The Foreclosure Scandal: An Epidemic in the Making
Sunday, January 9, 2011 at 7:12PM Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
First Ally Financial (formerly GMAC) voluntarily shut down their foreclosures and evictions in 23 states, only to be followed by Bank of America of America and JP Morgan Chase. Bank of America has now announced that they have suspended their foreclosures in all 50 states! Numerous states have initiated investigations, high ranking politicians have demanded a federal investigation and/or foreclosure moratorium. One title company has refused to insure title to foreclosures involving Ally Financial. Courts are dismissing foreclosures due to faulty paperwork.
What is going on? What is the problem, why are they stopping their foreclosure process and what is going to happen to the foreclosures that are affected? How many lenders are going to be facing these problems? What about past foreclosures, can they be overturned? How is this going to impact foreclosure sales and home values?
Every day, the number of lenders involved increases, the scope of the problem increases, and the concerns mount.
Background to the Problem
Numerous lawsuits have sprung up around the country alleging foreclosure irregularities. In one such lawsuit against Ally, a deposition was taken of an employee who testified that he signed 10,000 foreclosure affidavits a month without reading or verifying all of the information contained in the affidavits. This practice is commonly referred to as “robosigning”. Other problems such as forgeries and notarization of documents not signed in front of the notary have been uncovered.
Once these problems became public, Ally voluntarily stopped foreclosures and evictions in 23 states.
Within a week Bank of America and JP Morgan Chase also announced their own suspensions of their foreclosures in these states and now Bank of America has suspended its foreclosures in all 50 states.
From an isolated problem to an epidemic
What started out as an Ally Financial (GMAC) problem has now become a BOA, Chase and PNC problem. All three have voluntarily halted foreclosures and evictions and/or have suspended foreclosure sales. It appears likely that more lenders will be joining this growing list. Moreover, the following states have issued moratoriums on foreclosures:
California (Ally and Chase)
Connecticut
Colorado (Ally)
Texas
The following states have initiated foreclosure investigations:
Colorado
Florida
Illinois
Iowa
Maryland
Massachusetts
North Carolina
Ohio
Texas
Bank of America
Citibank
HSBC
JP Morgan Chase
PNC
Wells Fargo
US Bank
The AFL-CIO has called for a national foreclosure moratorium. Numerous politicians, including the Speaker of the House, the Chairman of the House Committee on Oversight and Government Reform, the Senate Majority Leader and the chairman of the Senate Banking Committee have called for a federal investigation and/or moratorium on foreclosures.
Foreclosure irregularities have been uncovering with other lenders who have not yet suspended their foreclosures.
In a case in Florida involving OneWest(successor to IndyMac), the vice president for bankruptcy and foreclosure for OneWest testified that her group signed 24,000 documents a month without reading all of them. She testified they review about 10 percent of the documents and take about 30 seconds to review them. She stated that she has signing authority for Deutsche Bank and Bank of New York, among others.
In another Florida case, a judge threw out a US Bank foreclosure because they back-dated documents to show that they owned the mortgage at the time of the foreclosure and ruled that they cannot refile the foreclosure. This case should alarm every lender of the potentially deadly consequences of their actions.
In New York a foreclosure by Deutsche Bank has been challenged. Deutsche Bank represented to the court that it had the right to foreclose the mortgage based upon an assignment of mortgage it received; however, the signature of the person who assigned the mortgage to Deutsche Bank has shown up in other cases and it appears that at least 3 people signed the documents using this name. It also appears that the company assigning the mortgage to Deutsche Bank did not have any rights in the underlying property when the assignment was made.
In a case in Kentucky, Bank of New York Mellon submitted documentation to the court stating that it held the note underlying the property in a trust. The borrower then submitted documentation that the note, in fact, may be held in a different trust.
In another case in New York, the documentation supporting a foreclosure by Chase is being questioned when Chase finally admitted that their previous law firm had filed inaccurate documents to support the foreclosure and that they could not find the proper assignment.
In Florida on September 17, 2010, a judge dismissed 61 foreclosure cases. The lenders in these cases will need to start the foreclosure process all over for each case.
The Elephant in the Room
The real problem facing lenders may not be “robosigning” and the lack of verification in their foreclosure procedures. The real problem maybe that they can't verify the information.
Remember the concern over the system (Mortgage Electronic Recording system - “MERS) created by the lenders that allowed them to bypass the public recording system and may it impossible for debtors to know who held their loan? After an initial outcry, everything quieted down very quickly but that may quickly change.
The MERS system allowed the lenders to place the mortgage with MERS as a nominee. As assignment of the mortgage to MERS would appear in title. The transfer of the actual ownership or right to receive the mortgage payments was kept track of internally by MERS. No assignment of mortgage was recorded which allowed the lenders to avoid paying the costs of recording, public knowledge of the transfer and to speed up the transaction. Without creating such a system is is hard to imagine that they could sell securitized, mortgage derivatives. As a by-product of this system, the lenders and/or investors may not be able to prove legally what mortgage they own. They can't rely on the public records but their transfers were never publicly recorded.
If the lenders can't verify the foreclosure information necessary to foreclose and this blocks the foreclosure, what happens? One result would be that the debtor can live in the house for free. While a mortgage shows up in title, the lender can't foreclose it. If this occurs, who is going to ultimately bear the loss? Lawsuits will spring up over night. What will this do to our lenders, the investors and insurers? All of them are already weak, can they withstand another blow? There is already talk about the possible need for another bailout.
