when an attorney/client relationship might exist between a borrower and an attorney/trustee, there is some guidance available. Although it is beyond the scope of this article to cover how attorney/client relationships can form, including through implication, it is worth noting here that one learned scholar suggests that many courts and the Restatement adopt the approach that it is the intent of the client that primarily controls the activation of the relationship.383
382

Helenius, 693 P.2d at 687.

Douglas K. Schnell, Don't Just Hit Send: Unsolicited E-Mail and the Attorney-Client Relationship, 17 HARV. J.L. & TECH. 533, 540 (2004).

383

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If this is true, then a borrower who contacts a trustee knowing that 1) the trustee is a lawyer, and 2) the trustee is supposed to help them, may well have a reasonable expectation that the trustee acts as their lawyer. Another model rule is implicated even if the borrower is never the trustees attorney. Namely, Model Rule of Professional Conduct 4.3. It addressed how lawyers should talk to unrepresented parties. It states: In dealing on behalf of a client with a person who is not represented by counsel, a lawyer shall not state or imply that the lawyer is disinterested. When the lawyer knows or reasonably should know that the unrepresented person misunderstands the lawyer's role in the matter, the lawyer shall make reasonable efforts to correct the misunderstanding. The lawyer shall not give legal advice to an unrepresented person, other than the advice to secure counsel, if the lawyer knows or reasonably should know that the interests of such a person are or have a reasonable possibility of being in conflict with the interests of the client. Under this rule, if the homeowner is not represented, what should an attorney/trustee do? If they have the trustee hat on, then they are supposed to be neutral and in some states even owe a fiduciary duty to the homeowner. If they have the attorney hat on, their interests are adverse to that of the homeowner. If the homeowner is represented, the trustee probably should not talk to them. Yet, they owe a duty under the law to talk to them. If the person is unrepresented, the trustee needs to make clear that they cannot help (at least with the attorney hat on) and that there interests are adverse. Then, the only advice they could give, is for the homeowner to seek counsel. Telling the homeowner to reinstate the loan by paying the back due amounts, if the homeowner does not believe he is in default, could be giving legal advice (and bad legal advice at that). Telling the homeowner to call the bank seems equally inappropriate. This scenario, of the ethical duties related to talking to an unrepresented party, is perhaps the

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best illustration of the untenable schizophrenia that exists when an attorney for the bank is also charged with being the neutral trustee in a disputed matter. If an attorney/client relationship is formed in even some interactions between borrowers and attorney/trustees, this would have wide ranging implications. For example, if the debtor becomes the attorney/trustees client, does this mean that the attorney/trustee breaches the duty of confidentiality if it shares information from the borrower with the bank? 384 Similarly, if the attorney/trustee fails to provide advice to the borrower when asked, does this constitute malpractice? And does the fact that an attorney fee or a trustee fee or both are routinely added to the debt of the homeowner when calculating the deficiency support the proposition that the attorney/trustee is the borrowers attorney? Interestingly, the most obvious conflict the attorney/trustee may have is with the bank. The attorney is required to represent the bank zealously so long as it is within the bounds of the law. 385 At the same time, the attorney/trustee is required by most state law to be neutral as between the bank and the borrower. If the attorney/trustee took this duty seriously, it would have to disclose this conflict to the bank. By disclosing that it could not advocate for the bank, or even take the banks story as true if challenged by a homeowner, the attorney/trustee would likely convince the bank it needed new counsel. Interestingly, there is no evidence any attorney/trustee has ever made such a disclosure to any bank. This speaks to the fact that most trustees either 1) dont see the conflict, or 2) dont care. All of the questions above can and should be addressed. This can be done without calling into question the ethics of any specific attorney. Most state ethics boards allow for advisory opinions to be issued in response to ethical inquiries. I propose that attorneys begin to pose ethical questions to these boards in order to define what an attorney/trustee may do and what they cannot. Here are some questions that could be asked:
See generally MODEL CODE OF PROFL RESPONSIBILITY DR 4-101 (1980). MODEL CODE OF PROFL RESPONSIBILITY EC 7-1 (1980), available at http://www.americanbar.org/content/dam/aba/migrated/cpr/mrpc/mcpr.authchec kdam.pdf.
385 384

