Big banks have stopped foreclosures in 23 states due to legal challenges to their ownership of mortgage notes. On Wednesday, JP Morgan upped their total to 41 states in which foreclosure operations had ceased.
Why the halt in foreclosures? It seems that the banks have ignored long established state property and title procedures and may not actually own the title to the homes subject to foreclosure (and others subject to the same procedures).
Calculated Risk quoted a JP Morgan spokesman saying,
"We've identified issues relating to the mortgage foreclosure affidavits and those include signers not having personally reviewed the underlying loan files but instead having relied upon the work of others. … And there are circumstances where affidavits have not been properly notarized" Oct. 13.
Failing to "personally review" loan documents means that asserting that the review took place was perjury. This happened for countless mortgages. Failing to properly notarize mortgage signatures violates state property law. It could also be seen as negligence by investors in the mortgages.
ForclosureGate - Shock and Awe
Those who saw the foreclosure and eviction movement around the country as inevitable may be in awe at this development. Citizens may be able to keep their homes longer, avoid eviction, and regroup financially. Rep. Marcy Kaptur (D-OH) was prophetic at the start of 2009 when she outlined what turned into a stunningly successful legal strategy.
The shock side of the equation is all bad news and getting worse by the day and week. The in ability of banks to foreclose could lead to chaos in the real estate market resulting in even lower property values.
Another shock wave is slamming into investors worldwide who hold over $2 trillion in Mortgage Backed Securities (MBS). They're watching the underlying viability of their investment attacked by homeowners who are challenging the legality of mortgages, state courts deciding in favor of homeowners, and aggressive actions by state attorneys general.
Matt Weidner picked up this subpoena issued on October 13 served to Fidelity National Financial of Jacksonville, Florida, a major title company (number 366 on the Fortune 500). (Florida Attorney General - Economic Crimes Investigative Subpoena Oct 13).
The subpoena demands all documents and other information relating to an investigation of "possible unfair and deceptive trade practices, unconscionable acts and/or unfair competition of the above named entity and/or associates." It goes on to demand, "Copies of any and all underlying documentation that allows for your employee or ex-employee, Linda Green to sign documents in the following capacities: … Vice President of Loan Documentation, Wells Fargo Bank; several Vice Presidents, Mortgage Electronic Registration Systems, the Vice President, American Home Mortgage, and other executives at major financial institutions. Was Linda Green a robo-signer?
Attorney General Bill McCollum is playing hardball. The day before the Fidelity National subpoena, he called for a meeting of Florida's major real estate finance firms including: Bank of America, JP Morgan Chase, GMAC Mortgage, PNC Financial Services and Litton Loan Servicing. The Miami Herald quoted a letter sent to Bank of America, JP Morgan Chase, GMAC Mortgage, PNC Financial Services and Litton Loan Servicing.
"I am writing you to express my concern for Florida's economic future and the credibility of Florida's judicial foreclosure system as a result of the actions of your company -- actions that have affected the integrity of title to real property for Florida's homeowners as well as the foreclosure process in Florida,''
At the same time, CitiGroup announced it was dropping its Florida foreclosure law firm due to an investigation by the Florida AG's office.
Now all 50 states attorneys general have joined into a probe of the legal concerns of the $11 trillion mortgage market in the United States.
Shoddy Procedures Haunt Lenders
Robo-signing entered the national vocabulary in a big way on September 22 when the Washington Post described the work of a Pennsylvania contractor who "attest(ed) to the accuracy of thousands of home foreclosure documents across the country." The attestations are a huge misrepresentation since the robo-signers often vouches for the accuracy of the mortgage information and states that the signing was done in the presence of a notary public.
Robo-signers have been at work across the country for years fueling the efficiency of the real estate bubble. While underpaid, they're a critical link in the movement of individual mortgages into the Wall Street creation called mortgage backed securities (MBS). These are the $2 plus trillion dollar investments Wall Street sold to the world. With a shady legal basis, perhaps none at all, the robo-signing process threatens to invalidate the mortgages processed and collapse the value of the investments made in MBS. Not only has the value of the mortgages collapsed, any remaining value may vanish as well.
Mike at Rortybomb outlined the legal problems with foreclosures in simple terms on Oct 8. MBS trusts, investors owning the mortgages, begin the foreclosure process, often times without proper documentation (just the robo-signer version). They employ mortgage servicers who use faulty or fraudulent documentation to initiate foreclosures in state courts. The courts then begin the foreclosure process against the homeowner in default. As Mike or Rortybomb explains, this process is fraught with legal problems.
Law, what law, we don't need no stinking law
The foreclosure process hit the wall after enough people followed Rep. Kaptur's suggestion and said, "Show me the note."
As it turns out, there was often no real note to produce. Lenders decided to bypass the process of filing papers with county governments in the mid 1990's. It saved them filing fees and allowed them to speed the process of pooling mortgages and selling the pools as MBS.
Utah University law professor Christopher L. Peterson described the process in a law review article published on September 29:
To avoid paying county recording fees, mortgage bankers formed a plan to create one shell company that would pretend to own all the mortgages in the country -- that way, the mortgage bankers would never have to record assignments since the same company would always “own” all the mortgages. They incorporated the shell company in Delaware and called it Mortgage Electronic Registration Systems, Inc. mortgages.
Even though not a single state legislature or appellate court had authorized this change in the real property recording, investors interested in subprime and exotic mortgage backed securities were still willing to buy mortgages recorded through this new proxy system. Christopher L. Peterson
The Mortgage Electronic Registration System (MERS) is ground zero for the current crisis. The very entity that was to bypass state and county laws and regulations and assume universal ownership apparently has a very limited or nonexistent basis in law.
If that's the case, then the MBS investors have no recourse to recover their investment in the mortgage investments. In addition, all mortgages written using these procedures are at risk if homeowners decide to walk away from upside down, under water notes by challenging the legality of their mortgages.
Stop Gap Measure Fails
Shortly after the September 22, Washington Post article on robo-signers, Senator Richard Casey, (D-PA) introduced 0/congress/bills/111/hr3808/text">a bill to the United States Senate that had been passed by the House of Representatives in April. The bill created a federal law invalidating the property laws of all 50 states. It made legal all of those robo-signed mortgages notarized outside the state in which the property was sold. President Obama exercised a pocket-veto and the bill died.
Who knows the motives of Senator Casey's, the Chairman of the Judiciary Committee, Senator Patrick Leahy (D-VT) who released the bill for a vote, and all the Senators present? A reasonable person interested in the facts could assume that this was a Hail Mary pass to preserve the value and legality of trillions of dollars of mortgages for the benefit of the Wall Street, the big banks, and their MBS clients.
Absent that protection, we may soon see a pincer move against the to-big-to-fail financial giants by state attorneys general and homeowners on one flank and MBS purchasers on the other.
Special thanks to Robert Oak for inspiring this article.
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Appendix: A Month of ForeclosureGate