‘Robo-signing’ controversy grows

Uncertainty could scare homebuyers from foreclosures

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Editor’s note: This story has been updated to include comments from the American Land Title Association, Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency.

The "robo-signing" controversy over lenders’ allegedly lax foreclosure procedures is picking up momentum, with the Office of Comptroller of the Currency ordering the nation’s largest lenders to review their foreclosure processes.

The OCC has directed Bank of America, J.P. Morgan Chase, Citibank, HSBC, PNC Bank, U.S. Bank, Wells Fargo and GMAC Mortgage to make sure they are following proper procedures and that no harm has been done in the past, the Washington Post reported, citing an OCC spokesman.

In testimony before members of the Senate Banking Committee Thursday, OCC Acting Director John Walsh said some lenders clearly had deficiencies in their systems, the Post reported. The committee was holding a hearing on implementation of the financial regulatory reform bill passed by Congress in July.

Attorneys general in California, Florida, Colorado, Ohio, Illinois, Iowa, North Carolina and Connecticut are also looking into lenders’ foreclosure procedures. Connecticut Attorney General Richard Blumenthal today asked the state’s Judicial Department to freeze all home foreclosures for 60 days.

GMAC Mortgage and JP Morgan Chase have already halted foreclosure proceedings in 23 states, following allegations that workers the companies employed failed to follow the proper legal procedures in filing paperwork related to judicial foreclosure proceedings.

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Workers at both companies have testified in legal depositions that they signed court affidavits that contained information they had not personally verified.

Ohio Secretary of State Jennifer Brunner has accused lenders of attempting to "concoct a chain of title they never had" in signing off on documents that supposedly demonstrated they had the right to foreclose.

Because mortgages may be bought and sold many times after they are originated, producing the paperwork that proves the lender is the noteholder can be laborious.

While lawyers representing homeowners in foreclosure proceedings have challenged lenders on such grounds before, they have mostly succeeded only in delaying, not stopping, foreclosure proceedings. Ultimately, in most cases lenders have been able to prove they are the noteholder.

GMAC Mortgage and JP Morgan Chase have said that will prove to be the case with the vast majority of foreclosure proceedings they have suspended.

The "robo-signing" controversy could slow the foreclosure process for thousands of homeowners, which some analysts say might help stabilize prices in distressed markets.

But it could also raise fears among homebuyers that if they buy a home in foreclosure — or even a bank-owned (REO) property from a lender — that they will find themselves in the midst of a legal challenge by the property’s former owner.

As more homeowners in the foreclosure process become aware of the issue, they are expected to hire lawyers to challenge the proceedings, the New York Times reported.

Homebuyers who bought distressed homes in instances where foreclosures were not properly done "could be vulnerable to claims by the former owners," the newspaper warned.

The Times reported that Old Republic National Title has instructed agents not to issue title insurance policies on properties foreclosed on by GMAC Mortgage (A spokeswoman for Old Republic told Inman News the company has a "policy of not speaking to the press.")

And a New York Times consumer blog, "Making the Most of Your Money," today warned would-be homebuyers that "if you are thinking about buying a foreclosed home, you may want to hold off."

"Is it safe to buy a foreclosed home now? Or will it even be possible?" asked blogger Tara Siegel Bernard.

A spokesman for the National Association of Realtors said NAR is monitoring the situation. Foreclosure laws vary from state to state, so it is difficult to make a blanket statement on issues involved with purchasing foreclosed and REO homes, the spokesman said.

In a statement, the American Land Title Association said flaws in documentation filed in the foreclosure process should ultimately have little adverse impact on new owners of REO properties, or on title insurance claims.

"If a new homeowner’s title is challenged because of a faulty foreclosure, the title insurer may have an obligation to defend the challenge," said Kurt Pfotenhauer, chief executive officer of ALTA. "However, it is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments on the loan subject to the foreclosure."

Laws vary from state to state, but homeowners who have purchased properties that have been through foreclosure have "numerous defenses available to assure their continued ownership," ALTA said.

The alleged deficiency in the foreclosure process may not have harmed the previous owner, for example. Also, foreclosure judgments are final court orders, and in many instances it will be too late for the previous owner to raise a technical objection.

In the event that a court does set aside a foreclosure due to a defect in documentation, the foreclosing lender would be required to return to the new homeowner all funds obtained from them, ALTA said, resulting in no loss under the title insurance policy.

Pfotenhauer said ALTA will nevertheless be asking lenders "to acknowledge that all appropriate procedures have been followed by the lending community before foreclosed properties are resold on the market."

Mortgage financiers Fannie Mae and Freddie Mac employ loan servicers who are handling hundreds of thousands of delinquent mortgages, and both companies have large inventories of REO properties they are trying to dispose of.

Their regulator, the Federal Housing Finance Agency (FHFA), issued a statement today acknowledging that accounts of problems with GMAC Mortgage and Chase’s handling of foreclosures "raise concerns for homeowners and mortgage investors alike."

FHFA said it supports efforts by Fannie and Freddie to remind loan servicers to process foreclosures "in accordance with their seller-servicer agreements and applicable laws and regulations. Where deficiencies have been identified, FHFA has directed (Fannie and Freddie) to work collectively to develop and implement a consistent approach to address any problems."

Terry Edwards, Fannie Mae executive vice president for foreclosure process compliance, said in a statement that the company is "disturbed by reports of servicers failing to follow proper procedures in the administration of foreclosure cases. We strongly believe that homeowners who have exhausted all other options and are now facing foreclosure must be treated fairly and equitably."

Edwards said loan servicers "should adhere to the exact requirements of the law in all of these cases, including the proper execution of affidavits, verifications and other legal documents as part of the default process."

Freddie Mac COO Bruce Witherell said the company is "deeply concerned" about the recent reports, adding that the alleged practices regarding the signing of affidavits "are clearly not in compliance with Freddie Mac’s guidelines and directives to its servicers. We are providing instructions to our servicers later today that are intended to ensure that their foreclosure processes are in compliance with state law and Freddie Mac’s servicing requirements."


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