I am definitely looking forward to tonight’s 60 Minutes special on foreclosure fraud. In it, the head of the FDIC, Sheila Bair, will call for a cleanup Superfund to cleanse the country of toxic mortgages.
Banks so poorly handled documentation on millions of mortgages that many today cannot prove that they own the homes they want to foreclose on. The resulting rash of lawsuits from people seeking to save their homes has one of the government’s top banking regulators worried that the torrent of litigation will delay the real estate market’s recovery.
Federal Deposit Insurance Corporation Chair Sheila Bair tells Scott Pelley banks should be forced to contribute billions to a clean-up fund that will help stressed homeowners stay in their homes and stave off lawsuits – there are 30,000 already – that threaten the economic rebound [...]
Like last year, banks are expected to foreclose on a million mortgages this year, a scenario that could generate more lawsuits over mismanaged paperwork. “I think that this litigation could easily get out of control,” says Bair. “…We’re already feeling like we’re falling behind it,” She thinks a large clean-up pool funded by the banks that would pay homeowners to accept a bank’s ownership claim without a lawsuit is necessary. “I would assume it would be billions [that the fund would need],” Bair tells Pelley.
It sounds like 60 Minutes actually got this and reported it correctly. Lynn Szymoniak, one of the leading experts in foreclosure document fraud, is profiled in the piece. You will see forged paperwork, misidentified dates, and fabricated documents.
Now, regardless of what you think of the proposed mortgage settlement, and the banksters’ counteroffer, it’s important to note that what Bair’s talking about would have to exist separate from that. Attorneys General or even federal banking regulators do not have the authority to waive claims in state courts on behalf of homeowners. So this Superfund would be a separate event.
And the more banks resist it, the more liable they will become. In an important case this week, a judge in Alabama dismissed a foreclosure because the bank failed to comply with the pooling and servicing agreement for transferring mortgages to the trust. This would be a stunning ruling if applied broadly, though whether or not it will stand as precedent across other states remains to be seen; it’s far too early in the process to determine that. But we know that banks simply did not convey mortgages to trusts properly as a general rule. Foreclosure fraud can be seen as a coverup for that original sin. And if state courts are starting to make rulings based on that sin, banks will be stuck and unable to pursue foreclosures on tens of millions of loans.
The ruling in favor of the borrower endorses an argument we have made since last year on this blog, that the pooling and servicing agreement stipulated a specific set of transfers be undertaken to convey the borrower note (the IOU) to the securitization trust within a specified time frame. New York trust law was chosen to govern the trusts precisely because it is unforgiving; any act not specifically stipulated by the governing documents is deemed to be a “void act” and has no legal force. So if a the parties to a securitization failed to convey a note to the trust within the stipulated timetable, retroactive fixes don’t work. In this case, the note had been endorsed by the originator, Encore, but not by the later parties in the securitization chain as required in the pooling and servicing agreement.
There’s evidence to suggest that, particularly in hard-hit foreclosure states, judges have simply had enough and are dismissing cases left and right because of shoddy paperwork. So while the banks give off a public posture of calm, in reality the continued awareness of fraud is hampering their ability to process foreclosures and locking up the system. Exposés by the press have had an impact as well: after a story by Pro Publica about a trustee blocking a mortgage modification for a borrower in Georgia, the servicer postponed the foreclosure for two months to give an opportunity for the trustee to give up and allow the modification.
The point is that it’s not the captured political figures who will eventually give urgency to the banks to find a resolution – it’s the judicial process. And while that may take a while, it’s a potentially much more favorable scenario for borrowers than some settlement which threatens to strip away their due process rights. Bair’s Superfund idea only works if it is commensurate with the level of title problems, and only if it’s completely separate from punishment for fraud already committed in state courts.
Related: Katherine Porter on Fannie and Freddie’s responsibility for servicer abuse.