Friday, October 22, 2010

Foreclosure-gate

The latest unintended consequences of the Federal Reserve-fueled housing boom is the wave of foreclosure problems sweeping the mortgage industry.  When someone takes out a mortgage on a house, they sign an endless stack of papers.  The mortgage company then sells the mortgage, including the papers, to a bank like Bank of America or JPMorgan Chase.  The bank bundles the mortgage with other mortgages and sends it through a depositor to a trust such as Deutsche Bank.  The trust then hires a servicer to collect the monthly mortgage payments.

So, the mortgage moves from a mortgage company to a bank, to a depositor, to a trust, to a servicer.  At each step of the process the appropriate papers should have accompanied the mortgage to identify who owns the house and who pays the mortgage.

Now suppose the original buyers can't make their mortgage payments.  After six months the servicer comes calling and says pay up or vacate the house.  This is entirely legal, as long as the servicer can prove that the trust for which it is collecting payment is the real owner.  Trouble is, with all the mortgages created and now with mounting foreclosures nationally, such proof is in question.

The original paperwork was transferred to a computer system called MERS, for Mortgage Electronic Registration System, and though the paperwork should still be available, it quite often isn't. 

As Elizabeth Shell explains:
To support the complaint that the mortgage hasn't been paid, the servicer must have an affidavit that verifies the trust actually does own the mortgage, and thus is owed six months of payments.

And that means someone at the servicing company had to personally swear on a affidavit in front of a notary that the note's ownership had been verified and that the homeowners owed back mortgage payments. This process is supposed to be done for each and every foreclosure.

With all the foreclosures from the financial downturn, critics claim "robo-signers" from the banks were robotically signing off on literally hundreds of thousands of affidavits.

This is where the waters can get incredibly muddy for that verification process. First, the servicer's robo-signer signing off on these affidavits may not have been checking every single one to see that the trust indeed owned the mortgage note. Second, the notary (which is required for affidavits) was often done at a later date than when the robo-signer signed off on the complaint. Sometimes months later.
With accusations of robo-signing, judges have become reluctant to accept affidavits in lieu of a printed note. As an Associated Press article reports:
Though some have chalked up the foreclosure debacle to an overblown case of paperwork bungling, the underlying legal issues are far more serious. Yes, swearing that you've reviewed documents you've never seen is a legal offense. But at the center of the foreclosure scandal looms something much larger: the question of who actually owns the loans and who has the right to foreclose upon them. The paperwork issues being raised by lawyers and attorneys generals have the potential to blight not just the titles of foreclosed properties but also those belonging to homeowners who have never missed a mortgage payment.

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