Meaningful reform, however, seems like a long-shot. Any potential legislation would require a bold and detailed proposal from a member of the House Economic and Business Development Committee, most of whom are new to the panel.
Rep. Angela Williams, D-Denver, and other members of the committee would not comment on the specifics of unfinished bills; still, members of both political parties said they recognized the importance of addressing the peculiarities of Colorado property law.
Banks seeking to foreclosure on a home in Colorado are not required to produce paperwork proving they made the loan on the property. Instead, all they need is a lawyer’s certification.
“None of the bills I’m sponsoring have been finalized,” Williams said. “But (foreclosure law) is a big issue … and we’ll be working closely with the stakeholders and the banks to come to a consensus on how to keep Coloradans in their homes.”
Last week, Massachusetts’ highest court ruled against Wells Fargo and US Bancorp, saying the banks failed to prove they held mortgages on properties at the time of foreclosure. Industry professionals expect rulings in a deluge of similar cases from courts around the country this year.
One Colorado Springs lawyer isn’t content to sit by as the judicial system sifts through the foreclosure morass.
Stephen Brunette of Gasper Law Group has developed a proposal for legislative change that he’ll be pushing with lawmakers in coming weeks.
Under Colorado’s current laws, “you have two judges in the same state that might rule in different ways,” Brunette said. “This can be a $100,000 legal fight for homeowners, and that’s just not fair.”
Brunette said he was going to lobby state Sen. John Morse, D-Colorado Springs, the El Paso County Bar Association and the Colorado Attorney General’s Office. “I’m going to take it around the state to see what kind of interest it generates,” he said. “I’d like to see some grassroots interest to really get this going.”
Brunette provided a copy of his proposal to the Business Journal this week. His plan strikes at a number of Colorado provisions that he said leaves homeowners vulnerable to questionable foreclosure practices.
Brunette’s primary concern is that Colorado law doesn’t require a bank to provide evidence of its name on the note or deed of trust; it is only required to have an attorney certify such a claim.
“This provision allows a foreclosure to move forward based solely on the claim of an attorney saying their client holds the debt,” Brunette said. “The law allows the certification to be a complete substitute for any evidence whatsoever.”
Rep. Spencer Swalm, R-Centennial, a member of the House business development committee, said this kind of ambiguity should not be tolerated.
“If banks are taking back properties where there is no clear title, that undermines the rule of law,” he said. “I’ll be taking a close look at this, and if it’s a problem, then we need to make sure that big institutions aren’t getting a free pass.”
Under Brunette’s proposal, a bank would have to produce documented evidence identifying it as the legal holder of the note before a foreclosure can move forward.
Some are skeptical that the matter can be managed by the legislature.
Michael Valdez, director of legislative relations for the Colorado Bar Association, said the proliferation of mortgage-backed securities trading might make legislative reform impossible at this point.
“Because of the secondary market, it could be extremely difficult for the banks to come up with the original documents,” he said. “I understand the motivation in wanting this, but it’s turned into an issue of tremendous complexity.”
A recent Congressional Oversight Panel report confirms the difficulties any potential legislation could face:
“The rapid growth of mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership. …Under the traditional mortgage model, a homeowner borrowed money from a single bank and then paid back the same bank. … Nowadays, a single mortgage loan may be sold dozens of times between various banks across the country.”
That’s not a strong enough argument for Brunette.
“I don’t care what the securities industry did with these things; people’s homes are not the same as illusory promises made between banks,” he said. “It’s a mad rush to foreclose on these properties, which is fine if they can prove they have the right to do it, but Colorado law allows them to foreclose without proof.”
“This isn’t a radical idea,” Brunette said. “I just want to get it back to basics. … This is about the integrity of property records in the state of Colorado.”
The chairman of the House business development panel, Larry Liston, R-Colorado Springs, said there are arguments to be made against increasing the stringency of such requirements.
“If we make the foreclosure process so onerous against the lenders that people can absolve themselves of responsibility, that will have unintended consequences down the road,” he said. “It might have a short-term benefit for people with mortgage problems, but a few years down the road it might become even more difficult for qualified borrowers to get a loan.”
Another of Brunette’s proposals would broaden the scope of the so-called Rule 120 proceeding, in which a judge or magistrate certifies a foreclosure sale.
At present, “the court doesn’t get into evidentiary issues, they don’t require proof,” he said. “If a homeowner wanted to contest the bank’s right to a foreclosure sale, (the Rule 120 proceeding) is only a hearing — they would have to hire a lawyer and file a separate lawsuit, which is beyond the means of most people.”
Brunette said Colorado law firms and banks lobbied hard in recent years to reduce foreclosure requirements.
“It should be the creditor’s responsibility to keep the borrower and court informed as to who owns the note, not the borrower’s or court’s responsibility to ferret out the truth,” he said.
Unlike every other state, banks in Colorado are not required to go through a court to proceed with a foreclosure. Instead, foreclosure documents are certified by paralegals, which some see as the Colorado version of the “robo-signing” problems that cropped up elsewhere.
Rep. Roger Wilson, D-Glenwood, another member of the House panel, had harsh words for the state’s processing techniques.
“These sound like assembly-line foreclosures,” he said. “We need to make sure that the separation of interests is there. This is definitely something I want to take a look at.”
Wilson said he met recently with local Realtor groups and that the issue is on his radar screen.
It is on many others’ as well.
In a recent article on thestreet.com, real estate analyst Mark Hanson predicted the situation will worsen:
“The litigation phase of the foreclosure crisis is going to get out of control. Homeowners, originators, underwriters, trustees, servicers, title companies, mortgage interest firms and everybody else involved in the origination, funding, securitization, servicing and insurance spaces will be suing everybody else.
“Multiple, big cases will come from state Attorney Generals, and class action suits will be announced daily.”
The Colorado Attorney General’s office is already involved in a multi-state investigation into foreclosure practices, and anecdotal evidence suggests that it might be years before the crisis is resolved.
Brunette represents a number of clients who might be considered “fringe foreclosure cases,” but have the kind of infuriating details the national media and consumer-rights activists would love to drum up.