No judge needed for banks to foreclose in state

Two years before dementia forced her to move into a nursing care facility, Dorothy Halstien obtained a $73,000 loan from Washington Mutual Inc. secured by her house on Whidbey Island.

In 2007, a year after she moved, the bank hired a trustee, Quality Loan Service Corp. of Washington, to foreclose. Halstien’s home was sold for $83,000, even though her guardian had arranged a sale for about $150,000 more. The party that bought the house out of foreclosure later sold it for $235,000, according to a suit filed in state court in Seattle.

Halstien’s case illustrates what some homeowner advocates call a conflict of interest in states where trustees, hired by mortgage lenders and servicers rather than the courts, shepherd homes through the foreclosure process.

The stakes are huge: more than two-thirds of foreclosures occur in the 27 states like Washington where there’s no mandatory court supervision, according to Christopher Dodd, the chairman of the Senate Committee on Banking, Housing and Urban Affairs. Trustees get paid by the loans they process and “the quicker they do it, the more business they get,” said Fred Corbit, an attorney at the Northwest Justice Project in Seattle who represents the Halstien estate. “Quality’s whole business model was pleasing these banks.”

The guardian sued, alleging that Quality wasn’t impartial as called for by Washington law, which requires that trustees act in good faith, and that it had filed a falsely notarized notice of foreclosure.

A jury in January awarded the estate of Halstien, who died in 2008, the difference between the foreclosure price and the final sale price, finding Quality had violated the state consumer-protection law. King County Superior Court Judge Barbara Mack added about $78,000 in interest and attorney fees in March.

Quality Loan has appealed.

All 50 states are investigating whether banks and loan servicers used false documents and signatures to justify hundreds of thousands of foreclosures. Attorneys general in non- judicial states, including Arizona, Texas and Washington, are conducting independent probes of mortgage foreclosure practices and examining the documents used to secure foreclosures.

Washington will have about 40,000 foreclosures this year, up from 31,000 in 2009, according to Statewide Poverty Action Network in Seattle. The state is ranked at 17th nationwide, said Danielle Friedman of the network, an advocacy group for the state’s poor.

“A handful of trustees do the vast majority of the foreclosures” in Washington, said Jim Sugarman, assistant attorney general. About 60 trustees operate in Washington, he said. Most are affiliated with law firms. Trustees receive a set amount of money to handle a foreclosure based on the difficulty of the transaction, he said.

The trustee system was set up as a “more efficient and less costly alternative for both the borrowers and the lenders,” said Lance Olsen, a Bellevue attorney. In a judicial foreclosure state, the borrower “could end up with half of the default owed in attorneys’ fees in a few months,” said Olsen, who represents Northwest Trustee Services in Bellevue.

Opponents of the system “want the outside independent review of a judge,” he said. “That’s a valid request, but it’s an expensive one for a review that’s most often not required.”

Borrowers in non-judicial states can still sue to stop a foreclosure, he said.

“The borrower still gets all of his rights, such as notice,” he said. “There is plenty of opportunity to reinstate and they can reinstate more cheaply.”

There’s no conflict of interest in lenders’ hiring the trustees, he said.

“Even if we’re retained by a lender, we can’t turn a blind eye to injustice, nor would we want to,” Olsen said.

Fees are often about $500 to $750 a foreclosure, he said.

“If you’re not acting in accordance with the statute, you’re going to be sued,” he said.

The Halstein case shows fees can add up, the estate’s lawyer said. Quality Loan received $1.9 million in fees to handle foreclosures for Washington Mutual in Oregon and Washington from Jan. 4, 2004, to April 30, 2008, covering 805 foreclosures, he said, citing evidence produced before trial. While the banks hire the trustees, “it’s actually the borrower who pays,” he said. The fees get added to the cost of the foreclosure.

“WaMu was never in jeopardy of not being paid in full because Ms. Halstien had no other home loans and WaMu’s appraiser concluded on Jan. 18, 2008, that the house was worth $320,000,” the estate said in the trial brief. The final sale price was about one-third the tax-assessed value, according to the suit.