One of the controversial pieces of the foreclosure fallout is the possibly illegal procedure known as “robo-signing” that has gained media attention in the last two weeks. We highlighted it in Thursday night’s broadcast, which is the first in a series by Paul Solman on the foreclosure mess.
But, what is robo-signing? How does a mortgage get to that point?
We’ll start at the beginning, with the loan for a house. Let’s say a couple, Mr. and Mrs. Newlywed, find what they think is the perfect home in upstate New York to raise the two children they plan on having.
They go to LovelyHomes Mortgage Company down the street and take out a $300,000 loan for their dream home.They agree to pay a certain amount every month for the next thirty years. The couple goes home to pick out curtains, and LovelyHomes sends the mortgage packing.
The loan would be sold to a bank, such as JPMorgan Chase or Bear Sterns, which ‘sponsors’ the loan. To securitize it (turn it into an investment, essentially), the bank bundles it up with other mortgages, and sends the bundle through a depositor and the bundle is sold to a trust, such as Deutsche Bank. The trust (also known as the bank in finance lingo) is hands-off: it hires a servicer to collect Mr. and Mrs. Newlywed’s monthly loan payment on the $300,000 mortgage, and other maintenance duties.
A mortgage can be a rather risky asset to hold on its own and has the potential to make money for investors, which is why it kept getting sold ‘up’ the investment ladder. The idea is that if Mr. and Mrs. Newlywed default on their mortgage, no one company or investor is out- that risk is spread out across multiple investments.
Theoretically, all the signed, dated and notarized legal documentation follows the loan at each step. For each round the Newlywed’s mortgage is sold, there should also be a few additional pieces of paperwork, saying the loan has been legally sold.
Say both Newlyweds lose their jobs and Mrs. Newlywed comes down with a series of health issues. Their dream home in upstate New York suddenly becomes too expensive. Unable to find a buyer, the couple misses six months mortgage payments.
At this point, the servicer comes knocking: “You haven’t paid us. We want our money or this house.”
Mr. and Mrs. Newlywed aren’t alone- last month saw a record number of foreclosures– well over 100,000.
To support the complaint that the mortgage hasn’t been paid, the servicer must have an affidavit that verifies the trust actually does own the mortgage, and thus is owed six months of payments.
And that means someone at the servicing company had to personally swear on a affidavit in front of a notary that the note’s ownership had been verified and that the homeowners owed back mortgage payments. This process is supposed to be done for each and every foreclosure.
With all the foreclosures from the financial downturn, critics claim “robo-signers” from the banks were robotically signing off on literally hundreds of thousands of affidavits.
This is where the waters can get incredibly muddy for that verification process. First, the servicer’s robo-signer signing off on these affidavits may not have been checking every single one to see that the trust indeed owned the mortgage note. Second, the notary (which is required for affidavits) was often done at a later date than when the robo-signer signed off on the complaint. Sometimes months later.
“What I see today is people not following those protocols and procedures, people not paying attention and disregarding the rules and the regulations that are there to ensure that we don’t have a meltdown like we did,” said Walter Hackett, a California attorney specializing in bankruptcy, during an interview for the broadcast piece, “Show Me the Money.”
Hackett, who spent 27 years in the banking industry, looks for problems in those procedures when clients whose homes are in foreclosure come to him for legal help.
“I look to determine whether or not there are enough facts to assert there was no contract because without a contract they’ve no right to foreclose,” Hackett said.
Let’s say LovelyHomes Mortgage Company goes out of business. If the original sale of Mr. and Mrs. Newlywed’s mortgage was never processed correctly and never verified at each step it was sold, then the trust cannot claim that it owns that mortgage. Which means creditors of LovelyHomes can claim that mortgage as an asset of the now-bankrupt company, and use that mortgage to offset the bankruptcy.
What does this mean for our jobless and health problem-ridden couple? They don’t know who owns their mortgage, which means payments could have been going to the wrong company. And now that they’re in trouble and need help, such as a loan modification, they don’t know which company to turn to.
If Mr. and Mrs. Newlywed’s paperwork got lost in the process or buried in a box somewhere, verifying to whom the couple owes money could get tricky. Throw in robo-signing and the fact that their loan was bought and sold a few times over without being verified, and it’s difficult to determine who legally owns their mortgage.
And that means the trust, such as Deutsche Bank, which depended on this and so many other loans as a source of income for investors, is hanging over a cliff. Given that our example couple represent hundreds of thousands of foreclosures that are beginning to be understood as victims of possibly fraudulent paperwork, the problem becomes exponentially murkier.
The servicer forecloses on the couple’s home. But did the company have the authority to do so in the first place? Not if the loan was never correctly sold at each and every step.
“We now know so many of these parties foreclosing have no contractual right to foreclose,” Hackett continued. “Even if somebody does, it’s not them. It doesn’t stop them. They’re playing so many games of paper today it’s criminal.”
All this could be an issue of too much paperwork for one person to personally verify; it might be an issue of laziness (such as a lack of motivation to dig through a warehouse of boxes of paperwork to locate the original note), it could be a red flag that the process is broken or it could be something else entirely- the industry has been rather closed-lipped as to how systemic the problem is.
Either way, it has led experts like Katherine Porter, visiting professor of law at Harvard University, to seriously question the mortgage industry.
“The foreclosures and the whole loss of wealth are going to deepen the disappointment and distrust in financial institutions to follow the rules of law,” Porter said, “and be fair when dealing with the little guy.”
But, warns Porter, this freeze is not a “get out of jail free” card for distressed homeowners.
“This is likely to mean delays to most people who are in foreclosure. This is not a silver bullet.”
The reality, she said, is that most people signed a note, owe the money, and cannot pay.