Untangling the latest installment in the nation's foreclosure mess
This article first appeared in the St. Louis Beacon, Oct. 18, 2010 - Foreclosures in the U.S. set a new record last quarter, even as some of the nation's largest loan servicers acknowledge that they haven't been crossing their 'T's and dotting their 'i's while processing thousands upon thousands of foreclosure documents.
The bottom line: The mortgage mire has deepened.
- On Wednesday, attorneys general from 49 states, including Illinois and Missouri, announced a multi-state investigation of fraudulent practices by mortgage servicers whose employees have been "robo-signing" thousands of foreclosure affidavits without verifying -- or even looking at -- the documentation.
- Until the legal system works out these issues, a handful of servicers, including Bank of America, have suspended foreclosures.
- While that might offer a degree of relief for some homeowners who are in default on their mortgages, housing advocates warn that they should still take the initiative in seeking solutions with their lenders.
- Financial experts are worried that concerns over the titles of bank-owned properties already on the market might further restrict an already ailing housing market.
But here's the topping on this housing mud-pie: Foreclosures continued at a relentless pace from July through September as 288,345 U.S. properties were taken back by lenders, the most in any three-month stretch since the housing bust began in 2006, according to RealtyTrac, an online foreclosure-marketing firm. More than 816,000 homes have been repossessed during the first nine months of 2010, although the moratoriums and legal questions could actually prevent the nation from reaching a projected 1.2 million foreclosures by the end of the year.
For perspective on these foreclosure developments, the Beacon talked to some local experts:
- Eric Madkins, senior housing director, Urban League of Metropolitan St. Louis
- Juli Niemann, a financial analyst who is executive vice president of Smith Moore and Company in St. Louis
- Kevin Cottrell, co-founder of Kelsey Cottrell Realty Group in Ballwin
- Rusty Reinoehl, a St. Louis attorney who represents homeowners in foreclosure cases
What have the mortgage servicers been doing with foreclosure documents, and why are the state attorneys general so concerned about it?
In a nutshell: Employees of some of the nation's largest mortgage servicers have been rubberstamping foreclosure documents without verifying their accuracy or authenticity.
On Wednesday, Missouri Attorney General Chris Koster and Illinois Attorney General Lisa Madigan joined with 47 other state attorneys general in announcing an investigation into the foreclosure filings of all major loan servicers, in light of growing concerns that the filings were handled improperly. Alabama didn't sign on initially but later joined the investigation.
The action was prompted after three of the nation's largest servicers -- GMAC/Ally, Bank of America and JP Morgan Chase -- acknowledged that their employees had signed thousands of foreclosure affidavits without having personal knowledge of the facts involved and without verifying the loan information. The attorneys general warned that this process, known as "robo-signing," could be a deceptive act and unfair practice. In many cases, the signings were done without the presence of a notary public, a violation of state law. The multistate investigation includes state bank and mortgage regulators and is being coordinated to address issues common to a large number of states.
Faced with concerns over its documentation process, Bank of America recently announced that it was stopping foreclosures nationwide, while JPMorgan Chase and GMAC announced moratoriums in 23 states, including Illinois.
At the heart of much of this mess are mortgage-backed securities, those complex financial instruments that fueled the mortgage meltdown in the first place, according to Reinoehl, who has represented dozens of St. Louis area homeowners in foreclosure cases.
Because of the way banks packaged and sold mortgages, it is often difficult to determine who actually owns a mortgage. One of the legal arguments being raised is that only the owner of the mortgage note can foreclose on a property -- not the loan servicer, Reinoehl said.
"A lot of homeowners were foreclosed on, based upon affidavits that we're now learning were signed by people signing 8,000 or 10,000 of them a month," he said. "They were showing up with an affidavit from someone at the bank saying, 'We are the holder of the note,' and those are hard to fight without spending a lot of money on an expert to trace the loan, investors, trusts, etc. Often these are homeowners who have fallen on hard times, were forced to default, and they don't have the money to hire experts and incur expenses."
Reinoehl said the mortgage servicers suspended foreclosures after title insurance companies learned that employees were rubberstamping documents -- and then refused to insure titles of properties foreclosed on by those lenders. Should a foreclosure be ruled illegal, the new owner of the property could be vulnerable to ownership claims, and the title insurance company could be left on the financial hook because it guaranteed that the title had no problems.
"It could bankrupt the title insurance companies," Reinoehl said. "And where does that leave the person who purchased the foreclosed home? With a title insurance check but with no house."
In Illinois, Madigan had already sent letters to GMAC/Ally, Bank of America and JP Morgan Chase demanding they halt all pending foreclosures in the state, including post-foreclosure sales and evictions. In addition, she had demanded that 23 other loan servicers suspend foreclosure action unless they could prove that their filings were accurate.
