In addition to satisfying federal and state regulators that they’re following the letter of the law, lenders embroiled in the "robo signing" scandal may soon have to provide warranties to title insurers in order to continue selling foreclosed homes.
Bank of America has already agreed to provide warranties to Fidelity National Financial Inc. that cover the title insurer’s costs if employees processing foreclosure documents for the bank make mistakes, Bloomberg News reports, and is in talks with other title insurers to do the same.
In a weekly e-mail to members Monday, American Land Title Association CEO Kurt Pfotenhauer said the group has been working closely with officials at the Federal Housing Finance Agency (FHFA), Fannie Mae and Freddie Mac, lenders and other stakeholders to secure assurances that lenders have performed proper due diligence on their foreclosures. Pfotenhauer told Bloomberg that the talks include the issuance of warranties.
Bank of America announced Friday that it would temporarily halt foreclosure sales in all 50 states until it completed a review of its foreclosure procedures, which so far "shows the basis for foreclosure decisions is accurate."
Bank of America reportedly agreed to provide warranties to Fidelity on the same day, which would presumably facilitate the sale of foreclosed properties once the review is completed. Bank of America did not immediately respond to a request for comment.
At least four other loan servicers have slowed or halted some foreclosure proceedings in 23 judicial foreclosure states, following allegations that employees handling court filings for the companies signed affidavits that contained information they had not personally verified.
Other loan servicers taking action, to date, are GMAC Mortgage, JP Morgan Chase, PNC Financial Services Group Inc. and Litton Loan Servicing.
Although the likelihood of a national foreclosure moratorium is receding — the Obama administration is on record as opposing the idea — as many as 40 state attorneys general are reportedly readying a joint investigation into the "robo signing" scandal.
In addition to mollifying state and federal officials, lenders that want to sell properties they have foreclosed must also convince title insurers they have followed the proper procedures.
ALTA, the title insurance industry’s trade group, continues to maintain that flaws in documentation filed in the foreclosure process should ultimately have little adverse impact on buyers of "real estate owned" (also known as bank-owned or REO) properties or on title insurance claims.
But Pfotenhauer acknowledged to Bloomberg that court rulings on valid foreclosures are going to be challenged, and that title insurers "may get pulled into litigation."
Old Republic National Title Insurance Co. has reportedly stopped insuring title for properties foreclosed on by JP Morgan Chase and GMAC Mortgage. The company will not confirm or deny the reports, which are based on internal company memos.
The Associated Press reported Friday that Stewart Title Guaranty Co. has issued guidelines to agents that include restrictions on insuring title for properties foreclosed on by JP Morgan Chase, Bank of America, OneWest Bank and GMAC Mortgage.
A spokesman for Stewart Title told Inman News that the bulletin provided guidelines and standards to enable its agents to insure REO transactions in jurisdictions where foreclosing lenders or state attorneys general have not issued a moratorium.
In arguing against a foreclosure moratorium, Peter Swire, an Ohio State University law professor who until August was a special assistant to President Obama for economic policy, said senior corporate officers at banks should instead personally certify that they have checked their internal foreclosure processes.
By doing so, they "would be essentially making a stronger set of ‘reps and warranties’ about the banks’ systems," Swire said in an opinion piece published by the Center for American Progress, where he is a senior fellow.
If a senior bank officer is not willing to make such a certification, Swire said, "then the regulators and the public have good reason to remain skeptical. If and when the senior officer does sign, the officer and the bank are taking responsibility — something many feel has not happened enough since the financial crisis began."
The scope of such certifications could vary, based on the what the senior bank official can actually promise, Swire said.
"A bank may have done enough double-checking to be confident that robo-signing has not occurred, for instance, but may not have double-checked its entire range of operations to make sure that other problems do not exist, such as possible problems in the title of some prior foreclosures," Swire said.
Banks "can gradually expand the scope of certifications over time as they scrub their systems, steadily increasing the portion of the housing market where judges and the public have this renewed basis for confidence."
In the long run, banks may also have to address questions about the system they set up in 1997 to facilitate reassignments of mortgages and track their ownership electronically.
The Mortgage Electronic Registration Systems, or MERS, saved financial firms hundreds of millions of dollars by reducing paperwork involved with reassigning loans, the Washington Post reports. But now lenders often find themselves without an official paper trail proving chain of ownership, leading them to resort to measures that ignited the robo-signing scandal, the paper said.
Ohio Secretary of State Jennifer Brunner has accused lenders of attempted to "concoct a chain of title they never had" in signing off on documents that supposedly demonstrated they had the right to foreclose.
In his weekly e-mail to ALTA members, Pfotenhauer acknowledged that "some lawyers are arguing, mostly unsuccessfully, that MERS does not have standing to foreclose on the property because (it doesn’t) own the promissory note, while others claim that MERS involvement makes the entire foreclosure illegal."
"If you read nothing else," Pfotenhauer advised, "check out MERS’s response to speculation about their role in the foreclosure process."
In a statement, MERS maintains that tracking reassignments of mortgages "does not create a defect in the mortgage or deed of trust."
Claims that MERS disrupts or creates a defect in the mortgage or deed of trust are not supported by fact or legal precedents," the group said.
"This is often used as a tactic by lawyers to delay or prevent the foreclosure. The mortgage lien is granted to MERS by the borrower and the seller and that is what makes MERS the mortgagee. The role of mortgagee is legal and binding and confers to MERS certain legal rights and responsibilities."