In California, the nation’s largest real estate market, the robo-signing scandal has produced many calls to halt foreclosures, but little real change so far.
For several years, lawyers who represent borrowers in foreclosure have been complaining about massive and gnarly problems in the foreclosure process.
Because of the way Wall Street sliced and diced mortgages into derivatives and sold them off, the ownership of the mortgage had often not been properly documented, these lawyers said.
Such documentation is a basic legal requirement of foreclosures.
But they couldn’t get many judges to go along with them, especially in California, where, by state law, judges don’t typically oversee foreclosures. They only get involved if a borrower files suit to block a foreclosure, and even then, the courts are reluctant to do anything that would benefit borrowers who haven’t been paying their mortgages.
But disclosures over the past week in the robo-signing scandal may change that, after bank officials disclosed that they signed thousands of foreclosure documents without reading them first. Among the problems were documents that appeared to be forged or inaccurate assessments of how much borrowers owed on their mortgages.
In states with court-supervised foreclosures, the big banks voluntarily called a halt to foreclosures. But not in non-judicial foreclosure states like California.
The banks’ position so far is that the robo-signing doesn’t represent any substantial problems in the documentation, just that they were overwhelmed and understaffed and couldn’t keep up with the paperwork.
Walter Hackett disagrees. He’s a former bank executive who now represents borrowers in foreclosure at Inland Empire Legal Services. Hackett also runs an online bulletin board for lawyers fighting foreclosure. “Sloppy paperwork is too nice a way to describe it,” Hackett told me. “It’s a conspiracy of ignorance.”
He recalled dealing with Wells Fargo on behalf of one client. They were promising his client a loan modification; however, by the time Hackett untangled the paperwork, it turned out the mortgage was actually owned by another bank. “Before a bank can foreclose on a property, they have to prove that they own the note,” Hackett said.
Meanwhile, Attorney General Jerry Brown has issued cease and desist orders against some of the big banks that have acknowledged problems in their paperwork. But Brown’s concern is not actually the robo-signing, a spokesman said, but whether the banks are complying with a California state law that requires the banks to attempt to work out a loan modification before they foreclose on a borrower.
Brown spokesman Jim Finefrock said, “We’re talking to them [the banks]. We’re hoping for a resolution of the matter.”
He acknowledged that Brown was focused on compliance with the California law, not the larger issues of whether documents had been improperly filed in foreclosure cases.
The implications of the foreclosure fiasco are potentially huge, what Reuters business blogger Felix Salmon describes as “the mother of all legal messes.” If the problems with the paperwork prove substantial, they could undermine previous foreclosures and home sales, leading to a waves of litigation involving borrowers, homeowners banks and investors. The bad news for the economy is that the robo-signing scandal will only prolong the foreclosure crisis, keeping those facing foreclosure, and the entire housing market, from attaining some kind of stability.
While politicians and organizations have been calling for investigations and moratoriums on foreclosures, those are only a start. We need real leadership to forge long-term solutions, instead of the weak half-measures we’ve gotten so far. Maybe the robo-signing mess will offer the opportunity for the administration, the banks and the investors to try again to solve the foreclosure debacle and to get it right this time.