Where Things Stand: Foreclosure Paperwork Scandal
Some struggling homeowners are currently getting a temporary reprieve from foreclosure sales and evictions during the holiday season, but that doesn't mean all foreclosure cases have stopped moving through the courts -- and it doesn't mean we're done covering the developments in the foreclosure scandal either. Here's where things stand:
Earlier this year, the discovery of sloppy documentation practices across the mortgage servicing industry caused many banks -- first GMAC, then Bank of America, JPMorgan Chase and others -- to temporarily freeze foreclosure sales as they conducted reviews of their document processing procedures. Mortgage servicers -- often divisions within large banks -- handle the day-to-day collection of mortgage payments. They're also supposed to provide loan assistance to struggling homeowners. Banks cast the problems as procedural mistakes but asserted that the underlying information in key foreclosure documents was accurate and did not result in any wrongful foreclosures. (As we've noted, banks and foreclosure defense attorneys disagree on what constitutes a wrongful foreclosure.)
One by one, they resumed some or all foreclosures and are re-filing the questionable documents, but attorneys for homeowners have said that the fixes have been inadequate and the result has been "more of the same." Last week, the Daily Business Review reported that new rules in Florida to remedy the problem of robo-signers -- bank employees who had signed foreclosure documents without verifying their accuracy -- had given rise to "robo-verifiers" who simply go through the motions of double-checking the documents.
Iowa's Attorney General Tom Miller, the point man on a 50-state joint investigation of the foreclosure scandal and mortgage servicing industry, has said that a quick settlement with banks and loan servicers is unlikely and that settlements would be worked out "one bank at a time." He's also said that criminal charges are a possibility. "We will put people in jail," Miller told homeowners and advocates in Des Moines earlier this month. The states' joint investigation remains ongoing, and some states have separately sued banks for deceiving homeowners fighting foreclosure.
On the federal level, the status of the investigation by the Office of the Comptroller of the Currency and other banking regulators is less clear. The OCC, the Federal Reserve and the FDIC are currently divided over new rules proposed by the FDIC that would rein in the bank abuses that may be causing improper foreclosures, according to the Huffington Post.
Last week, a group of more than 50 economists, analysts and academics wrote a letter to these federal regulators, urging them to establish national standards for servicing. In the letter, they said that servicing fraud presents problems for investors, homeowners and the U.S. economy. They also urged regulators to compel servicers to grant loan modifications and principal reductions -- or reducing the amount owed by homeowners -- when economically possible.
We've noted, however, that for about half of the country's mortgages, the chances for principal reductions are slim. That's because the Federal Housing Finance Agency, the regulatory agency for government-controlled Fannie Mae and Freddie Mac, does not permit them to grant principal reductions, even though doing so could save the mortgage giants money in the long term and help homeowners whose mortgage debts have come to exceed what their home is currently worth. (Read our primer for more on how Fannie and Freddie -- together with their approved foreclosure law firms -- contributed to the foreclosure mess.)
Reuters also reported that the Senate adjourned last week without confirming a new head for Fannie and Freddie's regulator. Republican Sen. Richard Shelby put a hold on President Obama's nominee, Joseph Smith, voicing concerns that Smith would support changing the rules to allow Fannie and Freddie to grant principal reductions.
The Senate also adjourned last week without appropriating $35 million that had been authorized by the Dodd-Frank financial reform bill for funding legal aid for homeowners fighting foreclosure. That means the money -- which legal experts including Miller had said was desperately needed -- wasn't actually set aside for use.
Though foreclosures continue to speed through courts in some states ($), in recent months some judges have increasingly questioned banks bringing foreclosure cases in court, forcing them to prove their legal standing to foreclose.
New Jersey's Supreme Court Justice Stuart J. Rabner last week issued an order calling on six major mortgage lenders and loan servicers to appear before the court next month and demonstrate why the state should not suspend their foreclosure actions, the Associated Press reported. And earlier this month, a justice on New York's supreme court testified before House lawmakers that he's seen problems in foreclosure cases "on a recurrent basis" and that questions of legal standing have become "a pervasive issue."
But it's also worth mentioning that foreclosures work differently depending on the state. Most states are "non-judicial foreclosure" states, meaning they don't even require foreclosure actions to go before a judge. Bloomberg noted that in these states, banks can more easily and quickly process foreclosures, and homeowners have less recourse to fight back.
Banks and the government have fallen short in helping homeowners in danger of foreclosure.
The Story So Far
Systemic failures at the country’s banks and mortgage servicers have exacerbated the most severe foreclosure crisis since the Great Depression, and government efforts to limit the damage have fallen short. ProPublica created an unrivaled database of homeowners who have faced foreclosure, opened a Facebook page to encourage homeowners to share their stories, wrote profiles of some of them, and incorporated their experiences into our reporting. We also provided a comprehensive rundown of the numbers behind the crisis.
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