Madigan also called on Congress to re-introduce legislation drafted by U.S. Sen. Richard Durbin, D-Ill., that would permit bankruptcy court judges to reduce principal amounts on mortgages. Housing advocates have long argued that giving judges that power could force lenders to modify payment terms for homeowners, in effect, streamlining the mortgage modification process.
Should there be a national moratorium on foreclosures?
While some Democratic politicians, including Senate Majority Leader Harry Reid of Nevada, have urged a national moratorium on foreclosures until servicers prove they are following the law, White House spokesman Robert Gibbs expressed concerns about such a strategy.
On Tuesday, Gibbs said that such action could create a "series of unintended consequences" that could harm recovery of the housing market. He added that the administration of President Barack Obama does support the multi-state investigation and wants to ensure that the foreclosure process is done legally.
Last week Obama vetoed legislation that would have required federal and state courts to accept documents notarized in other states, including those with electronic signatures. The legislation was originally designed to speed up foreclosure cases, which are already clogging the legal system -- and was written and approved before the robo-signing came to light. Critics argued that the legislation would make it more difficult to challenge fraudulent documents and could further open the doors to fraudulent practices.
Niemann said she is glad Obama didn't sign the bill because it is clear that abuses have happened.
"Expediting this would have just literally been a license to steal," she said. "Procedures have not been followed. That's been patently obvious down the line. Every time you sell the property or take over and assume the loan, there has been improper transfer of the deeds and titles, and as a consequence, a lot of stuff has been lost in the shuffle. This happens when you have a massive event, and they can't keep up with the paperwork. Untangling the mess is going to take time. But in the meantime, trying to straighten things out by going turbo on foreclosures was just nuts."
That said, Niemann believes a national moratorium would have been a bad idea because it would have encouraged people who owe more on their homes than they are worth to simply stop paying their mortgages.
"If they had done a massive moratorium, everyone rationally could stop paying their mortgages because they couldn't be evicted," she said.
While it is unfortunate that many homeowners are under water on their mortgages, the hard truth is that they are responsible for their debt, Niemann said.
"Whatever happened to the sanctity of the contract? Whose fault is it that you bought at the peak of the housing market? It's not the mortgage company's. It's not the bank's. It's personal responsibility," she said.
While some lenders may share responsibility because of lax underwriting policies and, in some cases, the use of high-pressure marketing tactics, in the end, homeowners signed the contracts.
"One hates to see this happening, but that's the consequences of a bad decision," she said. "How many times did your mother tell you to save for a rainy day? We are under-saved in the United States. So people basically are spending all of their income, and when the disaster hits they have no savings to tap into. Unemployment insurance certainly isn't going to cover the mortgage, especially if it's a sizeable mortgage."
Is anyone going to get a free house out of this?
Reinoehl believes that the legal questions being raised have opened the door for homeowners to file successful quiet title suits against lenders who can't support claims that they are the holders of the notes on foreclosed properties. Such suits would raise all sorts of legal questions about who actually owns the properties, who can collect mortgage payments -- or foreclose on them.
In the meantime, lenders may be more willing to work with homeowners requesting mortgage modifications, Reinoehl said. And at the end of the day, that's also what his legal actions are intended to do.
"I attempt to give homeowners leverage to negotiate a modification when their attempts to get modifications through the bank's 'good will' and correct processing of their documents have failed," he said. "It is my belief that banks are extremely inefficient when they are attempting to process modifications."
Reinoehl said that many of his clients were denied modifications even though they met the guidelines of the lender and the federal government's Making Home Affordable program.
"The moratorium has bought the homeowner some breathing room," Reinoehl said. "It's gotten so much media attention on a national, local and regional level that I anticipate the banks will at least somewhat more seriously consider modifications to avoid these mass foreclosures that we've seen because that's what's gotten them in trouble in the first place. In my opinion, they should be considering modifications whenever they're an option anyway, because who wants a vacant house?"
Reinoehl said he encourages homeowners to seek financial counseling to help them decide if they should fight to keep their homes.
"It has to financially make sense," he said. "The banks have to make some money. I don't have any clients who simply have no income because if they don't they can't afford to pay me either. In almost every circumstance, I have clients who have been given a trial payment, made their trial payment, made them for three or four months, and then the bank sent the payment back and said we're foreclosing. I don't understand why if the trial payment made sense three months ago, and they've been making it, why are they rejecting it now?"
Reinoehl believes the foreclosure moratoriums and legal standoff will last until at least Election Day because of the political fallout from any action taken to remedy the situation.
In the end, homeowners who are in default should be guaranteed fair treatment under the law, but they shouldn't expect to get their homes back because the banks didn't do the foreclosures correctly.
"I don't anticipate getting anybody a free house -- I just don't think that the judges would let that happen," Reinoehl said.