Update 2 May 2011:
Virginia Lawyers Weekly notes:
Default judgment. The death penalty for a civil defendant. The ultimate sanction for bad conduct in litigation. Used only when a judge is really fed up with “egregious misconduct” or when a judge is really hot about how litigants – or lawyers – have handled themselves.
A Charlottesville federal judge last month found a defendant mortgage lender had withheld evidence and made false claims in a lawsuit over alleged fraud in a home loan. He reached the boiling point and hit the defendant with default judgment for “misdeeds and misrepresentations.”
Post written not by Jim Duncan; the author wishes anonymity. Some is inside-baseball stuff specific to the lending world, but the long and short is – if you want justice, be prepared to take ownership for ensuring justice is done. What follows may or may not be indicative of widespread abuses in the lending world, but it is a local-to-Charlottesville example of one instance of poor lending practices. There is much more information to be gleaned and more insight into the personalities, the names, the motivations – in the Default Judgement linked at the bottom of this post; I encourage you to read it for yourself. There is more to this story. An investigative reporter might get a story or two out of this.
On Thomas Jefferson’s Birthday, April 13th, 2011, a Federal District Court judge issued a default judgment of fraud against GMAC. And, few know, until now.¨This tale may seem surreal, bizarre or even idiotic. But, it is all true. In 2010, a lawsuit was filed in Circuit Court after the homeowners, Donald and Melissa Scott (and plaintiffs in this lawsuit) had failed in their attempt to refinance their mortgage on their home in Palmyra. It seemed logical enough – they fit the guidelines for a program call Open Access, a Home Affordable Refinance Program (HARP) through Freddie Mac. HARP allows homeowners to refinance, even if their loan-to-value was higher than traditional guidelines, because preventing future foreclosures is seen to be valuable to our recovering economy. ”
“So, the homeowners pursued a refinance to lower their interest rate and payments, but hit a snag. Their broker, through a different national lender, told them that they had an insured mortgage. But, claimed the homeowners, we do not have an insured loan, we don’t pay any monthly mortgage insurance premium, nor did we sign any documents indicating mortgage insurance was required at the time of the current loan’s origination. The broker moved the loan forward and checked with Freddie Mac again. After numerous attempts to prove otherwise, including with GMAC, it was determined that the loan had LPMI. For those uninitiated, LPMI means Lender Paid Mortgage Insurance, or a higher interest rate in lieu of monthly MI payments. Some lenders chose to offer LPMI in the past (and today) because MI historically was not tax deductible until several years ago and according to IRS regs it becomes non-tax deductible if Federal AGI exceeds $109,000. The issue with LPMI, is that those loans are specifically not eligible for HARP refinance mortgages.”
LPMI is neither good nor bad in and of itself, but it must be disclosed by lenders and their loan officers. In this case, GMAC employed Karen Morris, who originated this loan. Ms. Morris failed to disclose that LPMI was attached to the loan and amazingly GMAC never caught nor subsequently disclosed this glaring oversight in closing documents.
Fast forward into the year 2010, noting around 100 filings prior and subsequent to the case moving to Federal court, all clearly showing a lack of disclosure to the homeowners that their loan had LPMI. For example, their HUD1 settlement statement was marked “uninsured Conventional.” At numerous points during the year, it would seem that GMAC would “see the light.” Logic would indicate the violations of HPA ” Homeowners Protections Act of 1998″ would nudge the lender to solve this dilemma by creating a solution. Those solutions could have included a principal reduction to their current balance, down to a number that would have allowed a traditional refinance or a refinance by GMAC itself, which would be placed in their portfolio, instead of being resold to Freddie Mac.Â The lender chose to litigate and bully the homeowners, while continually failing to provide requested material in discovery to the plaintiff’s attorney.
Moving into 2011, GMAC continued on their path to neither produce documents nor negotiate in good faith with the homeowners towards a solution. After stunned parties learned that the judge had issued a default judgment two weeks prior to jury trial, the only remaining items to be determined by the jury were damages.
So, let’s see you’ve been called as a juror in Federal court. You are not excluded by either side due to biases or other strikes. In opening comments by the plaintiff’s attorney, you are told that the judge has found the defendant in default judgment of fraud. You are then told you will decide how much the lender will pay the plaintiffs for a year and half of agony, time, money and frustration. Yeah, you’re right GMAC settled out of court prior to any jury hearing these facts. Of course, it’s all sealed. Well, not all sealed. The fraud is public. <
Read the Default Judgement yourself (PDF)
* LPMI = Lender Paid Mortgage Insurance
AGI =Adjusted Gross Income
MI = Mortgage Insurance (required typically on conventional loans that exceed 80% loan to value)