The rights and responsibilities of lenders in dealing with upside-down loans are governed by State as well as Federal law. In all cases, lenders must act “in good faith and with fair dealing” and comply with the law. However, in at least two recent actions in California, Wells Fargo appears to indicate that they consider themselves above the law and can do whatever they choose:
1) A Buyer and Seller entered a Short Sale Agreement to which Wells Fargo consented as long as they completed the sale by May 31st. Everything went well and the Buyer obtained his financing by mid-May and was ready to close escrow. However, on May 11th, Wells Fargo breached their own short sale consent and foreclosed. They admitted this was a mistake and, even though a fix was easy because they ended up with the property, they have refused. Their only suggestion was that the Buyer could attempt to buy it when Wells Fargo puts it back on the market. It apparently doesn’t matter to Wells Fargo that the Buyer loses the money he spent pursuing the purchase; the Agent loses the sale commission they earned; and the Seller suffers greater credit damage with a foreclosure on their record. And of course, Wells Fargo’s own investors will likely lose more in an REO re-sale. The Buyer, Seller, and Agent have now filed suit against Wells Fargo to force them to rescind the foreclosure and honor the Short Sale Agreement and the title to the property has been clouded with a Notice of Pending Action (“Lis Pendens”) stopping any re-sale. We’ll keep you informed as this progresses.
2. In another more incredible action, Wells Fargo has actually filed a lawsuit against a Borrower without even foreclosing! In California (and most States), a lender who makes a loan which is secured by a lien against the real estate must foreclose first before they have any right to pursue any claim against a borrower for a deficiency. This is called the “Security First Rule”. In this case, Wells Fargo made a home equity loan to a property owner which was secured with a Deed of Trust against the property. The owner subsequently defaulted on the loan. But, instead of foreclosing, Wells Fargo filed a lawsuit against the borrower, failed to identify in the suit that the loan was secured with the real estate, and instead have treated this like an unsecured personal loan. When confronted with this breach of California’s real estate laws, Wells Fargo (through their attorney) has refused to dismiss the lawsuit and comply with the law. While this reaction demonstrates a very troubling arrogance, it is equally troubling that their attorneys would knowingly violate California law. Sadly, in this case, the property owner cannot afford to challenge Wells Fargo’s actions in Court.
There is no question that these are tough times for lenders as well as borrowers. The lenders created a house of cards by making loans that should never have been made to borrowers who could never have afforded them if they were priced according to economic reality. It could only have worked if real estate prices continued to climb forever. But the real estate economy never works that way. Booms are always followed by busts usually every 6-10 years. The lenders knew this even if the gullible borrowers did not.
This reality doesn’t excuse borrowers from defaulting even if it was foreseeable. The laws on breach of contract are clear… don’t pay and you’ll be foreclosed. But the borrowers distress certainly doesn’t give the lenders such as Wells Fargo any legal right to disregard the law simply because they think the borrower can’t afford to stop them. It is exactly this arrogance that has caused Americans to attack Wall Street for its greed and lack of concern for the damage caused to its investors. In the lending industry, Countrywide paved the way for the economy’s collapse by promoting subprime loans. Wells Fargo in contrast acted responsibly and maintained their reputation for sound lending. Now however, Wells Fargo’s apparent lack of concern for the law may undermine not only its reputation and further damage its borrowers, but may also promote a broader distrust of the lending industry at a time when trust and credibility are needed most.
We’ll keep you posted as these and other similar cases move forward. Meanwhile, if you’ve been challenged with a wrongful foreclosure or if you have specific questions about your liability, short sales, foreclosure, or any legal issues, feel free to contact us at firstname.lastname@example.org. We offer a $200 flat fee consultation to evaluate your liabilities and strategize a resolution. This can be done in person or by phone. If interested, please call us at 916-966-2260.