New report finds near-universal irregularities in foreclosures
Major U.S. banks admitted two years ago to cutting corners on the paperwork necessary to foreclose on some defaulting borrowers -- for example, by having workers sign court affidavits without having actually read the associated documents -- but it's been hard to quantify how extensive "robo-signing" and similar practices were. This week, a consultant to the San Francisco Assessor-Recorder's office issued what it said was the first examination of the paper trail involved in hundreds of actual foreclosure sales, and the results were stunning.
According to Aequitas Compliance Solutions, more than 80% of the nearly 400 foreclosure sales reviewed had "what appeared to be one or more clear violations of law." And about 99% showed one or more document "irregularities" that could have violated California statutes. The failings ranged from purely technical problems, such as incomplete filings, to ones that could have hindered borrowers from exercising their rights, such as conflicting disclosures about a loan's ownership, premature foreclosure sales and improper claims to the proceeds.
Although technically not robo-signing, many of the irregularities found by Aequitas similarly involve attestations in legal documents that simply weren't true. It's possible that the problems were caused by inattentive bank employees who were overwhelmed by the number of defaulting borrowers. The less charitable interpretation is that mortgages had been traded and securitized so sloppily, banks no longer could figure out what they actually owned and where they'd acquired it.
Sounds bad, right? Nevertheless, many readers will react to this revelation the same way they've reacted to efforts by the government to slow the pace of foreclosures: They have little sympathy for people who bought more home than they could afford. In this view, the victim is the lender, not the borrower.
It's true that the report offers no evidence that these failings caused borrowers who were current on their mortgages to lose their homes, or that defaulting borrowers weren't given adequate warning and time to work out a solution with their lenders. Aequitas looked at a sample of foreclosure sales in San Francisco County between January 2009 and October 2011; according to ForeclosureRadar.com, the foreclosed homes sold in California that October had been in default for more than 330 days.
But Aequitas offers two counterarguments to the notion that the failures it identified didn't cause any real harm to the borrowers who lost their homes. First, lenders can foreclose, repossess and sell a home in California without a court's permission or supervision. For that reason, the paperwork requirements are crucial to protecting borrowers' due process rights. Those requirements are meant to ensure that borrowers have enough time to contest a foreclosure in court, as well as accurate information about the party (or parties) that own the loan.
Second, Aequitas cited evidence of widespread violations by lenders, mortgage securitizers and loan servicing companies of consumer protection laws -- such as the Truth in Lending Act, which requires accurate disclosure of a loan's terms and conditions. So while some borrowers may have foolishly bitten off more than they could chew, others were roped into riskier and less affordable loans than they thought they were signing up for:
Given these well‐documented and widespread origination and servicing issues, it is not implausible that there are homeowners who are alleged to have defaulted on loans to which they never fully agreed to and, further, are being foreclosed upon by lenders that might not even own such loans. The fact that these homeowners borrowed something, on some terms, from someone should not be enough to rob them of their due process right.
It's well-nigh impossible to say how many borrowers fall into that category without a case-by-case examination of foreclosures. Such an inquiry would not be precluded, however, by the recent deal California and 48 other states and their attorneys general struck with five major banks. Said Aequitas: "The agreement settles only some aspects of the lender misconduct relating to the foreclosure crisis and, with respect to those, does not resolve all legal claims. Consequently, based on our understanding, the settlement does not resolve most of the issues this report identifies, nor immunizes lenders and servicers from a host of potential liabilities arising therefrom."
Meanwhile, the Mortgage Bankers Assn. reports that the percentage of mortgages in foreclosure -- 4.4% -- remains far above the historic average, but the number of borrowers falling behind on their loans continues to decline. As my colleague Scott Reckard observes, that's a consequence of the significantly tighter lending standards that banks have adopted in response to the housing bust and pressure from regulators. Nevertheless, analysts expect a surge in foreclosures in the wake of the multi-state settlement. That's all the more reason to monitor the lenders' procedures carefully to prevent more corner-cutting.
Paul Leonard, California director for the Center for Responsible Lending, said he was still mulling what the right response would be. Two possibilities, he said, would be to have the attorney general conduct routine audits of foreclosure files, or to apply some oversight to the trustees that file notices of default and seek foreclosure sales.
-- Jon Healey
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