OCC - Correcting Foreclosure Practices

On December 20, 2011, the Office of the Comptroller of the Currency (OCC) updated its announcement regarding correcting foreclosure practices. We have previously issued newsletters here, here, and here on this subject and also related matters regarding foreclosure processing.

Earlier in 2011, on April 13, 2011, the OCC, the Board of Governors of the Federal Reserve System (FRB), and the Office of Thrift Supervision (OTS) announced enforcement actions against 14 large residential mortgage servicers and two third-party vendors for unsafe and unsound practices related to residential mortgage servicing and foreclosure processing. The enforcement actions were based on interagency examinations conducted in the fourth quarter of 2010.

Through those enforcement actions (consent orders), federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

On January 4, 2012, the OCC announced that it was promoting public service advertisements about the Independent Foreclosure Review.

In this newsletter, we will consider several aspects with respect to implementation of the consent orders.

• Independent Foreclosure Review
• Mailings to Consumers
• Deadline for Review Requests
• Independent Foreclosure Auditor
• Eligibility for Review
• Notifying the Public
• Engagement Letters
• Interim Report
• Library

Independent Foreclosure Review

Under the consent orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers.

Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

Mailings to Consumers 

As part of that program, the 14 mortgage servicers covered by the enforcement actions were required to begin mailings to consumers on November 1, 2011, continuing to December 31, 2011.

The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the special Independent Foreclosure Review website for more information about the review and claim process. Telephonic assistance is given at this website.

Deadline for Review Requests

 Review requests must be received by April 30, 2012.

Independent Foreclosure Auditor

An independent foreclosure auditor must be a third-party. The independent foreclosure auditor will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers.

Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

OCC: Fixing Deficient Foreclosure Practices

Jonathan Foxx
President & Managing Director
Lenders Compliance Group

The Office of the Comptroller of the Currency (OCC) issued a report on November 22, 2011 on the actions by 12 national bank and federal savings association mortgage servicers to comply with consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices.

The report, entitled Interim Status Report: Foreclosure-Related Consent Orders, summarizes progress on activities related to the independent foreclosure review announced November 1, 2011, as well as other activities to enhance mortgage servicing operations, strengthen oversight of third-party service providers and activities related to Mortgage Electronic Registration Systems (MERS), improve management information systems, assess and manage risk, and ensure compliance with applicable laws and regulations.

Based on information in the relevant OCC issuances, much of the work to correct identified weaknesses in policies, operating procedures, various control functions, and audit processes would be substantially complete in the first part of 2012, but other, longer term initiatives will continue through the balance of 2012.

In addition to the interim report, please note that the OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders.

For those of you who have not had to respond to and implement a consent order, I would say that the engagement letters are generally pro forma and consistent with similar terms and conditions we require in our own commitments and proposals for such audits and due diligence reviews. As a general proposition, the review process being implemented at some companies may differ from that described in the engagement letters because of subsequent coordination with the OCC to ensure a consistent process among the servicers.   

The engagement letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews. In fact, the terms of engagement specifically prohibit servicers from overseeing, directing, or supervising any of the reviews. Limited proprietary and personal information has been redacted.

Newsletter Sections
Interim Report
Engagement Letters
Correcting Foreclosure Deficiencies
Professional Assistance
Library

Interim Report

The interim report summarizes actions taken by national banks and federal savings associations to correct deficiencies in mortgage servicing and foreclosure processing identified in consent orders issued on April 13, 2011, by the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) against 12 mortgage servicers.

The OCC took action against eight national bank servicers: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. The OTS took action against four federal savings association servicers and two holding companies: Aurora Bank, FSB; EverBank (and the thrift holding company, EverBank Financial Corp.); OneWest Bank, FSB (and its holding company IMB HoldCo LLC); and Sovereign Bank.

The consent orders were based on examiner findings during an interagency review of major residential mortgage servicers conducted in the fourth quarter of 2010.

A summary of the findings of the interagency review is available in the "Interagency Review of Foreclosure Policies and Practices," produced by the OCC, Board of Governors of the Federal Reserve Board (FRB), and OTS.

