David and Mary Ellen Wolf were several payments behind on their home mortgage and knew that foreclosure loomed.
They were puzzled, though, when a foreclosure notice came early in 2011 from Wells Fargo because they hadn’t done business with that bank.
They asked their West University neighbor, lawyer W. Craft Hughes, for help. After poring over mortgage records, Hughes came to the conclusion that neither Wells Fargo nor its mortgage servicer, Carrington Mortgage Services, had legal claim to the note on the house or the right to foreclose.
A state district court jury in Harris County agreed last month and awarded the Wolfs $5.4 million after a four-day trial.
“It’s very unusual,” said Linda E. Fisher, professor of law at Seton Hall Law School who has testified before Congress on the effect of mortgage fraud on consumers. “Cases like this don’t usually get in front of a jury.”
The situation has its roots in practices that evolved in the years leading to the Great Recession that began in 2007. Wall Street investment houses were eager to generate mortgage-securitized trusts – financial instruments created by bundling thousands of mortgages and selling shares to investors who expected to profit from the combined monthly mortgage payments.
That’s how the Wolfs’ loan, which they originally got through the First Community Credit Union in late 2000, eventually became part of the Wells Fargo and Carrington portfolio.
To deal with the paperwork involved with securitized trusts, many banks set up a process that came to be called robo-signing – high-volume approval of mortgage transfer documents by employees who didn’t review details and missed troubled mortgages. Homeowners have had little success in court with arguments that robo-signing made loans unenforceable through foreclosure.
But the Wolfs took a different route.
Hughes argued that when Wells Fargo retroactively attached the Wolfs’ mortgage to a securitized trust that was closed and sold to investors three years earlier, the bank violated a Texas law that prohibits fraudulent real estate filings. The jury agreed, although State District Judge Mike Engelhart hasn’t formally entered the verdict, and the bank and mortgage company haven’t said whether they’ll appeal.
The Wolfs discussed the jury’s decision recently under the portico of the residence at the center of the case, a 1950s ranch-style house on Buffalo Speedway.
It’s on the market for $850,000, and neither the couple nor their lawyer knows who legally owns it.
“That’s a big question mark,” said Hughes. The jury found that neither Wells Fargo nor Carrington owns the mortgage note. But the jury also determined the Wolfs owe $655,000 on the note they signed in 2006.
Wells Fargo and Carrington declined to comment on the case.
During the trial, Wells Fargo argued the timing of its filings did not make them invalid. Ownership of a deed is created when the promissory note is transferred to a trustee, not when change of ownership is recorded at the county clerk’s office, Wells Fargo’s lawyers argued in court filings.
The Carrington Trust was created in 2006. Wells Fargo didn’t file the Wolfs’ transfer documents until 2009.
Wells Fargo also argued the Wolfs do not have legal standing to contest whether their note and deed of trust were handled correctly under the trusts’ pooling and servicing agreements. The mortgage industry has used that argument successfully in foreclosure cases across the country.
A party alleging bank fraud must prove that someone suffered a loss, said David Kwok, assistant professor at the University of Houston Law Center. But homeowners are typically in the background and aren’t involved in buying or selling mortgages, transferring documents into trust agreements or creating mortgage-backed securities. The banks, brokers and transfer agents that do that work are the ones who can claim damages.
But, he added, the Wolfs’ case is intriguing because of the way the homeowners used the Texas statute.
The Office of Inspector General for the U.S. Department of Housing and Urban Development criticized Wells Fargo in 2012 for failing to establish effective controls over its foreclosure process. The agency’s report studied the nation’s five largest Federal Housing Administration mortgage servicers.
The inspector general found that Wells Fargo employees routinely certified they had personal knowledge of the content of documents yet didn’t have the underlying records or verify their accuracy. Some signed as many as 600 documents each day – the practice that came to be called robo-signing.
‘Behind the scenes’
“The law allows the banks to do whatever the hell they want behind the scenes,” said Hughes. “And when homeowners sue, the courts say that the homeowners don’t even have standing to object to the foreclosures if they’re bought by mortgage-backed security trusts.”
But this time, the Wolfs could stop the foreclosure – and potentially receive millions of dollars in damages if the jury verdict stands – because of the Texas law that prevents fraudulent filing of documents involving real estate.
Dana Karni, a consumer rights lawyer in Houston, said that lenders, as well as companies that buy debt at a discount. then try to collect it, may view occasional legal judgments as a business expense unless juries award millions of dollars or more.
‘An M or a B’
“When a bank gets hit in the gut, the only way they really feel it is when they’re paying out damages that start with an M or a B,” Karni said.
Hughes filed the Wolf case as a class action on behalf of about 4,000 Texans, but it was dismissed on a procedural issue over the timing of some claims. He is hoping to resurrect the class claim on behalf of Texans he says have faced similar foreclosures.
The Wolfs bought their home in the heart of West University in 2000 for $283,150. Six years later, they refinanced their mortgage for $400,000.
David Wolf was chief technology officer for a construction company in 2009 when he got word, along with hundreds of other employees, that funding was drying up and he no longer had a job. By 2010, the Wolfs were only making partial payments and by the end of that year, they had stopped paying entirely because he hadn’t found a new job.
A representative from Carrington told them that with the job loss and mounting bills, they would be good candidates for a federal program to help struggling homeowners. Shortly after they submitted the affidavits and other documents. However, they were served with the foreclosure notice. By that time their $400,000 loan had increased to $500,000.
The Wolfs tried to sell their house for $590,000 and received a couple of offers, but the sales didn’t close. They also wrote a letter to Wells Fargo in 2012 offering to pay their $2,500 monthly mortgage into an escrow account until the property’s ownership is settled. The Wolfs said they never got a reply to the offer.