By now you have all read about the mortgage foreclosure fraud going on in Florida and in other places. There is clearly a big problem and there are clearly not many constructive solutions.
This article is the best that I have seen because it explains the broader situation. From Washington Post:
Some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork – an admission that may open the door for homeowners across the country to challenge foreclosure proceedings.
The legal predicament compelled Ally Financial, the nation’s fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.
As head of Ally’s foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate. He was also required to sign the documents in the presence of a notary.
In a sworn deposition, he testified that he did neither.
The reason may be the sheer volume of the documents he had to hand-sign: 10,000 a month. Stephan had been at that job for five years.
How the nation’s foreclosure system became reliant on the tedious work of a few corporate bureaucrats is still a matter that mortgage lenders are trying to answer. While the lenders may have had legitimate cause to foreclose, the mishandling of the paperwork has given homeowners ammunition in their fight against foreclosure and has drawn the attention of state law enforcement officials.
Ally spokesman James Olecki called the problem with the documents “an important but technical defect.” He said the papers were “factually accurate” but conceded that “corrective action” may have to be taken in some cases and that others may “require court intervention.”
Olecki said the company services loans “from hundreds of different lenders,” but he declined to provide names.
Spokesmen for Fannie and Freddie confirmed Tuesday after inquiries from The Washington Post that they use Ally, formerly called GMAC, to oversee some mortgages. The companies have launched internal reviews to assess the scope of any potential issues.
Ally, Fannie and Freddie – all troubled mortgage companies that received extraordinary bailouts by the federal government during the financial crisis – declined to say how many loans might be affected.
Florida is a state with a huge foreclosure backlog and a lot of problems in the foreclosure process. They have set up special courts to reduce the foreclosure backlog. Some of these courts are trampling on the law itself in order to clear the docket.
No one disputes that foreclosures dominate Florida’s dockets and that something needs to be done to streamline a complex and emotionally wrenching process. But lawyers representing troubled borrowers contend that many of the retired judges called in from the sidelines to oversee these matters are so focused on cutting the caseload that they are unfairly favoring financial institutions at the expense of homeowners.
Lawyers say judges are simply ignoring problematic or contradictory evidence and awarding the right to foreclose to institutions that have yet to prove they own the properties in question….
…Florida’s foreclosure mess is made murkier by what analysts and lawyers involved in the process say are questionable practices by some law firms that are representing banks. Such tactics, these people say, have drawn out the process significantly, making it extremely lucrative for the lawyers and more draining for troubled homeowners.
Doctored or dubious records presented in court as proof of a bank’s ownership have become such a problem that Bill McCollum, the Florida attorney general, announced last month that his office was investigating the state’s three largest foreclosure law firms representing lenders.
“Thousands of final judgments of foreclosure against Florida homeowners may have been the result of the allegedly improper actions of these law firms,” said Mr. McCollum in an interview. “We’ve had so many complaints that I am confident there is a great deal of fraud here.”
To be sure, adjudicating foreclosure cases is difficult, complicated by multiple transfers of mortgages and notes when a loan is sold, bewildering paperwork submitted by loan servicers and shoddy record-keeping by the many institutions that touched the mortgages during the byzantine securitization process that fueled the housing boom.
Nevertheless, Florida law requires that before a financial institution can foreclose on a borrower, it must prove to the court that it actually has the standing to do so. In other words, it has to show that it is truly the owner. And this is done by demonstrating ownership of the note underlying the mortgage.
This is where the Foreclosure Fraud comes in. Banks created this situation by developing toxic complex products and trading assets like baseball cards. To maximize value of these tradable products, they had to minimize servicing costs so the net cash flows to the investors would be maximized. So they cut corners. All information goes into electronic systems and it is those systems that buyers and sellers rely on. The documents themselves are just so much trouble. They have to be filed, shipped, imaged, tracked, stored, and so on. That costs money and is prone to human error. And, when you do this on a massive scale, there are a lot of errors. But no one really cares as long as you can foreclose anyway. Well, that monkey is no longer dancing. Here are part of the findings of Judge Johnson of the Fourth Judicial Circuit Court in Duval County Florida:
Fraud on the Court. This is no small matter. After said finding and other similar findings, the chickens are coming home to roost.
What will solve this problem? It may be that many records will have to be sorted out, some of these swapping transactions re-documented, errors cured, new cases filed and litigated, tort cases defended, etc.
I have mixed feelings about this because slowing the clearing of the foreclosure backlog is not good for the general economy. Uncertainty will remain in the real estate markets about what the floor valuations are and buyers will not return to the markets even when they can afford to do so. But, the laws of nature cannot be reversed. Actions have consequences and those must play out.
This investment newsletter elaborates on what the consequences may be for banks. The actual dollar consequences are unknowable. But there will be consequences. The question is whether these ongoing uncertainties create what this author describes as “zombie banks” out of our largest institutions that handle something over 60% of total US bank deposits? I’m not sure we can wait to find out.
We need new banks with clean balance sheets, clear consciences, and new ways of operating.