Engagement Letters
Pursuant to 12 C.F.R. § 4.12(c), the listing order of the engagement letters at the OCC's election has no precedential significance.

The engagement letters were submitted by the independent consultants that were retained by servicers regulated by the OCC. These independent consultants will be conducting foreclosure reviews pursuant to the requirements of the April 13, 2011 consent orders. 

The engagement letters describe how the independent consultants will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of servicer deficiencies identified in the OCC's consent orders.  
Limited proprietary and personal information has been redacted from the engagement letters.

Since the acceptance of the engagement letters in September of this year, the independent consultants have further refined and made adjustments to the processes, procedures, and methodologies outlined in the engagement letters in consultation with OCC supervision staff.

For instance, there were a number of changes made to integrated claims processes to ensure a single, uniform process among the servicers.

Correcting Foreclosure Deficiencies

Independent Foreclosure Review

As part of those consent orders, federal regulators required servicers to engage independent firms to conduct a multi-faceted review of foreclosure actions in process in 2009 and 2010.

Under the orders, independent consultants are charged with evaluating whether borrowers suffered financial injury through errors, misrepresentations, or other deficiencies in foreclosure practices and determining appropriate remediation for those customers. Where a borrower suffered financial injury as a result of such practices, the agencies' orders require financial remediation to be provided.

As part of that program, 14 mortgage servicers covered by the enforcement actions will begin mailings November 1, 2011 that will continue through the end of the year. The mailings are intended to provide information to potentially eligible borrowers on how to request a review of their case if they believe they suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure proceedings related to their primary residence between January 1, 2009 and December 31, 2010. The mailings will include a request for review form.

Borrowers may also visit the Independent Foreclosure Review for more information about the review and claim process. Furthermore, assistance with the form and answers to questions about the process are available at 1-888-952-9105, Monday through Friday from 8 a.m. to 10 p.m. (ET) and Saturday from 8 a.m. to 5 p.m. (ET).
Requests for review must be received by April 30, 2012.

The third-party consultant will assess whether any errors, misrepresentations, or other deficiencies resulted in financial injury to borrowers. Where a borrower suffered financial injury as a result of such practices, the consent orders require remediation to be provided. 

During the review, customers may be contacted by mortgage servicers for additional information at the direction of the independent consultant.

Professional Assistance

Library

Interim Status Report: Foreclosure-Related Consent Orders
November 2011

Interagency Review of Foreclosure Policies and Practices
April 2011

New Mortgage Servicing Practices

On August 10, 2010, the New York State Banking Department issued new regulations that address the business practices of mortgage loan servicers and establish additional consumer protections for homeowners.

Part 419 of the Superintendent's Regulations, which went into effect on October 1, 2010, were a follow-up to the adoption of Part 418 in July 2009, which established standards and procedures for the registration of mortgage loan servicers in New York. The regulations implement certain provisions of the Mortgage Lending Reform Law enacted in 2008 to address the foreclosure crisis and establish greater consumer protections for subprime and high-cost home loans.

Recently, Benjamin M. Lawsky, the Superintendent of Financial Services of New York's Department of Financial Services and Banking Department, announced that the Department had entered into two agreements with certain servicers to implement new servicing practices. The Department considers these new servicing requirements to be landmark changes, and they form the basis of the new Mortgage Servicing Practices.

In the first instance, Superintendent Lawsky announced on September 1, 2011 that Goldman Sachs Bank, Ocwen Financial Corp, and Litton Loan Servicing LP agreed to adhere to the new Mortgage Servicing Practices. The agreement, entitled "Agreement on Mortgage Servicing Practices," was required by the Department as a condition to allowing Ocwen's acquisition of Litton, the Goldman Sachs mortgage servicing subsidiary. With the Litton acquisition, Ocwen's mortgage servicing entity, Ocwen Loan Servicing, LLC becomes the 12th largest servicer in the nation. The servicer has 60 days from the date of the acquisition to implement the provisions and requirements of the Mortgage Servicing Practices.

