One of the most flagrant abuses uncovered in the foreclosure fraud investigation involves banks foreclosing on the homes of people serving in the military. Laws specifically protect active duty service members against lenders who would take advantage of their absence by foreclosing while they are away on active duty. The law does not completely prevent such foreclosures, but requires courts to take the military service into account in deciding whether to order a foreclosure. Yet major lenders in recent years have routinely foreclosed on active duty service members without disclosing the borrower’s military status to the courts as the law requires. In some cases, lenders simply didn’t check whether the borrower was on active duty. In others, lenders knew the borrower was on active duty but filed false court papers asserting the opposite. In the first major settlements in this issue, Bank of America will pay $20 million and Morgan Stanley, $2 million for improper foreclosures between 2006 and 2009. Military reservists called up to active duty are more likely to fall behind on their mortgage payments because of the lower income they receive while in military service, in comparison to their civilian salaries. On the other hand, at least a few of the foreclosures in question were undertaken against service members who were current on their mortgage payments.
Update: Washington state banking regulators closed First Heritage Bank of Snohomish, which had 5 locations and $163 million in deposits. The failed bank had financed several failed real estate development projects with loans that were large relative to the size of the bank. It had been in business for 30 years. Columbia State Bank is taking over the deposits and purchasing the assets, paying a 0.75 percent premium for the deposits.