TOPICS > Economy

‘Robo-Signing’ Paperwork Breakdown Leaves Many Houses in Foreclosure Limbo

October 6, 2010 at 5:02 PM EST
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Foreclosures in 23 states have been halted by major banks after allegations surfaced of illegal practices. Jeffrey Brown talks to the president of the Center for Responsible Lending and a Columbia economics professor for more.
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JEFFREY BROWN: Now: the latest housing market mess, this one to do with what may well be hundreds of thousands of tainted foreclosures.

ANNOUNCER: We’re Ally, a new bank whose rates will always be…

JEFFREY BROWN: It started last month, when Ally Financial, the nation’s fourth-largest mortgage lender, halted evictions of homeowners in 23 states, from Maine to New Mexico.

The lender, formerly known as GMAC, admitted employees signed thousands of foreclosure documents without reading them, a practice dubbed robo-signing. Luis Fernandez is one of thousands of people who could be affected.

LUIS FERNANDEZ, homeowner: They never answered me. They never called me. And they never got in touch with me.

JEFFREY BROWN: The loan officer on his case has acknowledged authorizing more than 10,000 foreclosures a month without reading them.

LUIS FERNANDEZ: There is something very, very sneaky behind all this.

JEFFREY BROWN: And the problem has now spread to J.P. Morgan Chase and Bank of America, the nation’s largest bank and, for the record, a NewsHour underwriter

Both banks have now frozen foreclosures in some two dozen states. The potential number of cases involved could be staggering.

ILYCE GLINK, real estate analyst: You’re dealing with 50,000 loans in one case, maybe 50,000, 40,000, 60,000 in another. That’s plenty of paperwork to have to go through.

JEFFREY BROWN: In the meantime, in recent days, Maryland Governor Martin O’Malley, Delaware Attorney General Beau Biden, and Texas Attorney general Greg Abbott have asked lenders to suspend foreclosures in their states. Today, North Carolina Attorney General Roy Cooper added his state to the list.

There’s mounting pressure in Washington as well. Yesterday, House Speaker Nancy Pelosi and 30 other California Democrats wrote to the Justice Department, the Federal Reserve, and the Comptroller of the Currency.

They said, “It is time that banks are held accountable for their practices.” And they asked regulators to investigate whether lenders broke any federal laws.

In addition, Senate Democrats Al Franken of Minnesota and Robert Menendez of New Jersey have asked that Congress’ investigative arm get involved. They want the Government Accountability Office to examine whether regulators overlooked problems at the mortgage companies.

ERIC HOLDER, U.S. attorney general: We are aware of the charges that have surfaced.

JEFFREY BROWN: Today, U.S. Attorney General Eric Holder said a mortgage fraud task force is looking into the allegations.

And for more, we turn to Michael Calhoun, president of the Center for Responsible Lending, a policy, research and advocacy group — the center served as co-counsel in one of the current foreclosure cases in Maine — and Christopher Mayer, professor of real estate, finance and economics at Columbia University’s Business School.

We contacted a number of banking industry trade groups and lenders. None agreed to join us for our discussion.

Mike Calhoun, I will start with you. You’re familiar with this process that people go through. Fill in the picture that we just presented a bit. What — what have some foreclosure processors allegedly done?

MICHAEL CALHOUN, president, Center for Responsible Lending: Well, this is a critical breakdown in one of the most important safeguards in the foreclosure process.

Before a bank or lender goes to court to take somebody’s home, they’re required by law to have someone individually review the paperwork and the payment history to make sure that the person is, in fact, behind on the mortgage, has not been charged improper fees.

And then they certify, under oath, under personality of perjury, that they have done this individual review. We have now found that, on an industry-wide basis, that was totally ignored.

And that means there are a lot of people out there who had foreclosure proceedings brought against them when they shouldn’t have. And we’re talking a lot of people. There are about 2.5 million households in foreclosure right now. Another 2.5 million people are at risk of foreclosure because they’re behind on their mortgages.

JEFFREY BROWN: And, Chris Mayer, what’s your take on it? What explains why it’s happening, and why in such numbers, and why with such prominent institutions?

CHRISTOPHER MAYER, Columbia Business School: Well, I think that this is part of what’s been an endemic problem in the industry, which was, we rushed to make mortgages with little to no documentation, and we were — you know, the rapid growth in securitized lending.

Between, you know, 2002 and 2005, we literally almost quadrupled the size of the privately securitized mortgage market. And that led to, I think, people pushing too quickly.

And then, on the other side, you know, people have just been overwhelmed. The industry has never been able to manage this kind of a problem. And it’s shown up in problems with foreclosures. It’s shown up in problems with contacting people and trying to figure out how to resolve many of the problems.

JEFFREY BROWN: Well, Mike Calhoun, just — I just want to understand this even more here. Are we talking about people who have lost a home who shouldn’t have lost a home or bad paperwork that might have affected the process?

MICHAEL CALHOUN: It’s both, but you can’t tell without this important part of the process to determine…

JEFFREY BROWN: So, it’s just that we don’t know?

MICHAEL CALHOUN: It’s sort of throwing darts against the wall determining who has got a foreclosure and who has a defense and shouldn’t be foreclosed.

And Professor Mayer makes a real important point. It used to be that you would get a home loan from your local bank. They would keep the loan, and you would deal with them throughout the process. Now the model has been, you take out a home loan, and then that loan is sold off to investors and to other institutions.

