Concerns Grow Over Servicers' Right to Foreclose. Larger Implications Loom
At least three major lenders/servicers have announced that they are temporarily suspending either evictions or foreclosures in 23 states because of possible sloppy legal work. Ally Financial's GMAC Mortgage unit, J.P. Morgan Chase, and Bank of America have all made such announcements in the last week, and the ultimate scope and impact of the situation is unclear.
The suspensions involve 23 states, all but one, North Carolina, are states in which judicial foreclosures are either required or are the norm. A judicial foreclosure requires that the lender appear in court with a sworn affidavit to in order to obtain a summary judgment permitting the foreclosure. The states involved are Connecticut, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont, and Wisconsin. Delaware, which is also a judicial foreclosure state, is not on the list.
GMAC was the first company to indicate there was a problem, announcing it was temporarily stopping evictions and the sale of foreclosed homes. Within a few days Chase and BOA said they were halting their foreclosures as well.
The Associated Press quoted an attorney who had sued Bank of America as saying that that there could be hundreds of thousands of foreclosures across the country by entities that had no right to foreclose, a problem that may be exacerbated by the sheer numbers of foreclosure actions. Representatives of lenders which have been deposed in law suits have, in several instances, admitted to signing thousands of foreclosure documents without reading them, a practice that has been called "robo-signing." One Bank of America lawyer estimated that she robo-signed 8,000 to 10,000 foreclosure documents each month.
Both JPMorgan Chase and GMAC said that they will amend paperwork only where they think procedures were not properly executed, but Bank of America intends to do so for all affidavits in cases that have not yet gone to judgment. Chase originally estimated that about 56,000 of its foreclosures would be affected by the temporary suspension but neither BOA nor GMAC have put a number to the impact.
As reported here yesterday, Fannie Mae and Freddie Mac have ordered their servicers to review "their policies and procedures relating to the execution of affidavits, verifications, and other legal documents in connection with the default process" and to notify legal counsel at Fannie and Freddie immediately if they have any concerns.
The effects of the self-imposed suspensions are beginning to spread. The Attorneys General of California and Connecticut, as well as of Massachusetts which is not among the 23 states, have called on banks to halt all foreclosures until the situation sorts out. At least one title company, Old Republic National Title, has discontinued issuing policies on GMAC foreclosures until further notice and the stock prices of several other title companies dropped significantly on Monday.
This morning on MND's Pipeline Press blog channel, Rob Chrisman shared feedback from a borrower who had already experienced a delay in the closing of their purchase transaction because their new home was a JP Morgan Chase foreclosure...
One reader wrote, "I have a client in Florida that closed on his sale in Florida on Thursday, and was supposed to close on his purchase of a Fannie Mae owned home this Wednesday. Well, last Friday he received a notice from the title company that they have indefinitely suspended the sale, due to the previous owner & servicer being JPM Chase. However, the borrower was foreclosed on two years ago. So now, with a wife and two dogs, my client has nowhere to go. The auction company gave him until today to cancel and get a refund of his deposit, or to extend for 6 months, but with no direction on a closing date."
It is always dangerous to quote from an unfamiliar Internet source, but Yves Smith, writing in Naked Capitalism, has quite a bit to say about this situation. He maintains that in most states the note is the enabling instrument for a foreclosure; the mortgage is "a mere accessory." The agreement that governs the creation of mortgage backed securities (MBS) requires that the note be endorsed through the full chain of title and that the endorsement be done pre-closing with only limited exceptions of up to 90 days.
Smith maintains that during the boom many originators (he specifically fingers Countrywide) simply quit conveying the notes and these documents are still in originator's warehouses. Without the note, the holder of the mortgages does not have the right to foreclose on behalf of the MBS investors. To merely backtrack and obtain the note is not sufficient, not only because of the time lapse but also because an assignment from a bankrupt originator would be problematic. Lastly, Smith says "IRS rules forbid a REMIC (real estate mortgage investment trust) from accepting a non-performing asset, meaning a dud loan."
He provides evidence that there is actually a price sheet on line for essentially fabricating documents to remedy these problems, up to including an entire collateral file or an allonge which Smith says has become the preferred fix for improperly conveyed notes. He has a lot more to say about the parties involved in this situation. You can read the complete text HERE
MND discussed this observation from the perspective of MERS. Below is an excerpt from MERS: Myths, Misconceptions, and Realities...
Misconception: If I stop making my payments MERS doesn’t have any right to foreclose since they don’t actually own my mortgages.
Reality: When a borrower signs the mortgage security instrument at closing, they grant and convey the legal title to the mortgage to Mortgage Electronic Registration Systems, Inc. (MERS) and MERS is the mortgagee. As the agent for the promissory note owner, upon instructions from the owner, MERS will commence a foreclosure. The mortgage instrument states that MERS has the right to foreclose and sell the property. Courts around the country have repeatedly upheld and recognized this right.
While this issue started a PR problem, it is growing into something bigger. Bank actions could delay foreclosures for months in many cases, and if homeowners join forces in class action suits, could create monumental problems.