The Foreclosure Mess and Compliance

The Foreclosure Mess and Compliance

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 charges.

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.


For additional commentary on developments in compliance and ethics, visit Compliance Building, a blog hosted by Doug Cornelius.