In the second instance, Superintendent Lawsky announced on November 10, 2011 that Morgan Stanley and its mortgage servicer Saxon, American Home Mortgage Servicing, and Vericrest Financial had agreed to the new Mortgage Servicing Practices.

The changes are substantial and clearly the Department is committed to enforcing them. Maybe you would suggest other changes. In any event, these servicing requirements will benefit both the consumer and the mortgage industry.

It is likely that these new Mortgage Servicing Practices will become a model in other states.

The following is a brief review of these new practices.

OVERVIEW

The Department has consumer protection concerns relating to practices "highlighted in the media" that have been prevalent in the mortgage servicing industry generally, including but not limited to, (1) the practice of "Robo-signing," (2) referring to affidavits in foreclosure proceedings that falsely attest that the signer has personal knowledge of the facts presented therein and/or were not notarized in accordance with state law; (3) weak internal controls and oversight that may have compromised the accuracy of foreclosure documents; (4) unfair and improper practices in connection with loss mitigation, including improper denials of loan modifications; and, (5) imposition of improper fees by servicers, among others.

OUTLINE OF PRACTICES

-Document Execution and Accuracy of Documentation
-Ownership of Note, Foreclosures
-Quality Assurance and Audits
-Oversight of Third Party Vendors
-Staffing
-Training
-Notices, Single Point of Contact and Modifications for Transferred Servicing Files
-Borrower Communication
-Independent Evaluation of Loan Modification Denials
-Restrictions on Dual Tracking
-Application of Payments
-Servicing Fees
-Force-Placed Insurance
-Compliance with Federal and State Law

PROHIBITED PRACTICES

• "Robo-signing," where servicer staff signed affidavits stating they reviewed loan documents when they had not actually done so.

• Weak internal controls and oversight that compromise the accuracy of foreclosure documents.

• Referring borrowers to foreclosure at the same time as those borrowers are attempting to obtain modifications of their mortgages or other loss mitigation.

• Improper denials of loan modifications.

• Failing to provide borrowers with access to a single customer service representative, resulting in delays or failure of the loss mitigation process.

• Imposition of improper fees by servicers.

SPECIFIC CHANGES

1) End Robo-signing and impose staffing and training requirements that will prevent Robo-signing.

2) Require servicers to withdraw any pending foreclosure actions in which filed affidavits were Robo-signed or otherwise not accurate.

3) End "dual tracking", for instance referring a borrower to foreclosure while the borrower is pursuing loan modification or loss mitigation, and prohibit foreclosures from advancing while denial of a borrower's loan modification is under an independent review, which is also required by the agreements.

4) Provide a dedicated single point of contact representative for all borrowers seeking loss mitigation or in foreclosure so borrowers are able to speak to the same person who knows their file every time they call.

5) Require servicers to ensure that any force-placed insurance be reasonably priced in relation to claims incurred, and prohibit force-placing insurance with an affiliated insurer.

6) Impose more rigorous pleading requirements in foreclosure actions to ensure that only parties and entities possessing the legal right to foreclose can sue borrowers.

7) For borrowers found to have been wrongfully foreclosed, require servicers to ensure that their equity in the property is returned, or, if the property was sold, compensate the borrower.

8) Impose new standards on servicers for application of borrowers' mortgage payments to prevent layering of late fees and other servicer fees and use of suspense accounts in ways that compounded borrower delinquencies and defaults.

9) Require servicers to strengthen oversight of foreclosure counsel and other third party vendors, and impose new obligations on servicers to conduct regular reviews of foreclosure documents prepared by counsel and to terminate foreclosure attorneys whose document practices are problematic or who are sanctioned by a court.

MERS, Fraudulent Practices, and TILA Time Limits to Foreclosure

A recent ruling by the U.S. Court of Appeals (Ninth Circuit), on September 7, 2011, rejected a claim by consumers to have been the victims of fraudulent mortgage loan practices because they were unable to avoid the effects of the statute of limitations on their Truth in Lending Act (TILA) claims.

