Why is the foreclosure machinery of our nation's largest
banks suddenly grinding to a halt?
The "Produce the Note" movement, encouraging consumers to
challenge the lender in foreclosure and make them produce the note. It's not
about proving you are current on your mortgage. It's about attacking a
structural flaw to stay rent and mortgage payment free in your house. The
success of the strategy is hit or miss. The first big success was in September
of 2008, when the First District Court of Appeals in Ohio ruled on a case in
which Wells Fargo Bank had commenced a foreclosure action based on a mortgage
it did not own. (Wells Fargo Bank, N.A. v. Byrd) Ultimately, the
produce the note attack is just a delay. The mortgage holder can find the note
or a copy with a lost note affidavit. There are only a few rare cases where the
foreclosure claim will be dismissed and effectively forgive the debt.
This is not a new problem. In 2007, a federal judge held
that Deutsche Bank lacked standing to foreclose in 14 cases
because it could not produce the documents proving that it had been assigned
the rights in the mortgages when they were securitized. The theory of simply
trading mortgage notes ran into the reality of real estate law.
In the past, I represented banks in M&A transactions.
For many, it was an afterthought in transferring the mortgage loans in the
portfolio they acquired. The reality is that they needed to file assignment
documents with the land records. The bigger the transaction, the more filings.
In Massachusetts, some registry of deeds were requiring a filing fee for each
mortgage assignment. That gets expensive very quickly.
The other reality of real estate law is that the
foreclosure process and laws are different in every state. There are 23 states
that require approval of a court to get a foreclosure order. These have been
labeled the "judicial states." The remaining states do not require court
action. In non-judicial states, banks aren't required to submit anything to the
court until they are sued by a homeowner seeking to stop a foreclosure.
Another reality of real estate law is that contracts for
real estate must be written. This is the "Statute of Frauds" drilled into the
heads of law students during their first year.
What kicked off the latest developments was the deposition of a GMAC loan officer named Jeffrey Stephan and
what he did for foreclosures in judicial states. Stephan admitted in a sworn
deposition in Pennsylvania that he signed off on up to 10,000 foreclosure
documents a month for five years. He hadn't reviewed the mortgage or
foreclosure documents, even though he was signing court affidavits that he had
done so. This got him the label of "robo-signer."
It didn't help that he used the title of "limited
signing officer," a red flag that his knowledge of the case was nonexistent. I
would bet that he had been pleading for additional people to help him.
The loan servicers have mishandled the records management
process and legal requirements. The process is in place to prevent foreclosure
mistakes. Unfortunately for them, this included submitting false documents to
the court. You can't file an affidavit saying you're familiar with the loan
file if you are not actually familiar with the loan file.
Now let's also layer in the origination fraud and sloppy
paperwork when the mortgage loans were put in place. There was plenty of fraud
during the residential real estate boom.
The last piece is the selection of servicer for
securitized mortgage loans. The ultimate servicer for the loan once its
securitized is generally the bidder with the lowest price. There may not have
been much emphasis on quality. That means sloppiness was rewarded.
Eventually, the mortgage servicers will get the proper
procedures and controls in place for their foreclosure process. They will end
up paying some fines and it will cost them more money to go through the
foreclosure process. They may even bring some individuals up on criminal
In the end, those house where the mortgage bill has not
been paid and the borrower has no prospect for paying the mortgage bill will
end up in foreclosure. Its just going to take some additional time and money.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.