Economy & Trade, Financial Crisis, Headlines, North America

Foreclosure Mess Reveals Longstanding Problems

Matthew Cardinale

ATLANTA, Georgia, Oct 31 2010 (IPS) - The discovery of apparent massive fraud in mortgage and foreclosure documents has called into question millions of pending foreclosures in the U.S. Several banks have enacted partial or complete moratoriums until the issues can be resolved.

In the next few years, the total number of foreclosures is predicted to reach 13 million. Credit: respres/creative commons license

In the next few years, the total number of foreclosures is predicted to reach 13 million. Credit: respres/creative commons license

Yet activists and experts who have been dealing with the foreclosure industry for years say this is a longstanding problem that’s only recently come to national attention.

“There are hundreds of cases around the country where judges have chastised lenders for all kinds of errors. Until now it’s been anecdotal, as if there are a few bad apples,” Kathleen Day of the Center for Responsible Lending (CRL), a homeowner advocacy group, told IPS.

“These moratoriums and the misbehaviour that led to them are only the most recent and the most visible symptoms of a chronically sick industry,” Professor Katherine Porter of the University of Iowa School of Law told a U.S. Senate panel earlier this month.

Porter authored a study in 2007 showing that 40 percent of mortgage companies’ paperwork in bankruptcy cases did not even include a copy of the note.

Bill Brennan, a legal aid lawyer in Atlanta, Georgia, has argued about paperwork errors for years while helping homeowners and consumers litigate cases.

He has also seen paperwork errors in credit card company lawsuits against individual consumers. The debts are often sold to a collection agency, which sues while providing little or no evidence to the courts of how the debt was accrued, because very few consumers actually go to court to dispute the cases.

Brennan said most of the focus in the current foreclosure paperwork scandal has been on 23 states with a judicial process for foreclosures.

“In these states, there’s a short-cut process, a motion for summary judgment, banks like to use to dispose of the cases quickly. They have to file an affidavit. The idea is many homeowners won’t reply to that. Many of the affidavits have been signed by robo-signers,” Brennan said.

Robo-signers are individuals whose names are used to sign literally thousands of documents per month.

The current scandal started on Sep. 20, when a representative of GMAC Mortgage, the nation’s fourth largest lender, admitted in a court case in the state of Maine that he had signed off on 10,000 pieces of foreclosure paperwork a month without reading them. GMAC halted evictions and the resale of repossessed homes in the 23 judicial foreclosure states.

Rep. Alan Grayson, a Florida Democrat, posted a video on his website showing several documents with very different signatures for the same name, suggesting some individuals were not even signing their own documents.

The problem of robo-signing could have serious legal implications, both civil and criminal, Brennan said, noting it is illegal to sign a document attesting that everything in a document is true and correct when in reality one does not know whether it is true or correct. “It’s criminal perjury. People can go to prison for this stuff,” he said.

Questions also emerged about the Mortgage Electronic Registry System (MERS), a database created by a private firm to record digitised mortgage titles. MERS would transfer titles on people’s homes between banks and trusts using Excel spreadsheets instead of by banks endorsing the notes.

Sixty million properties in the U.S. are recorded in the name of MERS, including 97 percent of the loans made between 2005 and 2008.

On Sep. 24, Reps. Grayson, Barney Frank and Corrine Brown wrote to Fannie Mae questioning its use of so-called foreclosure mills. The state of Florida opened an investigation into three law firms that had allegedly fabricated thousands of documents and the state of California asked GMAC to halt foreclosures there as well.

Four days later, JP Morgan Chase announced it would halt 56,000 foreclosures. Bank of America soon followed suit, saying it would stop foreclosures in 23 states, and eventually expanding the directive to all states.

However, after about two weeks Bank of America said it would re-start foreclosures after reviewing the problems.

“We’re sceptical” of Bank America’s recent reversal, Day told IPS. “Wells Fargo said everything was great, and it turns out they had problems in tens of thousands of documents. All evidence suggests a pervasive, systemic problem.”

“They [the banks] seem to think they can correct the problem by redoing some paperwork,” economist Ellen Brown wrote in an article. “But if the holdings in recent court decisions are upheld, it will not be just a question of hiring extra staff to clean up some files. For all those mortgages filed in the name of MERS, say these courts, the chain of title has been irretrievably broken.”

Prof. Porter, in her testimony, cited a variety of problems: “Some paperwork is missing, evidenced by increasing use of lost note affidavits to try to remedy past mistakes. Some transfers of loans simply did not occur or were not properly conducted. The proliferation of assignments in blank. The widespread use of MERS. Confusion about location of physical paper for these loans.”

Brennan has found that in Georgia, while there is technically a judicial process for foreclosures, the majority of borrowers sign away their right to legal recourse when entering the loan. Still there are problems with the ways the foreclosures are done and some possibilities for remedying them, which also apply in the 27 non-judicial foreclosure states.

“The mortgage in most states is made up of a promissory note and a deed to secure debt,” Brennan explained. Banks usually sell mortgages to another bank, then another bank, then another.

“They mainly transfer the deed to secure debt. And those transfers are being signed by robo-signers. They’re supposed to assign the note as well, there’s been a lot of controversy over ‘Show me the note,'” Brennan said. The legal recourse could come through an equity pleading or a bankruptcy filing.

According to CRL, about two million families are currently facing foreclosure proceedings and about three million more are just weeks away from that point.

CRL estimates that in a few years, the total number of foreclosures in the current economic crisis could reach 13 million, and that communities of colour will lose about $360 billion worth of wealth.

Brennan believes while all of this gets sorted out in the courts and other forums, “President [Barack] Obama needs to have a moratorium on all foreclosures, and they need to be aggressively doing loan modifications.”

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