PORTLAND, Ore. – There’s been no shortage of coverage over the past week about the great foreclosure freeze – several of the nation’s largest servicers of mortgages putting a halt on most, if not all, foreclosure sales amidst accusations that their officials mishandled foreclosure documents.
Arguments for and against the freeze have ensued. Consumer advocacy groups and politicians are arguing that banks aren’t using foreclosure as the last possible option. Real estate professionals, meanwhile, argue the freeze is delaying imminent foreclosures and worsening the real estate woes.
Regardless of your stance on the issue, there’s been very little coverage on how exactly these lenders mishandled the foreclosure documents.
Well, I’m going to try and take a stab at explaining the two issues that got us to the great foreclosure freeze, or foreclosure-gate, or as others are calling it, the biggest fraud in the history of capital markets.
The first is quite simple. As foreclosures began to add up, and multiplied upon themselves, high ups in these lending institutions started robo-signing – signing off on foreclosure documents without properly reviewing them, or in some cases, not reading them at all.
An official for GMAC Mortgage – one of three lenders to halt foreclosure sales in the 23 states where judges handle foreclosures – admitted late last year in a deposition that his team of 13 signed approximately 10,000 foreclosure documents a month without reading them. A Bank of America employee – the first lender to halt foreclosure sales in all 50 states – confessed during a bankruptcy case earlier this year that she signed nearly 8,000 foreclosure documents a month, usually not looking over them because of the sheer volume.
But this robo-signing issue, while obviously wrong, is only part of the problem. And honestly, doesn’t hold as much weight in court as the other issue.
The other problem has to do with ownerships of these mortgages that eventually ended up in foreclosures.
The problem stems from a computer program known as Mortgage Electronic Registration Systems – or MERS. It was created nearly a decade ago by officials from the major players in the mortgage business, Fannie Mae, Freddie Mac and GMAC (owned by Ally Financial, the first company to be accused of the mishandlings).
The program acts much like an electric stock exchange, selling mortgage-backed securities from these lending institutions to investors around the world. When it was created it was meant to help keep organized the millions of mortgages that were cut up, repackaged and sold across the world. But all it really did was make these mortgages owned by multiple people much more prevalent.
As a result, it’s hard to pinpoint exactly who, and how many people, own a mortgage. And the lawyers smell the blood in the water.
For example, attorneys Jeff Barnes and Elizabeth Lemoine won a federal court ruling late last month here in Oregon against MERS and OneWest Bank. The duo successfully defended and argued a Motion to Dismiss the borrowers’ lawsuit challenging a nonjudicial foreclosure.
In layman’s terms, the court ruled that MERS cannot transfer promissory notes, or simply, can’t do what it has been doing.
This is one of a handful of cases over the last year involving MERS. And it seems that judges are siding more and more against the computer program.
While I can see the obvious merit in the program considering how hot mortgage-backed securities were on the market, it seems that precedent is being set against it.
It’s going to be really interesting to see how this unfolds, especially a month before an election.