Robo-Signing, Toxic Titles, and MERS: Oh My!

Even amidst the chaos, the news came as a shock:¬† Ally Financial, parent company of GMAC, announced it was halting foreclosures in judicial foreclosure states due the discovery of technical flaws in their foreclosure procedures.¬† An attorney fighting a foreclosure action deposed a so-called “robo-signer” who admitted he signed thousands of affidavits per month, but never read or reviewed the underlying documents.¬† This story was shortly followed by revelations that similar defects had been discovered by JP Morgan Chase, which announced it was halting foreclosures in 23 states.¬† By the end of the week, Bank of America announced that it, too, was halting foreclosures and reviewing its policies and procedures.¬† UPDATE:¬† Lawsuits filed across the country have yielded inconsistent results, further complicating efforts to determine a clear solution to the controversial MERS program.

10/10/2010 UPDATE:  More evidence is coming to light that the Administration has been aware of the serious deficiencies and problems within the loan servicing industry, but has done little to address the problems.¬† At most, they sent letters advising loan servicers to be more careful.

10/15/2010 UPDATE:  News of widespread defects in foreclosure processing has led to calls by all 50 states for investigations, threatening to shut down the foreclosure process entirely.¬† The Administration’s reliance on the banks to voluntarily solve the housing crisis appears to be misplaced, according to the NY Times.¬† Wall Street’s response has been to blame homeowners for not paying their mortgages.¬† Although this is certainly a valid claim in many instances, it fails to account for the widespread incompetence that allowed or encouraged lenders to make ridiculous loans that exceeded the true value of the properties used as security, not to mention the creation of collateral investment products based on the newly securitized debt, or faulty policies that pushed for homeownership at any price — including no money down loans.¬† Moreover, the industry blaming homeowners for not paying their mortgage overlooks the fact that this same industry — despite billions of dollars in public TARP funds – cut off virtually all avenues of credit, making it impossible for homeowners to remedy the downturn with refinanced loans.

Noting that the decisions to halt foreclosures were only directed at those states that require judicial action to foreclose, California Attorney General Jerry Brown responded by ordering first GMAC, then Chase, to halt all foreclosures in California until they could prove compliance with California law.  It is likely the AG will similarly issue an order against Bank of America.

In a Bulletin issued October 1st, Old Republic Title announced it would suspend issuing insurance policies for REO sales for GMAC and JP Morgan/Chase.¬† Although the Bulletin states that they expect to resume insuring REO sales, it should be noted that the Bulletin was issued before B of A’s announcement.¬†¬† Moreover, there appears to be some difference of opinion whether Citibank and Wells Fargo also have similar issues with their procedures.¬† At least one article implies that despite their initial insistence that their procedures were solid, there was some evidence to the contrary.

Further complicating this situation is the role played by MERS.¬† MERS, is a private company formed by the mortgage banking industry to create an electronic process which allows for the transfer of deeds — hence the name “Mortgage Electronic Registration System.”¬† Approximately 62 million mortgages are registered with the system, and they claim¬† “Our mission is to register every mortgage loan in the United States on the MERS¬Æ System.”¬† However, in the early stages of the housing crisis, attorneys defending homeowners raised the point that foreclosures brought in the name of MERS were¬† invalid, since MERS only acts as the nominee for the lender, and has no standing to bring the action.¬† Judges in judicial foreclosure states agreed, and a scramble ensued to produce affidavits of lost notes, or other forms of proof of standing, and the foreclosure actions would usually proceed with some delay.¬† However, as more and more lending institutions have collapsed, the chain of records and titles have disappeared.

The primary issue today is whether — or how many — pending loan mod, short sale and foreclosure actions in the United States have been compromised by the combination of “robo signing” of affidavits by GMAC, JP Morgan Chase, Bank of America, and possibly others, and the potential break in the chain of title due to defects in the MERS process.¬† Since MERS only operates as the “nominee” of the mortgage holder, the question arises as to its “ownership” of the mortgage itself, and therefore its legal authority to transfer title.¬† In some cases, the courts have found specific language where the homeowner authorized MERS to act as the mortgage holder, but in others, there is a question whether MERS had any authority at all.¬† In July, MERS created a public database that allows anyone to search and find the loan(s) and investors associated with a property.¬† You can search by Mortgage Identification Number (MIN), by address, or by name.

The situation is critical, and adding to the confusion are promises by the ever-present influx of groups promising — for a fee — to save homeowners from losing their homes.¬† These groups admit that this is a “limited time opportunity” due to the fact that the lenders will eventually close ranks and solve the problems. ¬†¬† One group, which charges up to $15,000 to file legal action and 20% contingency for any principal reduction they negotiate, concedes that they have no way to guarantee success, but appear to rely on the fact that the confusion among the lenders and title companies will yield favorable results because the lenders don’t want to litigate.

We will see whether the pending halt to foreclosure actions due to revelations of “robo signing” and faulty affidavits, combined with the legal issues created by MERS, will merely postpone the process or reshape the entire system.¬† Until this gets sorted out, the only certainty we can count on is that there is still no light at the end of the housing crisis tunnel.