Owners who default on their mortgages and have their homes sold by nonjudicial foreclosure may still pursue their lender for wrongful foreclosure, according to a recent California Supreme Court decision. [Yvanova v. New Century Mortgage Corporation (2016) 62 C4th 919]

Although the Court declared its ruling has a “narrow” application, many prior California homeowners who were victims of the financial crisis may leap to follow the perceived precedent set by the case.

Wrongful foreclosure and the Great Recession

However, the Yvanova decision does not address several issues which arise after a foreclosure is challenged as wrongful. For example, the ruling does not indicate whether:

  • the holding may be used by an owner to preemptively avoid a foreclosure; or
  • the owner’s allegations in a foreclosure case are necessarily proven or correct.

Prior homeowners who suffered losses due to allegedly wrongful foreclosures are not guaranteed success — but they do now have a leg to stand on in court. The foreclosed homeowner still needs to prove their trust deed was improperly handled, which led to an unlawful foreclosure.

Additionally, the sheer number of homeowners who fell victim to the Great Recession is too large to adjudicate every prior homeowner who lost their home to foreclosure. California was hit harder than most states, with over a million homeowners foreclosed upon during the housing crisis. Subprime lending, shady assignments and the overwhelming rush for mortgage-backed bonds (MBB) caused many homeowners to default on mortgages they were never able to afford in the first place.

Strategic defaults were also rampant in the Great Recession. Homeowners who recognized their houses were black-hole assets chose to default as a means of escaping years of mortgage payments which earned them no equity.

Thus, the chances of prior homeowners having suffered wrongful foreclosures due to lender conduct are not good, though not impossible. The difference between an unlawful foreclosure and a homeowner who simply feels their foreclosure was wrong is the factor which will keep Yvanova from spurring a flood of wrongful foreclosure suits.

California’s Homeowner Bill of Rights, which became law on January 1, 2013, specifies certain behaviors which may constitute a wrongful foreclosure. To be guilty of a wrongful foreclosure under the Homeowner Bill of Rights, a mortgage holder needs to:

  • commit prohibited dual-tracking, or simultaneously process a mortgage modification and a foreclosure action [Calif. Civil Code §2923.18];
  • improperly process foreclosure documents, referred to as robo-signing [CC §2923.17]; or
  • appoint more than one representative or contact to each homeowner. [CC §2923.7]

Mortgage holders, lenders and other servicers who commit these violations relevant to a foreclosure are liable for up to $50,000 to the injured homeowner. [CC §2924.19]

Related: FARM:  California homeowners: Know your rights

The Homeowner Bill of Rights is only in effect until January 1, 2018. Also, Yvanova does not establish any statute of limitations for wrongful foreclosure suits. If a statute of limitations is set with a short span, such as four years, the majority of foreclosed upon homeowners retain no legal benefit at all.

California foreclosures today

California’s foreclosure rate has since recovered after the Great Recession, with only 0.4% of homes in any stage of foreclosure at the end of 2015. This means Yvanova’s pertinence to foreclosures today is mostly retroactive.

On the other side of the coin, taking steps to avoid a wrongful foreclosure by unlawful assignment of a trust deed is still critical for mortgage loan brokers (MLBs) arranging investments today. MLBs need to ensure they are performing their due diligence obligations to trust deed investors and property owners when considering assignment of a trust deed note by properly documenting defaults and other relevant defects before assigning the note and trust deed. For example, MLBs need to:

  • review all documentation throughout the mortgage modification and foreclosure processes to ensure there are no gaps or incorrect information; and
  • ensure any mortgage modification requests have been resolved before pursuing a sale of the encumbered property.

Thorough documentation of the property owner’s financial standing – creditworthiness for the mortgage – and the trust deed’s ownership (assignments) can avoid situations leading to wrongful foreclosure suits in the first place.