"Greed is good." So claimed Gordon Gekko in the movie "Wall Street."
Often so in business, but for banks that cut paperwork corners to make more money, greed was bad. It will cost them billions of dollars and many months to clean up the foreclosure mess they've made.
The newspapers are full of foreclosure horror stories and politicians are arguing over whether a national foreclosure moratorium is necessary. Meanwhile, major banks, including Bank of America and JP Morgan Chase, have called a halt to foreclosure proceedings. Now all 50 state attorneys general have said they were launching a joint investigation into the mortgage industry. Criminal charges may emerge.
What's going on?
There are widespread flaws in the documentation that must be submitted by lenders to courts to obtain foreclosures. Two basic types of flaws have received the most attention.First "robo-signers," or low-level back office employees, signed hundreds or even thousands of foreclosure documents falsely attesting to the ownership of mortgages and amounts owed on mortgages. These documents were sworn to by robo-signers who never even looked at the underlying files to determine if the "facts" they were swearing to were true. In states where foreclosures must be approved by a court, the courts are rejecting these documents.
The second type of flaw grew out of the booming mortgage securitization process that played a major role in creating the financial crisis. In the securitization process, large numbers of mortgages were bundled together and sold to investors as securities. This process took on a frenzied rush during the housing boom, with the dull paperwork aspects relegated to back-office employees. Many of these securities, often sliced and diced into various species of additional securities, were sold to investors around the world. In this environment mortgage notes, the basic evidence of the borrower's debt, were often misplaced or even lost.
A foreclosing lender that cannot produce the borrower's note often may be unable to establish "standing" to sue. Standing requires that the party prosecuting the action have a sufficient stake in the outcome to be recognized in the law as being a real party in interest. The holder of the note generally is regarded as the real party in interest in a foreclosure case and when the alleged lender cannot produce the note, its standing can be challenged.
These paperwork flaws have to be corrected for lenders to prevail in court in foreclosure proceedings. And it will take time, lots of time, to correct the flaws. That's the unintended benefit for homeowners facing foreclosure.
The lenders recent announcement of the suspension of foreclosure activity did not specify how long the suspension would last, but the clean-up process could take many months.
First, each case must be individually reviewed by a lawyer or other individual with mortgage foreclosure expertise to determine which documents in a case are flawed, including robo-signed documents. Then the flaw must be corrected, a process that may be easy or nearly impossible, depending on the availability of underlying documentation, the nature of the flaw and whose signature must be obtained to correct it.
Misplaced or lost notes have to be found or evidence must be gathered to establish that the plaintiff claiming to be the lender in a foreclosure case actually owned the note.
Finally, cases that were submitted with the flawed paperwork must either be withdraw and replaced with new suits with the proper paperwork, or the existing suits must be amended to substitute the proper paperwork.
The bad news for banks is that cleaning up the foreclosure mess is a gargantuan task that will take thousands of lawyers and other specialists months to do. The cost to the lenders of this cleanup process can't even be determined yet, but it will be big.
The good news for homeowners facing foreclosure is that both the foreclosure suspension period and the additional months required to correct the flawed paperwork extend the time that homeowners facing foreclosure can remain in their homes. And while they still may ultimately lose their homes, the breathing space the foreclosure suspension provides may afford them the opportunity to find work that will permit them to deal with their mortgage problems.