Three major mortgage lenders, GMAC Mortgage, JPMorgan Chase and Bank of America have halted foreclosures in states where the process is handled through the court system after suspicions surfaced that employees did not follow legal procedures in preparing the required documentation. These paperwork problems are widely expected to draw out the already devastating foreclosure crisis in the affected areas. The states most impacted are the states where judicial foreclosures are standard.
As these and more of the nation’s largest lenders concede that their foreclosure procedures might have been improperly handled, lawsuits are beginning to reveal the many mistakes in critical documents and procedures required by law.
The bad practices being investigated appear to be so common, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.
For example, in some cases, documents have been signed by employees who say they have not verified critical information (required to be checked) like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, where, for example, the notarizations predate the actual preparation of documents. Of course this is problematic because it evidences that signatures were never actually reviewed by a notary, which is also required.
On still other important documents, official’s names appear to be forged. Additional problems have emerged when multiple banks have all argued that they have the right to foreclose on the same property, a result of a murky trail of documentation and ownership.
What is causing the banks to behave with such disregard for the legal process? Most probably the increase in foreclosures in recent years has strained the resources of lenders (and their legal representatives). According to the Mortgage Bankers Association, the percentage of loans that were delinquent by 90 days or more stood at 9.5 percent in the first quarter of 2010, up from 4 percent in the same period of 2008. Clearly the increase in the number of delinquencies and defaults does not excuse the lender’s or their agent’s failures to meet their legal obligations before trying to remove defaulting borrowers from their homes.
The implications are not yet clear for borrowers who have been evicted from their homes as a result of improper filings. But courts may impose sanctions on lenders or their representatives or may force banks to pay borrowers’ legal costs in these cases. Certainly individuals living in homes which are currently threatened with foreclosure may be able to have their foreclosures deferred or perhaps stopped entirely.
Judges may also dismiss the foreclosures altogether, barring lenders from filing again and awarding the home to the borrower. That would create a loss for the lender or investor holding the note underlying the property. Almost certainly, lawyers say, lawsuits on behalf of borrowers will multiply.
Many lenders or loan servicers that begin the foreclosure process after a borrower defaults do not produce documentation proving that they have the legal right to foreclosure, known as standing. As a substitute, the banks usually present sworn statements attesting to ownership of the note signed by an employee of a legal services firm acting as an agent for the lender or loan servicer. Such sworn statements (called affidavit) allow foreclosures to proceed, but because they are often hastily prepared, valid questions have arisen about their accuracy.
Although lawyers for troubled borrowers have questioned the banks foreclosure procedures for years now, the issue grew to a head in mid-September when GMAC said it was stopping foreclosure proceedings in 23 states because of problems with its legal practices and procedures. The move by GMAC followed testimony by an employee who signed affidavits for the lender; he said that he executed 400 of them each day without reading them or verifying that the information in them was correct.
JPMorgan Chase and Bank of America followed with similar announcements that they were halting their foreclosure process until they could review their legal practices. But these three large lenders are not the only companies who have failed to verify crucial aspects of a foreclosure case. As a result, many more banks will follow suit and halt their foreclosure processes pending review of procedures. As such, the foreclosure problem is going to last much longer.
For homeowners who have not yet been foreclosed upon, they may have more leverage and in some cases may be able to get real loan modifications and/or more time to find a buyer for a short sale. I believe we are also likely to see an increase in short-sale approvals by banks.