'Foreclosure-gate’ and TARP II
Political pressure is mounting on banks to freeze foreclosures amid widespread allegations that lenders deliberately fabricated legal documents to speed up hundreds of thousands of foreclosure filings.
Last month, three major lenders — Bank of America, JP Morgan Chase and GMAC — announced they were suspending tens of thousands of foreclosure auctions across the county while they conducted reviews of their foreclosure-processing procedures.
News of the foreclosure freeze and the potential for masses of defective foreclosures has sent shock waves through the housing and financial markets. Flawed paperwork by banks raises potentially serious legal problems for the lenders, mortgages servicers and the foreclosure law mills that have been involved in mass-producing documents needed to foreclose over the last few years. The story broke a couple of weeks ago when retired Maine attorney Thomas Cox deposed so-called GMAC “robo-signer” Jeffrey Stephan and learned that he had signed hundreds of foreclosure affidavits each day, the the New York Times reports.
How bad is it?
Blighted Titles
It could have sweeping and long-term catastrophic consequences. Time Magazine believes the so-called “foreclosure-gate” could cost the banks billions. Bloomberg puts the price tag for lenders at $120 billion.
One big problem is blighted titles. Blighted titles in the 23 judicial foreclosure states where the lenders halted foreclosure could have a crippling effect on the housing market. Title insurance companies, fearing exposure to ‘clouded title’ claims, could stop writing title insurance policies on foreclosed homes.
Already, Old Republic National Tile has refused to provide new title insurance to any property foreclosed by JP Morgan Chase and Ally Financial’s GMAC Mortgage. No title insurance means no buyer will touch a foreclosed property without clear title, according to St. Petersburg, Fla., real estate attorney Matthew Weidner, who has blowing the whistle on this topic for years.
Kangaroo Courts
Meanwhile, attorneys general in all 50 states are investigating improper foreclosure practices. Florida’s AG is investigating the so-called foreclosure mills that banks use to handle hundreds of thousands of foreclosure cases. And the state’s woefully backlogged courts are using retired judges to plow through the flood of foreclosure files, the the New York Times reports.
The implications are not yet clear for borrowers who have been evicted from their homes as a result of faulty foreclosures. But lawyers representing borrowers say lawsuits on behalf of borrowers will multiply, according to Reuters.
Another Bank Bailout: TARP II?
Going forward the banks will face many more legal challenges over their foreclosure processes. What is currently a massive legal problem for the banks could morph into something larger, where investors in mortgage backed securities sue the banks for fraud. If investors do sue, the U.S. government might need to step in and backstop the lenders once again. Naked Capitalism blogger Yves Smith, writing in the the New York Times, sums up the debacle nicely. He also wrote an interesting story today about Bank of America’s growing problem.
Surprisingly, we haven’t heard much from Citigroup, which is partially owned by the U.S. government, and Wells Fargo, whose balance sheet is littered with bad loans. But news is starting to trickle out that they too may be guilty of “robo-signing.” The Financial Times reported that a Wells Fargo executive robo-signed as many as 500 documents a day.
Get out your calculators because this mortgage mess is going to cost taxpayers billions to fix, the the New York Times says. It could even bring us TARP II.
Stay tuned. This story is just beginning to get interesting.
You can read more stories on RealtyTrac’s News and Opinion section.