Monday, October 18, 2010

Foreclosures: The Plot Thickens


Jonathan Foxx, is the President and Managing Director of Lenders Compliance Group, the first full-service, mortgage risk management firm in the country.


Question: What term describes when a servicer does not comply with applicable state and local laws on foreclosure?

Multiple Choice:
(A) Foreclosuregate.
(B) Foreclosure meltdown.
(C) Foreclosure scandal.
(D) Foreclosure fraud.
(E) All of the Above.


In my Commentary of October 4, 2010, issued soon after the commencement of the current crisis in foreclosure processes, I wrote:

  • I suppose an argument can be made that this situation will eventually straighten out and most foreclosures will be completed in the fullness of time. This is a procedural matter that will require a legal solution. Most foreclosures are not going to be reversed, once this legal mess gets disentangled, although regulatory oversight may be considerably strengthened.

In the two weeks since making that observation, we have learned that gaming the foreclosure process has been far more the norm than the exception among several servicers. It is one thing when a particular servicer acts on its own to cut corners in due diligence, it is quite another thing when others, especially the largest servicers, act in a similar way.

Regulators have a phrase for this: systemic failure.

There is nobody who truly believes the handling of enormous number of mortgages through the foreclosure process has been an easy or efficient task to effectuate. Our clients look to us to offer guidance in administrative coordination and relevant preparation. But applicable statutes and implementing regulations are meant to be followed - fully, accurately, and timely - by all parties to a transaction. An alleged failure to comply - and what compliance is! - may require a court to decide. But no party to a contract can walk away from requirements of the law, or the attendant legal remedies. Servicers are no doubt anticipating extensive litigation against them from borrowers and investors alike!

Of course, the politicians have gotten into the act, with some of them asking all servicers to voluntarily impose a moratorium on all foreclosures. All servicers? All foreclosures? Voluntarily? Good luck with that! At this point, the Attorneys General of all 50 states - up from 23 states two weeks ago - have banded together to investigate the alleged violation of foreclosure procedures and the "robo-signing" predicament.

Last Tuesday, October 12th, President Obama pocket vetoed a bill that would have streamlined the foreclosure process by permitting servicers to file foreclosure documents at state and federal courts that were notarized by a notary or by a computer. Recently, there have been allegations that the Administration actually knew for some time about the weaknesses inherent in some servicers' foreclosure processes. Expediency in foreclosing seemed to be tolerated, in lieu of regulatory compliance and following the dictates of the law.

The following day, Wednesday, October 13th, I was on a morning call with a friend when he broke off our conversation to tell me that, just at that instant, news sources had reported in real time that JPMorgan Chase had suspended its use of MERS - and would henceforth foreclose in its own name, not in the name of MERS. Given the on-going litigation against MERS, I suppose such an outcome was inevitable. Lawsuits against MERS abound in many states, including California, Nevada, Arizona, Maine, Arkansas, Tennessee, and Kansas. There is now a class action complaint in Kentucky, a RICO-action, against MERS, GMAC, Et Al.

Simply put: at issue is whether MERS has standing to foreclose in its own name, as nominee, with beneficial interest in the note or mortgage, and thus the legal authority to transfer promissory notes and appoint successor trustees.

Many borrowers facing foreclosure, and their attorneys, have become aware of the opportunity to postpone or prevent foreclosure. They are finding ways and means to challenge foreclosure proceedings. In fact, an investigative journalist has written a 250 page report, entitled "Clouded Titles," about the MERS fiasco and the possible options that attorneys are suggesting to avoid foreclosure.

Fannie and Freddie, and Citicorp, have suspended their use of certain foreclosure attorneys in the wake of the "robo-signing" scandal.

Over the weekend, Shaun Donovan, the HUD Secretary, stated that "a national, blanket moratorium on all foreclosure sales would do far more harm than good -- hurting homeowners and home-buyers alike at a time when foreclosed homes make up 25 percent of home sales." The problem is this, though: without clear title or insurance companies willing to insure title, who would buy an REO?

As I have said repeatedly, the drafting, maintaining, and monitoring of policies, procedures, forms, and practices, and also hiring appropriately trained personnel, to assure compliance with state and local foreclosure laws are the only operationally sound corrective and proactive measures. Nevertheless, this sudden foreclosure paralysis is yet another example of financial institutions not implementing existing regulations.

An opportunity now presents itself to permanently fix this systemic risk! Will we rise to the challenge?


So, What Do You Think?

I would welcome your comments and views.

Please feel free to email me at any time.

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LENDERS COMPLIANCE GROUP is the first full-service, mortgage risk management firm in the country, specializing exclusively in mortgage compliance and offering a full suite of hands-on and automated services in residential mortgage banking.