The essence of the consumers' charges was that they were never properly informed of the operations of the Mortgage Electronic Registration System (MERS) and that some of MERS's activities were fraudulent. Their efforts to invoke equitable tolling and equitable estoppel were both rejected by the Court.

This class action lawsuit, Cervantes (et al) v. Countrywide (et al), is available in our Library.

The following outline is a brief description of this case.

Synopsis

• Spanish speaking consumers who were given mortgage loan documents in English were not entitled to have the statute of limitations on the Truth in Lending Act claims tolled.

• Equitable tolling was possible only for consumers who exercised due diligence but still were unable to discover the basis of their claims.

• There was no reason the consumer could not have obtained a translation of the loan documents at an earlier time.

MERS

This class action challenges origination and foreclosure procedures for home loans maintained within the Mortgage Electronic Registration System (MERS).

It is worth noting the lengthy and detailed description of MERS that the Court provides in its finding.

MERS was described by the court as a private electronic database used by lenders and servicers to track the assignment of changes in loan ownership and servicing rights.

MERS becomes the legal owner of the mortgage loan and tracks successive assignments of the loan's beneficial ownership in the database so that it is unnecessary to record the later assignments in the county land records.

However, according to the consumers, this practice impermissibly separated the trust deed or other security instrument from the loan note.

They also claimed that MERS' asserted beneficial ownership of the security instrument was a "sham" because MERS had no financial interest in the instrument. This prevented MERS from being involved in any foreclosure activities.

In addition to their state-law (Arizona) claims objecting to the foreclosure, the consumers asserted claims under the Truth in Lending Act.

Statute of Limitations in TILA

TILA claims are subject to a one-year statute of limitations that begins to run when the loan documents are signed.

According to the Court, the lawsuit had not been filed until three years after the loans were made. 

This meant that the suit was untimely unless there was some reason to excuse the lateness.

The consumers put forward two theories for this tardiness:

• equitable tolling, and 
• equitable estoppel.

Equitable Tolling

The statute of limitations could be tolled - that is, suspended - for a period during which the consumers were unable to obtain information vital to their claims despite making appropriate efforts.

According to the consumers, equitable tolling was appropriate because they spoke only Spanish and were given loan documents only in English.

The court rejected this position because they had not described any circumstances beyond their control that prevented them from having the loan documents translated.

Equitable Estoppel

Equitable estoppel could have actually helped the consumers if they could show that the mortgage companies being sued had engaged in conduct over and above the claimed fraudulent scheme that prevented the consumers from filing suit within the one-year limit, the court said.

However, the consumers had merely claimed that the lenders had fraudulently misrepresented and concealed the "true facts." They had not described what those "true facts" were or how the concealment or misrepresentation exceeded the basis of their TILA claims.

As a result, the Court decided that the TILA claims were time-barred.

GMAC: Spectral Hand of "Robosigning"

COMMENTARY by JONATHAN FOXX

Jonathan Foxx is a former Chief Compliance Officer of two publicly traded financial institutions, and the President & Managing Director of Lenders Compliance Group, the nation’s first full-service, mortgage risk management firm in the country.

This past Friday, January 14, 2011, GMAC decided to cancel certain foreclosure actions in Maryland.

At a time in which foreclosure actions are expected to accelerate 20% in 2011, and 2.87 million properties were the subject of default notices, auctions, or repossession in 2010 (a 2% gain from 2009), and banks seized more than 1 million homes in 2010 (up 14% from 2009), the impact of the spectral hand of so-called "robosigning" has now apparently reached a new threshold.

GMAC and Maryland Foreclosures

In a move that should place renewed emphasis on loss mitigation and further curtail the headlong rush to foreclosure processing, GMAC has decided to cancel foreclosure proceedings on 250 properties in Maryland. There have been reports of perhaps 1,000 foreclosures affected and possibly many more.

The ostensible cause of this retreat is due to defective affidavits, executed by one Jeffrey Stephan, a "robo-signer" who has attested to, among other things, the authenticity of foreclosure documents without having had any knowledge about them.

