Banks and mortgage services have been under scrutiny lately with questions about whether they have fully complied with legal requirements in seeking to foreclose on property securing mortgage loans.
"With the downturn in the market, there was a massive surge in foreclosures," says William A. "Mac" McBride, a litigation attorney at Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. "The systems at banks and mortgage servicers were not designed to deal with the tsunami that hit them. They had systems in place designed to deal with X number of foreclosures and were suddenly dealing with X to the 100th power."
Smart Business spoke with McBride about how the industry fell apart and the steps it is taking to put itself back together.
How did the problem regarding affidavits in mortgage foreclosures come to light?
It came to light this summer when an employ¬ee for a lender/servicer stated in a deposition that he had not taken all the steps necessary to verify the information in affidavits he was sign¬ing. Out of that came the term 'robo-signing,' which refers to the situation where a large number of documents are allegedly placed on an employee's desk and he signs them without fully investigating their accuracy.
The problem is that when one signs an af¬fidavit, the signer, or affiant, is stating under oath that he or she has personal knowledge or has made sufficient investigation to swear and affirm that the information in the affida¬vit is accurate, that the borrower is, indeed, in default on the underlying loan and the parties pursuing foreclosure own the note or other¬wise have the right to pursue the foreclosure.
What was the result of the disclosure of 'robo-signing'?
Virtually all banks undertook reviews of their internal systems. A number of banks instituted temporary moratoriums on foreclo¬sures, halting them while they reviewed their systems, while others looked at their systems and determined a moratorium was not neces¬sary. In addition, in an increasing number of foreclosure proceedings, borrowers are con¬testing the foreclosure by challenging the as¬sociated affidavit.
Although you are seeing a lot of these cases among plaintiffs, in the overwhelming major¬ity of these cases the affidavits are factually accurate and reflect the state of affairs at the time they were signed. The borrowers are in default and, generally, by the time they get to foreclosure, they are as many as 12 to 18 months in arrears, and it's safe to say the foreclosure is going to happen once the paperwork is sorted out.
The problem is not that homes are being taken from innocent people because other people are making things up. The problem is that if you are signing an affidavit, you are testifying you have personal information or have made sufficient investigation to confirm that what you are signing is accurate, when, in some cases, the signers were simply relying on their underlings to do their jobs properly without verifying it. That is not a trivial thing; filing documents under oath with a court is serious business. But to the extent inaccurate affidavits were filed, the inaccuracies related to the knowledge of the affiant rather than to the default status of the borrower.
What has been the negative impact on banks?
The sole realistic collateral for mortgage loans is the underlying property, because, by the time of foreclosure, borrowers rarely have other significant assets. A bank can't sue and realize a money judgment; the assets aren't there. The house backs up the loan, and if there is a significant delay in the bank's ability to foreclose on the property and liquidate it, that slows down the process. Not only could that temporarily impair capital while banks try to foreclose and liquidate, it could also affect future lending decisions. Every time you throw an obstacle in the way for a lender to be able to realize on collateral, that calculates into its decision to make loans. In theory, you could see banks further raising their lending standards because this is one more potential obstacle. The biggest impact though is likely to be on the housing market and economy generally. Anything that delays foreclosure delays the ability of the market to clear and prolongs the housing crisis, which has already lasted for three years.
What other institutions are being impacted?
An increase in challenges to foreclosure also burdens the judicial system, which was designed for a very different economic reality. Banks have more flexibility to adjust in that they can hire people or acquire new technology. But the court system, being dependent upon the political process, isn't as nimble. For the system to suddenly change from a model where it might have 5,000 foreclosures a month to where it now has 100,000 hugely stresses a court system that already has a very large backup.
How does this issue impact third-party purchasers of foreclosed property?
It creates uncertainty. For example, say the bank foreclosed on Joe and Mary Smith a year ago, and the property was sold to Susan Jones. But the affidavit submitted in connection with the foreclosure wasn't properly verified, so the chain of title is being challenged. If the original borrower complains that the foreclosure was wrongful because the affidavit was fraudulent, suddenly you have a third-party title issue.
That presents potential concerns for those who buy property out of foreclosure, as well as for title insurance companies that verify the title is good. If that adversely impacts the willingness of purchasers to buy property out of foreclosure, it's another factor that may slow the clearing of the market and prolong the housing crisis. That inability to sell will further damage banks and lenders by impairing their ability to realize capital on that collateral as a result of either being unable to sell or having to sell at a significant discount that reflects that there's a title uncertainty.