And another company, who doesn’t own the loan, is the one collecting, processing your payments, and also bringing these foreclosure proceedings. So, there’s a real disconnect there. These companies are not the ones typically that own the loan. They’re just foreclosing for someone else.

And so they don’t have the same incentives, the same need and incentive for care if — they would have if they actually held the loan and had a lifetime relationship with you.

JEFFREY BROWN: So, when we start to look at the impact, Chris Mayer, first of all, the people who are in these homes, what happens to them now?

CHRISTOPHER MAYER: Well, I think this is one of those places where I think, as Mike said, we don’t quite know yet. I mean, we know from other data, not just from these — from the problems with the foreclosures, that, you know, there are about 5.2 million people who are seriously delinquent, that is, 60 days or worse on their mortgage.

I think — while we don’t know for sure in individual cases, I think it’s pretty likely that the vast majority of these are problems of paperwork, as opposed to the fact that — you know, that there are just people who haven’t made payments.

And I don’t underestimate — I mean, if you kick people out of their home, even in a small number of cases who don’t deserve it, the losses are — you know, the costs to us are very large. So, we have to fix these problems.

All that said, I think what’s likely to be the case is that we’re still going to find the vast majority of these are going to proceed once these sort of — you know, once a human being actually looks at the process that took place.

JEFFREY BROWN: Is it possible — I will stay with you, Chris Mayer — is it possible that some lenders will now be more willing to negotiate with people in — in a tough situation, perhaps on the payments or principal balance, just because of this doubt about the foreclosure?

CHRISTOPHER MAYER: I think the question about negotiating depends critically on what happens when they sort of look under the hood and see what happens.

I will say that we have had some experience with foreclosure moratoria in the past. For example, California, you know, had one in 2008. And what happened was, there was a short period where foreclosure sort of slowed.

It doesn’t appear that that really led to a lot more negotiations and a lot more resolutions. And I think, at the end of the day, once somebody takes a look at this, you know, there is going to be an additional impetus. I suspect we will find a few cases where there are people who have been unjustly treated. And, you know, those are very serious.

But I think we will find a few cases where we’re going to be able to modify the loans. But I’m not sure that — I — I guess I’m a little pessimistic, given our past record on this, that we’re going to find a large-scale change in the number of people that are eventually going to face the loss in their homes.

JEFFREY BROWN: What kind of impact do you see on these people in their homes and on the larger housing market, of course?

MICHAEL CALHOUN: You make an important point about the modifications, because the people who were supposed to fill out these foreclosure papers correctly are also the same companies that are supposed to determine if homeowners are eligible for modifications of their loan to keep them in their house.

JEFFREY BROWN: Which has been a big issue over the last few years, of course, right.

MICHAEL CALHOUN: And it’s been a big issue.

And it’s just further evidence. These stories echo the ones that have been aired, that people trying to get loan modifications, would send their paperwork in over and over again. It would get lost, and then they would end up being foreclosed on, without ever getting an answer to their modification.

So, it affects a lot of families in that direct way. In terms of the overall economy, the housing market is a real drag on our current economy, which doesn’t need any further handicaps. This just mucking up of the whole system will make it harder to resolve both the modifications, the foreclosure, and ultimately the settlement of the housing crisis.

And — and, finally, it’s — it’s emblematic in a real way of a larger imbalance that has been in effect between the rights of consumers and the rights of lenders, that most families have had the experience. They take out a loan, and then they get a notice in the mail that says, send your payments to somebody you have never heard of, and, if you have a dispute, you have to deal with them.

And no one was really there looking over those companies’ shoulder to make sure that was done fairly. With the passage of the financial reform bill, it sets up this new agency, the consumer protection agency, and now gives it the power, which will go into effect next summer, to regulate these companies and review and inspect these companies that are servicing your mortgages and deciding whether or not you get foreclosed on.

JEFFREY BROWN: Well, and a last word from you, Chris Mayer. The one positive — potentially positive aspect I have heard in all this is — is the possibility of giving a kind of floor to the — to the — to housing prices, as we have this sort of moratorium and letting the market stabilize a bit. Is there that potential for some upside?

CHRISTOPHER MAYER: Unfortunately, I think I agree Mike on this point as well, which is, I think the mucking up the system, the uncertainty about what’s going to happen is — you know, unless we think this is going to really substantively change what’s happening, I think that uncertainty is actually going to be worse, not better, for the housing market.

If you’re thinking about buying a home and you say, well, gee, there’s going to be a bunch of foreclosed homes that come on the market six months from now, maybe I will wait, or if you’re a lender saying, you know what, I was thinking about lending, but I’m afraid that, six months from now, the housing market is going to take a big hit again, I think uncertainty is just bad for all of us at the moment.

It’s bad for confidence by consumers. It’s bad for confidence for homeowners. And this is just a really unneeded problem. And I also agree that we — you know, we’re going to have to find better ways in the future to move forward.

JEFFREY BROWN: OK.

CHRISTOPHER MAYER: But, you know, like what happened with the housing tax credit, we had a temporary boost while the housing tax credit was in force, and, as soon as it expired, you know, bad news hit again.

JEFFREY BROWN: All right.

CHRISTOPHER MAYER: And so I think it really behooves everyone to work quickly to resolve this.

JEFFREY BROWN: All right, we will leave it there. Chris Mayer and Mike Calhoun, thank you both very much.

MICHAEL CALHOUN: Thank you, Jeff.

CHRISTOPHER MAYER: Thanks a lot.