By Robert Brannum
Before the term “robo-signing” was coined, large banks and mortgage lenders were feverishly initiating loan foreclosure proceedings to protect their assets as mortgage values deteriorated.
Then, news stories began to emerge about erroneous foreclosures on the wrong homes, homes that had been purchased outright without mortgages, and the delivery of faulty loan documentation to courts around the country.
Mass Foreclosures a Result of Mass Originations
The bumper sticker suggesting one “drive like hell – you’ll get there” comes to mind. The massive number of home loans generated during the boom years of 2005 and 2006 caused overwhelming paperwork and processing issues for loan originators, lenders, and other counterparties involved in securitization and servicing. In many instances, paperwork was incomplete, inaccurate or falsified in order to approve, and then later sell, those mortgages. Of the $4 trillion of mortgages that were securitized, more than four million loans that are estimated to be in foreclosure suffer from the same lack of proper paperwork, including in many cases a clear delineation of mortgage ownership.
Investigative researchers began to document the mass-production of foreclosure by many of the same lenders that perfected the mass-production of loan originations and securitizations. These researchers reported their findings on blogs and message boards, reporting that in order for lenders to initiate high volumes of foreclosures – in many cases, tens of thousands daily – those lenders were submitting incomplete, inaccurate, and, in some situations, fraudulent paperwork to the courts.
Mainstream media outlets, including The Washington Post, began to pursue the bloggers’ allegations. Legal investigations began, depositions were taken, and the industry-wide practice of robo-signing was quickly revealed. In a typical situation, a bank officer or representative signs, either physically or digitally, affidavits proclaiming the ability to proceed with foreclosures. Signers of those affidavits are legally required to attest to the accuracy of the affidavits. But the robo-signing investigation revealed that individuals were affirming thousands of affidavits in a single day, bringing scrutiny of the foreclosure processes of the largest lenders from advocacy groups and state attorneys general.
Foreclosure Processes Suspended
The revelation of robo-signing of foreclosure affidavits at Ally Financial, a subsidiary of GMAC, caused it and other large lenders, including Bank of America and JP Morgan Chase, to re-examine their foreclosure preparation processes. In a recent article published by Bloomberg Businessweek, a robo-signer at Nationwide Title Clearing acknowledged his role in authorizing more than 5,000 loans per day for Citigroup and JP Morgan Chase –
including many loan affidavits he never saw, but on which his signature was digitally added (digital signatures are not improper, but they carry the expectation that the signer attests to the documents’ accuracy and validity).
The robo-signing issues have led to inaccuracies, including issuing foreclosure statements for the wrong homes, to incorrect owners, and in some cases, without properly confirming which lending party – originator, servicer, securitizer or other party – legally owns the loan, and therefore, has authority for issuing the foreclosure process in the first place. Adding to the challenge of loan provenance is the fact that many leading securitization parties, such as New Century Financial and Lehman Brothers, have gone out of business.
Let the Class Actions Begin
Not surprisingly, class action litigation has already begun, starting in Florida and Maine, and now including Kentucky, Maryland and New Jersey. Ohio’s attorney general filed a separate lawsuit in November as well. More are expected across the country.
The class action in Florida, which was filed against GMAC, could easily be a proxy from any other state and directed toward any other large lender accused of robo-signing, charging that the lender was “systematically fabricating evidence in the form of fraudulent affidavits.” The lawsuit in Maine accused the lender of “submitting false representations” regarding its foreclosure activities.
The state of New York has also been highly engaged in the robo-signing foreclosure scandal. In mid-October Attorney General Andrew Cuomo, now governor-elect, was vocal in asking all servicers engaging in robo-signing to suspend all foreclosure actions until their procedures complied with state law (see main story, page 8).
New York has been hit particularly hard by the economic recession, and tens of thousands of New Yorkers have been impacted by the foreclosure crisis. According to the attorney general’s office, more than 60,000 homes in the state are in foreclosure – although that number is closer to 80,000, according to the Mortgage Bankers Association – and 130,000 additional homeowners have received pre-foreclosure notices from their lenders this year after falling behind on their payments.
NY Judge Raises the Ante
The latest stone to be cast in the foreclosure scandal has also originated in New York. In October, the chief judge of the New York State Court of Appeals, Jonathan Lippman, issued a new rule that requires banks to affirm they have reviewed each foreclosure case for accuracy – under penalty of perjury – and that banks must pay the lawyers’ fees for homeowners who win their cases against those lenders. The rule was created in an effort to motivate lenders to review each foreclosure case as required by law, and to affirm, under penalty of perjury, that they have properly prepared and reviewed the documentation. This new rule is the first of its kind in the US.
The New York Bankers Association has come out in support of Lippman’s ruling. In a November statement to the State Assembly’s Standing Committee on Banks, NYBA President and CEO Michael Smith noted of the new rule, “As a result, New Yorkers facing the foreclosure process are afforded better protections than citizens of virtually any other state in the country.”
The rule is a boon to consumer advocates, who would expect their lenders to now pause long enough before starting foreclosure proceedings to ensure the accuracy of their claims. It essentially strikes down the ability for lenders to generate mass foreclosures as was currently being done under the robo-signing process. And with legal fees covered by the lender should the homeowner win, one might expect the rule to embolden homeowners to contest more cases.
The short-term impact appears clear, as large banks will need to slow their foreclosures to ensure they’re properly reviewing documentation. According to the New York Post, that is very much what has happened: in the few weeks since Lippman put the foreclosure rule in place, almost no new foreclosure cases have been filed.
Robert Brannum is a freelance writer with special expertise in the finance industry.