How Banks Violate the Duty of Good Faith to Homeowners in Foreclosure Situations

When homeowners fall into foreclosure and the bank or trustee has a public auction of the home scheduled to satisfy the debt, there are various duties that must be met for the sale to be valid. One that is not very well known or publicized, and one that banks may violate repeatedly, is the duty to exercise good faith and diligence in conducting the sheriff sale or trustee sale of the borrowers' property.

This means that lenders in a judicial foreclosure state or trustees in a nonjudicial foreclosure state must do their best to protect the homeowners' rights under the loan documents. Borrowers have a number of such rights that lenders need to observe in order for a sale to be valid. If any are violated, the homeowners may be able to have the auction rescinded, delay the eviction, or sue the lender for damages.

There are several main duties that mortgage companies and trustees have towards homeowners. These are as follows:

1. The lender must remain at arm's length with the purchaser at the auction,
2. The lender must conduct the sheriff or trustee's sale fairly,
3. The lender must make a reasonable effort to get a fair market price for the sale of the property, and
4. The lender must limit expenses of the auction to a reasonable amount.

If any of these duties to the borrowers are not met, the homeowners may have grounds to sue the lender for damages or to have the sale reversed.

However, despite the duties the lender has towards the homeowner and despite the potential penalties for not meeting these obligations, lenders routinely fail to meet them. Banks and trustees have little incentive to advertise the auction of a home in any but the most cursory manner, as they know there will be few bidders at the auction. But this may be a violation of the duty to obtain a fair price.

Some courts have held banks responsible for low bid prices at auctions, especially if the lender is the sole bidder at the sheriff sale and then turns around and resells the property at a higher price soon after. If the lender buys the property for cheap with no equity returned to the borrowers, and then sells the property to a third party and takes the profits for itself, the former owners may be able to sue for this difference.

Because banks often sell homes soon after the auction for more than they purchased the properties for at the public sale, this may indicate that they know they can get higher prices at foreclosure sales. But homeowners can not just let their lenders get away with stealing their equity. The banks force the sale of the home and then, despite having the duty to advertise the sale and obtain a fair price, just cover the unpaid mortgage and take higher profits later on.

While not every homeowner will be able to stop foreclosure, sell the home at a fair price on his own, or qualify for a loan modification or other solution, the courts have ruled that the banks have a duty to attempt to obtain a fair price in the forced sale of a home. When banks do not do this, as in 75-95% of auctions where the lender is the only bidder and only bids as little as possible, borrowers may want to examine how they can recoup the equity in their homes that the bank had a duty to attempt to obtain for them.