Minnesota family faces foreclosure after fouled up mortgage modification

ST. PAUL

At one point in 2008, Tim and Rochelle Falkenberg thought they were getting a chance to turn around the foreclosure process on their Lakeville home.

More than two years later, the Falkenbergs are still wondering what happened to the deal they worked out on paper with their lender.

"They had jumped through every hoop on earth for a year," said their attorney, Nicholas Slade.

The Falkenbergs recently filed suit against Bank of America Corp., the company that bought their original lender -- Countrywide Home Loans Inc. -- in 2008. That was the same year the couple signed up for a loan modification program sponsored by Fannie Mae and administered by Countrywide, as they hoped to rescue their home from foreclosure.

Slade thinks it's possible that after Bank of America completed the deal for Countrywide in July 2008, the Falkenbergs' loan modification agreement "sort of fell through the cracks."

Whatever the reason, the Falkenbergs' lawsuit says the foul-up cost them their home.

The Falkenbergs' case isn't a carbon copy of other high-profile lawsuits filed across the country, which claim that banks started foreclosure proceedings without having the mortgage and other required paperwork in hand. They claim they had a contract for a loan modification with their lender -- but Bank of America didn't follow through.

An attorney for Bank of America did not return a call for comment.

The Falkenbergs, who have a pizza business, had taken out a

mortgage from Countrywide in 2003 on their three-bedroom, two-bath home. But when the economy worsened a few years later, they needed to modify that deal.

They signed a contract with Countrywide for a loan modification plan and sent a $2,300 payment in May 2008 to get things started.

But the very next month, Countrywide proceeded to foreclose on their house at a sheriff's sale. Their lawsuit says that at the time of the sale, they were not in default on the mortgage.

Countrywide placed the winning bid for their home.

Facing eviction, the Falkenbergs sought out Slade. Their case is now moving through the federal court system.

It wasn't until several months after the sheriff's sale that the Falkenbergs were informed Countrywide had not accepted their $2,300 payment, their lawsuit says.

Dakota County property records list the Federal National Mortgage Association (Fannie Mae) as the owner of the home, which is currently valued at $188,000.

The Falkenbergs are still in their home and are hoping the lawsuit's outcome will put their name back on the title to the property and allow them to stay there.

Their case, one of at least a handful filed in Minnesota on similar foreclosure issues, is a sign that more homeowners are choosing a legal route to stall or reverse a foreclosure.

Minnesota is not one of the states where foreclosure requires a trip before a judge. Instead, the process includes public advertisement and a sale conducted by the county sheriff -- but no automatic involvement with the courts.

"Certainly it's a much more streamlined process for the lenders," said Bryan Battina, another Twin Cities attorney who has represented homeowners facing foreclosure. He says there could be more lawsuits from borrowers who tried to modify their mortgages, especially because some lenders have been hesitant to put anything in writing for loan modification programs.

A scary landscape

Minnesota's foreclosure rate remains near historic highs, and people who deal with homeowners in financial trouble say the need for credit counseling hasn't diminished.

"Our numbers are looking like they will be higher than 2009," said Ed Nelson, a spokesman for the Minnesota Home Ownership Center, a nonprofit group that works to help residents stay in their homes. "We may be rivaling our numbers of 2008, which was our record year," Nelson said.

A rising number of people coming to the Center for advice previously had paid "mortgage consultants" -- whom Nelson refers to as vultures -- only to find out later they'd been taken for a ride.

The recent foreclosure moratoriums by some lenders did help, Nelson said, but "then they went right back on doing business as they have."

But for most of the struggling homeowners who show up at the Home Ownership Center, mishandled mortgage paperwork typically isn't the problem, Nelson said. More often, he said, clients need help because they fell behind on payments after becoming unemployed or underemployed. And they don't know what their options are when foreclosure proceedings start.

"The people struggling now have never needed help on a foreclosure before. They think mortgage help is for other people," Nelson said.

He fears scammers will try to use the paperwork mess to snare more victims facing foreclosure.

In some "mortgage consulting" scams, troubled homeowners pay $2,500 or more to a firm that says it will negotiate for you with a bank or -- another trick -- say they'll go through your paperwork, find a mistake "and then the bank won't own your house," Nelson said. But that's a lie, he said. "Even if you find an error in the paperwork, it doesn't negate the outstanding mortgage debt," he said. Homeowners who get hooked up with such firms find themselves several more months behind in payments and out more money.

"It's not a good landscape out there for struggling homeowners," he said.

Attorneys and others tied to the local real estate market say it will take time to see how big the mortgage paperwork problem actually is in Minnesota. In the meantime, the uncertainty just bogs down a real estate recovery that has had trouble gaining momentum.

"All of this stuff is just slowing the process down," said George Karvel, a business professor at the University of St. Thomas who specializes in real estate and finance. In most cases, challenges about bogus paperwork are unlikely to save someone's house, he said.

Karvel said it's important for banks to follow legal procedures. But at some point, he says, lenders and the market will have to reckon with a lot of bad loans. Ultimately though, he says, all the current paperwork problems do is "prolong the very painful process that we as a country have to go through in adjusting to all these losses."

There remain a large number of homes with delinquent mortgages that could be foreclosed, but banks haven't been taking action, he said. With the volume of foreclosures still so high, banks do see a benefit in not having them sit vacant, as homeowners are there to keep up the property.

But once the banks get around to foreclosing, they'll recognize those losses on their balance sheets, and "nobody knows the magnitude of the problem," Karvel said. "We don't know if the banks actually recognized those losses, how many more banks would go belly-up."

And the effect of the mortgage mess could be central to what's hampering an economic recovery. In a recent report, the International Monetary Fund found that the persistently high unemployment in the U.S. stems largely from foreclosures and homeowners stuck with property worth less than what they owe on it.

Karvel believes the state and the nation will have to find a way to shake the psychological underpinnings of the recession before things turn around in the housing market and the broader economy.

As baby boomers age, they're no longer driving demand for houses, and with so many Americans already owning homes, there doesn't seem to be pent-up demand to fuel a rebirth in the housing market.

"Everyone who could qualify, and even those who couldn't, have a loan and a house," he said.

Distributed by McClatchy-Tribune Information Services.