The freeze is on. A number of major lenders have halted foreclosures in almost two dozen states because thousands of sworn affidavits could be false.
“If you’re facing foreclosure the freeze is good news — at least until the inevitable thaw,” says James J. Saccacio, chief executive officer of RealtyTrac. “But a freeze is a temporary event that also brings uncertainty into the marketplace. If you’re waiting for a return to marketplace normalcy — whatever ‘normalcy’ might be — then another kink in the foreclosure process is hardly going to be helpful.”
When you submit a sworn affidavit to a court there’s an understating that it’s true and can be used as evidence by a judge. Alternatively, if you submit an affidavit which is found to be untrue you then get into the realm of penalties, sanctions and the possibility of reversed decisions.
It appears that tens of thousands of foreclosure affidavits were simply signed by lender representatives — without checking actual claims, a process widely described as robo-signing. This means an affidavit could be factually wrong and what was thought to be grounds for foreclosure could be untrue. The result is a massive foreclosure freeze in 23 states, calls for a criminal investigation from Capitol Hill and new efforts to stop foreclosures nationwide.
“I don’t want to say that every one of these cases is wrong and a fraud on the court, but it is a big concern for us,” J. Thomas McGrady, chief judge of the Sixth Judicial Circuit in Florida, told the New York Times.
McGrady also said something else. According to the Washington Post, McGrady explained that if the paperwork was improper then judges “are going to have to vacate that judgment and start over again.”
If affidavits are found to be widely “wrong and a fraud” then courts will be forced to review not just current cases but past ones as well. Given that there have been more than 10 million foreclosure filings in the past five years one of the first questions to come up will be the matter of how far back courts will need to go.
For instance, the state of Ohio is already asking for civil penalties of up to $25,000 for each faked affidavit. There were nearly 46,000 foreclosures in Ohio during the first six months of the year and if all are found to be robo-signed the state could seek more than $1.1 billion in penalties — and far more if it looks into past years.
Imagine a situation where an owner was foreclosed as a result of a false affidavit. Will the owner be able to get back the property? Not likely if it’s been sold to a new owner. Instead past owners might be able to get monetary damages.
What damages lenders might owe borrowers are unclear. Could foreclosure have been avoided with a proper affidavit? Or is the affidavit issue just a minor technicality that would not have changed the course of events? The answer to such questions could be worth billions of dollars.
Large numbers of buyers and investors have purchased foreclosed properties in the past few years, but if the foreclosure process was botched did the new owner get good, marketable and insurable title?
“Fraud and forgery,” says the American Land Title Association, “are examples of hidden title hazards that can remain undetected until after a closing despite the most careful precautions. Although emphasizing risk elimination, an Owner’s Policy protects you financially through negotiation by the insurer with third-parties, payment for defending against an attack on the title as insured, and payment of valid claims.”
Given what the title insurance industry sells — protection against title defects, including fraud — the robo-signing mess is sure to result in additional liability.
First Liens Versus Second Liens
We often think of the company that collects our mortgage payments as the “lender,” but that’s usually not the case. Most often loans are originated by one company, packaged together on Wall Street and then sold to investors such as pension funds and insurance companies. The investors who put up cash and buy the securities are really the lenders while the people who collect the monthly checks and foreclose if necessary are usually “servicers” rather than loan owners.
In general terms “lenders” fall into two groups — those who hold first liens and those who own second liens. If a home with two loans is foreclosed the first lien-holder must be paid off entirely before a second lien-holder can collect a dime.
“When houses that have been packaged into a mortgage bond are liquidated at a foreclosure sale — the very end of the foreclosure process — the holders of the junior, or the riskiest debt, would be the first investors to take losses,” according to the Wall Street Journal. “But if a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream.”
In other words, junior lien-holders gain from a freeze because they’re still collecting payments — a gravy train which ends once a foreclosure is completed.
The catch is that all lenders will suffer if the affidavit fiasco lingers. The worth of mortgage-backed securities will be unclear if the foreclosure process halts and “unclear” means less value in a marketplace where note buyers want stability and certainty.
In addition, there will be arguments regarding who is really responsible for the affidavit mess.
Servicers work under “pooling and servicing agreements” (PSAs) so some will say that servicers are really lender agents and therefore lenders are responsible for whatever servicers did. Others will argue that servicers acted without authority and did not meet contractual requirements.
Whatever the argument — and regardless of who wins — the one certain result is that the foreclosure process now has still-another layer of problems to untangle.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.