Authority of Servicer to Settle
My friend and colleague Matt Weidner just posted an eye-opening blog describing how a servicer had settled a foreclosure lawsuit by agreeing to waive any deficiency, yet the plaintiff’s attorney argued that Fannie Mae, as the owner of the Note, could still pursue the deficiency if it so chose. It’s a shell game, really – making a settlement with a homeowner, then saying, “ha, ha – we offered you something in the settlement, but now you get nothing.”
As Matt explained, the judge was understandably upset. This is, quite frankly, one of the reasons I love arguing that courts should do everything in their power to limit the ability of servicers to prosecute foreclosure cases. There are just so many problems here. Does the servicer actually have the authority to foreclose? How do we know? If we settle, is a written settlement agreement with the servicer binding?
Read the transcript Matt posted. This is why judges shouldn’t allow foreclosure complaints to be verified by servicers, much less foreclosure lawsuits to be prosecuted by servicers.
This sounds problematic, particularly when you think about whether the servicer actually has authority to settle a case. Frankly, it is problematic. However, there is a simple solution. If you’re a homeowner and you settle a case with a deficiency waiver, make sure the Court signs an Order specifying “Plaintiff is not entitled to a deficiency from Defendants,” or words to that effect. If that order is signed (in a final Order or a Final Judgment of Foreclosure), I believe it prevents anyone from taking the position, later on, that the owner of the Note can still pursue a deficiency. After all, the Court has already ruled there is no entitlement to a deficiency, so that ruling would be binding on the parties in the future, even years later. And that Order is recorded in the Official Records of that county for everyone to see.
But what if the company pursuing the deficiency is not the plaintiff, you ask? Could the “plaintiff” be barred from pursuing a deficiency but some other company, like the owner, still be able to do so? I think not. In my view, a signed court Order, along the lines I described, precludes this. The legal doctrine at play is called res judicata. It applies not only to the parties in a lawsuit, but to those in privy with the parties as well. Hence, if a servicer is the plaintiff and the court enters an Order that there is no deficiency, but the owner tries to claim a deficiency at a later point in time, I think the Order which says there is no deficiency would be binding on the owner as well as the servicer. The owner can’t point to an Order in a case involving the servicer – it’s own agent – and argue that Order does not bind the owner as well. In other words, you, as the homeowner, could point to the Order and say “the court has already ruled the plaintiff is not entitled to a deficiency, and that ruling is binding.”
What if there is not an Order? That’s where it becomes more troubling. If all the homeowner has is a written settlement agreement, I’d be concerned that may not be binding on the owner of the Note. There are arguments it is, of course, but it’s not a path down which I’d want to travel. An Order is much better. In fact, that’s why, when I settle foreclosure cases for clients with a deficiency waiver, I make sure there is a signed court Order which makes it clear the Plaintiff is not entitled to a deficiency. Getting such Orders for my clients helps me sleep better at night.
Mark Stopa
www.stayinmyhome.com
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