By this point, we all should know the sorry story of robo-signing that has facilitated the massive foreclosure proceedings by banks. GMAC's decision was brought on by a class action handled through the University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit. Though there were other aspects tried in the case, the central position of the case argued that any foreclosure action which used Jeffrey Stephan as the "signer" was essentially illegitimate, and therefore must be dismissed.

I should point out that GMAC is not the only recipient of this argument: although not yet a settled matter, the University of Maryland Consumer Protection Clinic and Civil Justice also want dismissed any foreclosure actions with affidavits from Xee Moua, Wells Fargo employee and admitted "robosignor," who stated in a sworn deposition in a Florida case that she had signed foreclosure-related papers on behalf of the bank and that the only information she verified was whether her name and title appeared correctly on the relevant documents.

Stephan estimated that he signed 10,000 documents a month; Moua claimed to sign at the rate of as much as 500 documents each day.

Mediation

In Maryland, a judicial foreclosure state, GMAC will refile these cases, but will be required to do so under new laws that went into effect on July 1, 2010. Certain features of these laws probably should be adopted in those states where state law itself provides a means to implement them.

Pursuant to these new Maryland laws, for instance, banks seeking to foreclose must demonstrate in filings that they reviewed and considered foreclosure alternatives, and provided specific notices to the borrowers. Importantly, these laws permit borrowers to be eligible to pursue court supervised mediation. Obviously, this law will change the timing, method and cost for conducting residential foreclosures in Maryland.

So the foreclosure process, as I've mentioned in previous Commentaries, is not going to cease permanently; for the most part, it will slow down for awhile, regroup, gather up its standing, reinforce its procedural integrity, and then restart.

Here's a good article on the Maryland controversy by a fine reporter who has been tracking this story with clarity for some time.

Servicing and Foreclosure

All this brings me to remarks that will be made today in an "Opening Address by FDIC Chairman Sheila C. Bair" at the Summit on Residential Mortgage Servicing for the 21st Century, an event sponsored in DC by the Mortgage Bankers Association.

In her prepared remarks, Mrs. Bair states that "chaos in mortgage servicing and foreclosure is introducing a dangerous new uncertainty into this fragile market," and that the "persistent adversary has been inertia in the servicing and foreclosure practices applied to problem loans." Her speech centers on the "mortgage servicing problem."

I think this observation of hers pretty much sums up the situation:

"The mortgage crisis also has revealed a fatal flaw in this unbundling of the mortgage-lending process: the misalignment of incentives between the various parties and specialists involved. We have dramatically underappreciated the potential for what economists call "principal-agent" problems arising from misaligned incentives. Mortgage brokers and lenders had little or no incentive to worry about whether borrowers could repay their mortgages. Neither did the investment banks putting together securitizations and CDOs." (My Emphasis.)

Some Suggestions

Essentially, Mrs. Bair suggests a clearly delineated loss mitigation approach that enhances mediation. Perhaps this realization is dawning belatedly on her and the servicers part, but at least it is being discussed in some way.

The suggestions she outlines are well worth considering:

1) In order to remedy failures endemic to the largest mortgage servicers ... [there should be] "enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure."

2) Servicers must commit to adequate staffing and training for effective loss mitigation ... [and] "establish industry benchmarks - based on a maximum number of delinquent loans per representative - and insist on a minimum standard of training to ensure that staff are up-to-date on the latest loss-mitigation programs."

3) [Servicers should] "expedite the loan modification process and help clear the market, [looking] for opportunities to greatly simplify loan-modification offers in exchange for waivers of claims."

4) Regarding second lien holders interests competing with first lien holder interests, "as part of any resolution of claims regarding large servicers, a fixed formula should be established to govern the treatment of first and second mortgages when the servicer or its affiliate owns the second lien" [a formula which should, at minimum] "require that the subordinate lien be reduced pro-rata to any change in the first mortgage."

5) There should be an "independent review of loss-mitigation denials" and "borrowers should have the right to appeal any adverse denial of a loan modification request to an independent party who has the proper information to conduct an immediate review and the power to correct erroneous determinations."

