First it was GMAC halting foreclosures in 23 states, then JP Morgan Chase said it will delay the process of more than 56,000 foreclosure proceedings and from there all the way to Bank Of America announcing last week that it was pausing foreclosure proceedings in all 50 states while they review the process and paperwork for “defects”.
Today it was announced that California will be joining a task force created as a multi-state inquiry into foreclosures.
All this comes when it seemed like foreclosures where starting to ease up.
But what is this latest crisis all about. What is it that the banks are corned with at this point of the game?
Lets start by a quick explanation of the life of a mortgage .
Once a mortgage is created, it does not usually stay with the bank or institution that originated it. Mortgages will change hands several times through its life span. When a mortgage gets sold and changes hands the new owners have to get an “assignment” from the buyers. An assignment is a document signed by both buyer and seller acknowledging the sale of the loan, this note has to be attached to all other documents and delivered to the new owner.
It gets a little more complicated from here. Many mortgages are the “securitized” this means that it get pooled in with a a large number of other mortgages by an investment firm and becomes part of a pool of mortgages that will be sold off in slices to different investors as an investment vehicle. Then someone is assigned with being the one in charge of properly dividing the money that comes in from the monthly mortgage payments and also of foreclosing on the ones that have stopped paying. This person is called the “servicer” . When a mortgage is securitized, what happens to the note, who gets the note? Neither the investor nor the servicer gets this note or assignment, not even the investment vehicle has the assignment, instead they go to a repository company and the transfer is noted in an electronic base.
So where did the break down occur? well, at the height of the mortgage wave, Notes were coming in at such a fast pace and paperwork was not being filed, revised or monitored. This was the barely -doc to no-doc era and so paperwork was more of an afterthought in many cases and this lack of concern went from the origination of the loan all the way to all the transfers.
Making matters even more complicated is the fact that some of the institutions went under or were acquired by larger ones.
You might ask, how does dis impact the foreclosures and why if that had been happening for all this years, why the halt now?
Well, there were warning signs and some people did raise their concerned voices but they were not paid attention to, probably because the crisis and the bubble burst seemed so large and that was the main concern, so it was until Jeffrey Stephan a loan officer for GMAC admitted in a deposition to the signing of about 10,000 foreclosure proceedings per month for five years straight without reviewing the paperwork properly, that serious cracks in the process were revealed in a very public way that caught so many people’s attention and brought forth a probe into GMAC (Ally) foreclosure proceedings starting a chain reaction to other banks since Jeffreys signed foreclosures for other institutions as well.
Initially the halt was done in 23 states that had what is called Judicial foreclosures. This means, that their foreclosure process, requires the lender to go through a court process and file a claim and turn in the appropriate paperwork which includes a sworn and notarized affidavit of a loan officer and submit the mortgage documents.
Often, however, judges will issue foreclosure orders without the mortgage documents so long as the borrower doesn’t contest this point.Once the do this the get the court approval to move ahead with the foreclosures.
As I said not all states require this, some states, like California, do not need to get a court approval in order to complete a foreclosure. So the first states where the pause was enacted where those where the bank had to initiate a court process and had been required to turn in paperwork which in many cases was nowhere to be found, so how could they have foreclosed with court approval without all of the paperwork in order?
In many cases the foreclosures were not contested by anyone and so in those cases the banks went ahead and foreclosed even with the missing assignment documents, but in some other cases there are allegations of banks and evidence has been produced to show that notarizations have been faked, documents forged.
Even though the situation looks worse in judicial states because there is forgery that was sent to court involved, this dies not exempt the other states from misdoings so, that is why the halt was extended in many cases to all 50 states.
In many cases, the notes do exist it will just take a big effort to find them and complete this files propperly. So this might sound like it is simply a case of paying to much attention to a paper trail. However, the fact that all this got through the banks, that there are allegations of forgery and in many cases there simply are no notes or assignments, this has the potential to become a huge mess.
There is lawsuit written all over this one from so many sides that it will look like lawyers playing fields.
Homeowners who have been paying their mortgage regularly are wanting to make sure the one they are paying actually owns the note, and if it turns out they don’t, well they will be suing for money paid to an institution that had no rights. Now there are those who properly securitize the loan and did not get the assignment note, they are looking into lawsuits from investors because tis bonds usually include a representation and warranties that the bank has obtained all documentation related to the mortgages included in the loan.
Without going into detail on this one, there is also a problem between senior and junior liens, and when the froze the foreclosure process, senior leans are responsible to pay junior liens some money even when the mortgage is not bringing in any, until this mortgage is foreclosed, so this puts senior liens in a delicate position.
And then, what happens if a note is never found? who owns that mortgage? Is the homeowner free and clear? who is he supposed to make payments to? If they stop making payments, who will have the right to foreclose?
Now let’s take it a step further. What will happen with all those people whose home was foreclosed and sold? If they come after the bank and actually prove that the foreclosure was improperly done? Their home was already sold, there is a new owner who might be facing a legal battle he did not sign up for.
Finally, if this situation takes a year to correct, once the halt is lifted, we will find ourselves with a wave of foreclosures that had been accumulating instead of slowly coming into the market at a regular pace, how will this new flood be absorbed by a weakened market?
Since the news on this one broke I have also been hearing some homeowners not currently in default that are not happy to hear that so many people will be living rent/mortgage free for a year (or two) while they are doing things correctly.
We should be paying attention to this one closely!
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