Q&A: Putting the Foreclosure Paperwork Scandal in Perspective
The scandal over flawed paperwork and sloppy practices by mortgage servicers continues to broaden. The issue is complicated, and "robo-signers" -- individuals working for servicers and signing off on thousands of foreclosure documents without much verification -- are only part of the picture. So we brought some of our questions about the broader foreclosure process to Geoff Walsh, an attorney with the National Consumer Law Center, a legal advocacy group for consumers.
Walsh helped fill in some context for us about how the foreclosure process was supposed to work, why it's not working, and why the recourse available to homeowners depends a great deal on where they live. We've edited the interview for length and clarity.
What should people make of this robo-signer scandal that just keeps getting bigger? It's getting so much attention, but isn't it just one of the many problems homeowners have experienced with mortgage servicers?
What's coming out now about the robo-signers in particular is the fact that just about all of the major loss mitigation initiatives, including the federal efforts by the Treasury with the [Home Affordable Modification Program], all rely completely on these same people, the mortgage servicers. To me what the robo-signer issue shows clearly is that the industry is on this path to foreclose as many cases as they can, as quickly as possible with as little work as possible.
There's no reason to be skirting the law and sending in fake documents to courts if you have any interest in taking good-faith measures to avoid a foreclosure and consider loan modifications like you're supposed to.
Do you think these problems were in any way inevitable, given the incredible volume of foreclosures these major servicers are handling, or is there some intent behind what we're seeing?
You have to infer some element of intent in not providing adequate staff to keep track of paperwork. Where you have the kind of very consistent pattern of losing paperwork and delaying making loan modifications permanent basically forever, there is a pattern there that I think shows intent not to comply with laws.
It seems like the amount of protection against wrongful foreclosures and the amount of recourse homeowners have is highly dependent on where they live.
Yes, it really is. There are certain states where foreclosures are carried on completely without any judicial supervision, and they can be carried out in two months, and other states [where] a foreclosure can take a year and half.
So if you're a homeowner and your state doesn't act, what recourse do you have if you're facing foreclosure in a non-judicial state?
It's difficult particularly in non-judicial foreclosure states, unless the states attorneys general take action or there are changes in legislation or homeowners are fortunate enough to get an attorney to represent them … It's extremely difficult to challenge them.
That's why these practices have become so commonplace, because you have to file a lawsuit in court to stop a foreclosure. It's a type of legal proceeding that's complicated -- it requires a motion for temporary restraining order or injunction, and it has to be prepared in a short time frame. It's expensive. There are very few challenges to foreclosures. In some states, there are very few attorneys that know how to do that.
[Several non-judicial states] have recently enacted statutes that said that before a servicer can complete a non-judicial foreclosure sale, they have to complete a certification saying they attempted to contact the homeowner and reviewed loss mitigation options.
What we may be seeing is in states like California [a non-judicial state], the attorney general in that state would have the authority, I think, to stay foreclosures and review whether major servicers have been compliant with that particular law. That would give a hook for them to conduct review.
In other non-judicial states there's typically a statutory requirement about who can conduct a foreclosure. It might say that to conduct a non-judicial foreclosure in Michigan, you need to be the owner of the note. So they could be subject to that.
My hope is that non-judicial foreclosure states would be setting up some sort of statutory requirement for these certifications in the future.
How's the foreclosure process supposed to work? There are so many stories about the process going wrong, it's almost hard to know what it was supposed to look like.
In judicial foreclosure states, there are requirements that certain legal papers be in order, like the party foreclosing has to possess an original note for the loan, and the mortgage has to be assigned to the party doing the foreclosure, and there ought to be a law firm that is dealing with actual, physical papers that they get.
In a proper functioning legal system, you'd have local law firm, say, in Pittsburgh, Pa., that is sent all the relevant loan documents, deals directly with someone who has authority to modify the loan, and makes critical decisions about loss mitigation issues. That was standard practice 20 years ago in mortgage foreclosures across country.
In non-judicial states, law firms conducting private sales are also supposed to be getting all of the proper loan documents themselves in their office. They would also be in contact with the people who own the note and mortgage and could make decisions about modifications.
But what you see now is the "foreclosure mill" [law] firms processing paperwork at a local level are often two or three levels down from even the major servicer. So say you have a major servicer like Wells Fargo, and Wells Fargo has contracts with different trusts that own mortgages. What Wells Fargo and other servicers typically do is when loans in their servicing portfolio fall into default, the information about those loans is transferred to other entities, like this Lender Processing Services, LPS, and what LPS does is manage data platforms. LPS has the authority to hire attorneys and firms throughout the country to foreclose on those Wells Fargo mortgages.
[Note: A subsidiary of LPS is currently the subject of a federal probe into how it handled foreclosure affidavits. LPS has acknowledged it once had problems, but says they were quickly addressed.]
So those robo-signed documents -- those are often not coming from major servicers but from default servicers. The servicer would just provide loan summary information to a robo-signer, and the robo-signer fills out lots and lots of information -- information like, "Yes, we own the loan and we have the right to foreclose; the homeowner owes X amount of money." That information is put on an affidavit that the robo-signers sign. They forward that to "foreclosure mill" law firms.
[Read: More on these "foreclosure mill" law firms, which handle the cases in court. Several of these law firms were being investigated by the Florida attorney general for their foreclosure practices, until a judge set back that investigation this week by striking down a state subpoena.]
… The problem is that if you base foreclosures on copies of notes or on unverified statements, it is possible that somebody who has the original copy of a note can enforce it later. Lenders are typically proceeding on copies of documents or notes that don't show that the original has been conveyed to them. Since most [foreclosures] aren't contested, they pass through the courts. Even in judicial foreclosure states, the overwhelming majority go through without being contested.
What's the most that homeowners can hope to recover if they've been subjected to a process that resulted in wrongful or premature foreclosure?
It depends on where they are in the process. In a lot of states there is a redemption period after a foreclosure sale took place, where a homeowner can stay in the house and still try to pay the mortgage off or take some action to set the sale aside.
In those states where there's a redemption period and the homeowner is still in it, they'd have some ways to challenge it whether they're in a non-judicial or judicial state -- particularly if the servicer bought property, which is more often than not what happens in these cases.
It's much more difficult after the redemption expired, and if a third party bought the property. But if you were injured by the sale, if you were harmed financially by the use of financial procedures, you ought to be able to sue for monetary damages for wrongful foreclosure.
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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