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1. Can a trustee who is an attorney and is required by law to be neutral, decide an issue in favor of its client and against a homeowner to whom the attorney owes a fiduciary duty if there is a dispute between the parties as to law or fact? 2. Can an attorney hold a duty of zealous advocacy for one party while simultaneously owing a duty of neutrality to a party whose interests are adverse to the attorneys client? Would this require written disclosure to one or both parties? 3. Can a trustee for a homeowner in a foreclosure also appear in court to advocate against the homeowner and in favor of foreclosure? 4. Does an attorney who serves as a trustee and has a legally recognized fiduciary duty to a borrower enter into an attorney/client relationship when 1) the borrower shares information with the trustee, or 2) if the borrower seeks advice from the trustee because the borrower believes the trustee is 1) an attorney and 2) supposed to be fair to the borrower? 5. If an attorney agrees to serve as a trustee in a foreclosure, and in the process of that foreclosure, obtains information from a borrower to whom the trustee owes a fiduciary duty, is the trustee prohibited from later using that information in a subsequent action against the borrower? 6. If an attorney agrees to serve as a trustee in a foreclosure, and in the process of that foreclosure, obtains information from a borrower to whom the trustee owes a fiduciary duty, is the trustee prohibited from later representing another party against the borrower in a related transaction? In addition to advisory opinions, if there are attorneys who are committing palpable violations of the ethical cannons, these specific attorneys could be reported. Adverse opinions in this setting could have an immense chilling effect on future bad acts. Similarly, if attorneys continue to engage in practices prohibited by advisory rulings, there would be little reason for them to escape punishment. Overall, it seems likely that some states would issue advisory opinions that would be inconsistent with some current practices, and that similarly, some lawyers are already crossing the

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line. These opinions, if issued, would curb the current questionable ethical practices by some attorney/trustees. 2. A Real Example to Build On I note that this is more than theory. In the not too distant past, at least one state issued an opinion that specifically dealt with trustees. In North Carolina, an ethics inquiry was filed. Its substance is below: Inquiry #2: If foreclosure proceedings have been instituted against a debtor, may Attorney A, who serves as Substitute Trustee in the foreclosure, file a motion in the Bankruptcy Court to set aside the automatic stay? Opinion #2: No. See CPR 94. So long as the attorney serves as trustee, he may not be involved in any proceeding arising from or connected with the deed of trust. 386 This opinion was later explained further in CPR 166, which said in part: The proper rule is that the trustee/attorney cannot ethically represent either the lender or the borrower in a role of advocacy at any state of the foreclosure proceeding. The trustee in his fiduciary capacity is charged with the duty of preserving the interests of both, and in that sense he represents both. If, during the existence of the fiduciary relationship, he should act in an adversary capacity for either, he would violate his fiduciary duty to the owner, and this would offend the Code provision against conflict of interest. 387 The problem is that the clarification was issued on July 14, 1978. As a result, there is a pressing need for the ethics of the dual
NORTH CAROLINE REAL PROPERTY ETHICS HANDBOOK 53 (Ethics Committee of the North Carolina State Bar 2012), available at http://nc.invtitle.com/sites/nc.invtitle.com/files/resource/ethicsmanual/upload/ethicshandbook20120523.pdf. 387 North Carolina State Bar, Ethics Op. CPR 166, available at http://www.ncbar.com/ethics/ethics.asp?id=695.
386

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role of attorney and trustee to be examined in light of the modern mortgage era. Clear inquiries and precise answers could be the fastest way to immediately impact the behavior of trustees. 388 3. How Would Ethical Decision Impact Ron Meehows Case? It is difficult to predict what ethics boards will say in response to questions about relatively new, sometimes poorly understood situations. However, it seems likely that a minimum, ethics decisions could serve as a check on the most egregious behaviors of some attorney/trustees. CONCLUSION Presently, the very banks that collapsed the world economy are being trusted to, with no judicial oversight and no meaningful neutral, remove people from their homes. The same companies who brought us robo-signing, derivatives, MERS, the bailout and exotic loans that were designed to fail are being trusted to do the right thing when it comes to foreclosure. The banks actions are unchecked because trustees are unregulated and in some cases unfair. There is no doubt this system doesnt work, and the human and financial costs of wrongful foreclosures are immense. Fortunately, there are some simple solutions that can convert trustees from potential accomplices in wrongful foreclosures to meaningful parts of the solution. Legislation, litigation, and ethical inquiries are all means to accomplish this goal, and it is a goal worth fighting for. Reforming the role of the trustee protects property rights, promotes certainty, reduces wrongful foreclosure, and encourages modifications of loans. These results are good for homeowners, but more importantly, they are net positives for the broader economy and society as a whole.

I plan to put this call to action in practice by partnering with an attorney who specializes in legal ethics in order to propound appropriate inquiries. In a future article, I hope to report on the results.

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