The potential fallout from the foreclosure scandal could be devastating to the real estate industry and the country as a whole.
How Does This Problem Impact Borrowers Currently in Default?
There are three possible consequences:
- The borrower in default is given more time to stay on the property but ultimately a foreclosure will occur;
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The lender cannot verify the information necessary to reinstitute a foreclosure and the borrower will never face a foreclosure;
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The admission of systemic flaws and fraud by lenders will encourage more litigation by debtors.
If a borrower has a mortgage that is in the foreclosure process or is facing an eviction after a foreclosure and their mortgage is one that is involved in the voluntary suspension, they will get more time. The mere fact that the process has been suspended does not mean that the lender cannot go forward or start the foreclosure over.
If a borrower is located in a state not subject to the voluntary foreclosure suspension or has a mortgage with a different lender, they are not directly affected by these voluntary foreclosure suspensions, although their lender may end up initiating their own foreclosure suspension in the future.
If a borrower is in a state that has initiated a foreclosure moratorium, their lender cannot continue or start a foreclosure if it is included in the foreclosure moratorium.
How Will This Impact Future Foreclosures
When major lenders have to admit that they took short cuts, the little trust that people have in them evaporates. People are already fuming mad and perceive that the large lenders have destroyed our economy and devalued our assets, which has resulted in millions of people losing their good credit and their homes. One only needs to look at the condition of homes that lenders are getting through the foreclosure process – they are often stripped and vandalized by the former owners.
As a result of the damaging information that is coming out, it is likely that the political pressure to investigate and initiate a federal moratorium will continue to grow. It is likely that we are going to see another round of voluntary or involuntary foreclosure moratoriums affecting all lenders. Additional litigation is going to increase seeking to stop foreclosures, invalidate past foreclosures and sanctions against the lenders.
How Will This Impact the Real Estate Market
There does not seem to be a clear consensus on this issue. Some argue that a moratorium will decrease the number of properties on the market and will shrink the “shadow inventory” which will have a positive effect on the market. Others argue that a moratorium will only delay the inevitable and will simply increase the time needed to churn through all of the foreclosures.
The other more immediate affect may be the ability to obtain title insurance for purchases of REO properties that were foreclosed by lenders with known foreclosure documentation problems. If the problem ends up casting doubt on all foreclosures it could shut down the REO market. What the industry will especially pay attention to are court rulings that invalidate foreclosures. It is one thing to delay a foreclosure, it is another to invalidate a foreclosure. If a foreclosure is invalidated the next question is can a new foreclosure be undertaken to remedy the problem or does it permanently bar a foreclosure. Finally, the courts would then have to look at how foreclosure issues will impact foreclosures that have already been completed. If the courts reopen all foreclosures that are defective, I cannot imagine the chaos that will result.
Title companies are going to be scrambling to determine what, if any, liability they might have on policies issued in conjunction with REO sales and what risk they are willing to take going forward. Old Republic has already announced that they will not provide new title insurance for homes foreclosed by Ally or Chase. So far the other title companies have not announced, to my knowledge, that they will not issue new title policies of REO properties. Only time will tell how much impact the foreclosure scandal will have on the title industry.
PNC Financial Services Group has reportedly notified title insurance companies that they are suspending sales of foreclosed homes for 30 days. Fannie Mae reportedly has stopped some foreclosure sales because of the uncertainty of the foreclosure process.
The more hidden result of the lenders indifference to rules, is that it further undermines the faith that they are playing by the rules and will further alienate borrowers and make it easier for them to justify walking away from loans and stripping properties. Many people already believe that there is one set of rules for lenders and another for the “common person”. This simply is throwing gasoline onto the fire.
The Bottom Line
At best, the lenders have created more uncertainty into the real estate marketplace. To date, uncertainty has not helped anyone in the short term or the long term. Uncertainty makes everyone that deals with real estate cautious and extra conservative. Uncertainty encourages lawsuits. Uncertainty cause values to drop.
To date, lenders have not shown the ability to remove uncertainty or to act efficiently. Short sales have gotten tougher and longer to process over the last three years, not easier and shorter. The lender's ability to process and sell their REO inventory has not gotten better over time. And now, the foreclosures themselves are in question.
Based on the recent past, it is tough to have any faith the lenders will deal with this problem any better than they have dealt with the other problems they have faced. In the mean time, everyone in the industry is going to have to continue to monitor the situation to see how the foreclosure scandal may impact their business or how it may impact their clients situation.
The foreclosure moratoriums will slow, if not kill, the REO market which constitutes about 25 percent of all sales. Given the uncertainty who wants to risk buying an REO that might be subject to a faulty foreclosure? At a minimum, the buyer must make sure that they negotiate title insurance that protects them. If title companies will not provide such coverage, the REO market will die and the property values will plunge.
The foreclosure problem may help the short sale market in that it may encourage lenders to work more earnestly on short sales and loan modifications. On the other hand, they may become so preoccupied with their foreclosure problems that they simply grind to a halt while they figure out what to do.
Debtors facing foreclosure in some cases will be happy because they can stay in their home longer without paying their mortgage and might even be able to rid themselves of the mortgage altogether. Other homeowners want the foreclosure to proceed so that they can move on with their lives and start to rebuild their credit.
If lenders are looking at new, possibly huge losses, their ability and/or willingness to lend will most likely decrease even further.
The bottom line is that real estate professional lives have just gotten more difficult. The mortgage scandal has become another complication on top of all of the other complications that have arisen in the market place over the last three years.
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