6) "Weak practices" in handling title documentation must also "cease" by assuring that banks and other servicers will be required to "foreclose in their own names instead of allowing MERS to foreclose [and] provide complete chain of title and note transfer history in the notice of default."

7) Settlements should eliminate "incentive payments to law firms for speedy foreclosures, as well as the use of lost-note affidavits, except where the servicer has made good faith efforts to obtain the note" [and such settlements] should "prohibit foreclosure sales when a loan is in loss mitigation, except in specific situations where delay would disadvantage the investor, violate existing contracts, or reward a borrower acting in bad faith."

Foreclosure Claims Commission

Mrs. Bair asserts a rather bold suggestion - one I have heard much about over the last few years, but now note that it has made its way into quotidian discourse: the creation of a foreclosure claims commission.

According to Mrs. Bair, this commission would be "modeled on the BP or 9/11 claims commissions, [and] could be set up and funded by servicers to address complaints of homeowners who have wrongly suffered foreclosure through servicer errors."

I think this will likely be resisted politically, legally, and financially for a number of reasons, but I'll let Mrs. Bair speak:

"Many in the servicing industry will resist a settlement such as this because it would impose much of the immediate financial cost on the major servicers themselves. But this would be short-sighted. The fact is, every time servicers have delayed needed changes to minimize their short-term costs, they have seen a deepening of the crisis that has cost them - and the rest of us - even more."

Resolutions

Somewhere in the interstitial fields of loss mitigation and foreclosure actions a resolution must be found.

And must be found soon!

What do you think?

I would welcome your comments.
Please feel free to email me at any time.

NYS: Leads with Foreclosure Affirmation

In what may be a national trend, on October 20, 2010 the court system of the State of New York directed that lender's lawyers must verify the accuracy of foreclosure papers filed with the court by signing an Affirmation.

The Affirmation provides this preamble:

During and after August 2010, numerous and widespread insufficiencies in foreclosure filings in various courts around the nation were reported by major mortgage lenders and other authorities. These insufficiencies include: failure of plaintiffs and their counsel to review documents and files to establish standing and other foreclosure requisites; filing of notarized affidavits which falsely attest to such review and to other critical facts in the foreclosure process; and "robosignature" of documents by parties and counsel. The wrongful filing and prosecution of foreclosure proceedings which are discovered to suffer from these defects may be cause for disciplinary and other sanctions upon participating counsel.

The Affirmation is available at the New York State Bar Association website or may be downloaded from our Library.

Highlights

Under penalty of perjury lawyers for lenders must file an Affirmation that includes the following attestations:

1. I am an attorney at law duly licensed to practice in the state of New York and am affiliated with the Law Firm of __________________, the attorneys of record for Plaintiff in the above-captioned mortgage foreclosure action. As such, I am fully aware of the underlying action, as well as the proceedings had herein.

2. On [date], I communicated with [name and title], a representative of Plaintiff, who informed me that he/she (a) has personally reviewed plaintiff's documents and records relating to this case; (b) has reviewed the Summons and Complaint, and all other papers filed in this matter in support of foreclosure; and (c) has confirmed both the factual accuracy of these court filings and the accuracy of the notarizations contained therein.

3. Based upon my communication with [person specified in ¶2], as well as upon my own inspection of the papers filed with the Court and other diligent inquiry, I certify that, to the best of my knowledge, information, and belief, the Summons and Complaint and all other documents filed in support of this action for foreclosure are complete and accurate in all relevant respects. I understand my continuing obligation to amend this Affirmation in light of newly discovered facts following its filing.

4. I understand that the Court will rely on this Affirmation in considering the application.

Visit Library for Issuance

State of New York, Unified Court System, Press Release, "New York Courts First in Country to Institute Filing Requirement to Preserve Integrity of Foreclosure Process" October 20, 2010
Affirmation (Verification of Foreclosure Papers) October 20, 2010

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.

Foreclosures: The Plot Thickens

COMMENTARY: by JONATHAN FOXX

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.

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.