Concerns Grow Over Servicers’ Right to Foreclose. Larger Implications Loom

by devteam October 5th, 2010 | Share

At least three majorrnlenders/servicers have announced that they are temporarily suspending eitherrnevictions or foreclosures in 23 states because of possible sloppy legal work.  Ally Financial’s GMAC Mortgage unit, J.P.rnMorgan Chase, and Bank of America have all made such announcements in the lastrnweek, and the ultimate scope and impact of the situation is unclear.</p

The suspensions involve 23rnstates, all but one, North Carolina, are states in which judicial foreclosuresrnare either required or are the norm.  Arnjudicial foreclosure requires that the lender appear in court with a swornrnaffidavit to in order to obtain a summary judgment permitting the foreclosure.   The states involved are Connecticut, Florida,rnHawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Minnesota, Nebraska,rnNew Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma,rnPennsylvania, South Carolina, South Dakota, Vermont, and Wisconsin.  Delaware, which is also a judicialrnforeclosure state, is not on the list.</p

GMAC was the first company tornindicate there was a problem, announcing it was temporarily stopping evictions andrnthe sale of foreclosed homes.  Within arnfew days Chase and BOA said they were halting their foreclosures as well.  </p

The Associated Press quoted anrnattorney who had sued Bank of America as saying that that there could bernhundreds of thousands of foreclosures across the country by entities that hadrnno right to foreclose, a problem that may be exacerbated by the sheer numbersrnof foreclosure actions.   Representativesrnof lenders which have been deposed in law suits have, in several instances, admittedrnto signing thousands of foreclosure documents without reading them, a practicernthat has been called “robo-signing.” rnOne Bank of America lawyer estimated that she robo-signed 8,000 torn10,000 foreclosure documents each month.    </p

Both JPMorgan Chase and GMAC saidrnthat they will amend paperwork only where they think procedures were notrnproperly executed, but Bank of America intends to do so for all affidavits inrncases that have not yet gone to judgment. rnChase originally estimated that about 56,000 of its foreclosures wouldrnbe affected by the temporary suspension but neither BOA nor GMAC have put arnnumber to the impact.</p

As reported here yesterday, FanniernMae and Freddie Mac have ordered their servicers to review “theirrnpolicies and procedures relating to the execution of affidavits, verifications,rnand other legal documents in connection with the default process” and to notify legalrncounsel at Fannie and Freddie immediately if they have any concerns.  </p

The effects of the self-imposedrnsuspensions are beginning to spread.  ThernAttorneys General of California and Connecticut, as well as of Massachusettsrnwhich is not among the 23 states, have called on banks to halt all foreclosuresrnuntil the situation sorts out.  At leastrnone title company, Old Republic National Title, has discontinued issuing policiesrnon GMAC foreclosures until further notice and the stock prices of several otherrntitle companies dropped significantly on Monday.  </p

This morning on MND’s Pipeline Press blog</a channel, Rob Chrisman shared feedback from a borrower who had already experienced a delay in the closing of their purchase transaction becausern their new home was a JP Morgan Chase foreclosure…</p

Onern 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.”</p

It is always dangerous to quote from anrnunfamiliar Internet source, but Yves Smith, writing in Naked Capitalism, hasrnquite a bit to say about this situation. rnHe maintains that in most states the note is the enabling instrument forrna foreclosure; the mortgage is “a mere accessory.”  The agreement that governs the creation ofrnmortgage backed securities (MBS) requires that the note be endorsed through thernfull chain of title and that the endorsement be done pre-closing with onlyrnlimited exceptions of up to 90 days.</p

Smith maintains that during the boom many originators (he specifically fingersrnCountrywide) simply quit conveying the notes and these documents are still inrnoriginator’s warehouses.  Without thernnote, the holder of the mortgages does not have the right to foreclose onrnbehalf of the MBS investors.  To merelyrnbacktrack and obtain the note is not sufficient, not only because of the timernlapse but also because an assignment from a bankrupt originator would bernproblematic.  Lastly, Smith says “IRSrnrules forbid a REMIC (real estate mortgage investment trust) from accepting arnnon-performing asset, meaning a dud loan.” rn   </p

He provides evidence that there is actually a price sheet on line forrnessentially fabricating documents to remedy these problems, up to including anrnentire collateral file or an allonge which Smith says has become the preferredrnfix 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</p

MND discussed this observation from the perspective of MERS. Below is an excerpt from MERS: Myths, Misconceptions, and Realities…</p

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.</p

While this issue started a PR problem, it is growing into something bigger. Bank actions could delayrnforeclosures for months in many cases, and if homeowners join forces in classrnaction suits, could create monumental problems.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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