Judge in Los Angeles sides with homeowner

From Bob Egelko at the San Francisco Chronicle:

A bank is legally bound by its promise to try to work out a loan modification with a homeowner to avoid foreclosure, a state appeals court has ruled.

Thursday's decision by the Second District Court of Appeal in Los Angeles involved a homeowner who said she refrained from protecting her home in a Bankruptcy Court filing after the bank promised to negotiate new loan terms - then foreclosed and evicted her.

The court refused to undo the foreclosure but said the owner, Claudia Aceves, could sue the bank for fraud. Her lawyer, Nick Alden, said the ruling should also help financially distressed homeowners who make several months of reduced payments in reliance on a bank's promise to modify their mortgages.

"The homeowner has no choice but to work with the bank," Alden said. Typically in such cases, he said, the lender will reject the final payment as insufficient, declare the borrower unqualified for a loan, and foreclose.

This decision is potentially an important step in giving homeowners more rights in their dealings with banks. Not many years ago, the state of regulations and the housing market gave banks an incentive to avoid foreclosures. Now there is a perverse incentive to play a game of "bait and switch" with those struggling to stay in their homes. By dangling the prospect of reduced payments, the banks take in "partial" payments for a number of months. Then they deny the request for modification and demand full payment. Eviction follows, and the bank buys the property at 20-25 cents on the dollar. Let's hope that banksters begin to be held accountable for their crimes!