Issue of the week: A plague of faulty foreclosures

last updated 8 January 2015

When GMAC Mortgage, the nation’s fourth-largest originator of home loans, announced last week that it was halting foreclosure proceedings in 23 states, the entire mortgage industry shuddered, said Lorraine Woellert and Dakin Campbell in Bloomberg.com. GMAC halted proceedings because it couldn’t properly document that it actually owned the mortgages on some homes in foreclosure. The company called the missing links in the paper trail “an important but technical defect” that didn’t result in any “inappropriate foreclosures.” However, regulators in California, Illinois, and Florida have opened separate investigations into GMAC’s foreclosure practices, and three Democratic congressmen recently wrote to Fannie Mae, the nation’s largest holder of mortgage loans, asking why lenders were “foreclosing on properties on which they do not even own the note.” Texas mortgage consultant David Lykken says “massive defects” in mortgage documentation are the norm, calling GMAC’s problems “endemic.” If that’s really true, thousands of foreclosures across the country could be invalid, creating a legal morass that could take years to untangle.

Here in Florida, we’re already in knots, said Harriet Johnson Brackey in the South Florida Sun-Sentinel. Bank of America recently rescinded the sale to Fannie Mae of a foreclosed property in Fort Lauderdale because BofA had already sold the property—for cash—to someone else. Such mistakes, say real estate attorneys, are common in Florida, “which has been swamped with foreclosure cases for several years.” Overwork could be partly to blame for the problem, said Ariana Eunjung Cha in The Washington Post. It turns out that “some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork.” The admission by Jeffrey Stephan, the head of GMAC’s foreclosure document processing team, which handles foreclosures for hundreds of different lenders, “may open the door for homeowners across the country to challenge foreclosure proceedings.” Stephan said he had hand-signed 10,000 documents a month, each attesting that foreclosure proceedings were justified and that the information in the foreclosure files was accurate. He has admitted, however, that he barely glanced at the files.

Don’t make Stephan the scapegoat for the lenders’ “inexcusably bad business practices,” said Paul Jackson in HousingWire.com. Handling defaulted and foreclosed loans “isn’t a moneymaker at any bank,” nor does this low-paying, unglamorous work attract top talent. Consequently, companies tend to shortchange their foreclosure operations until problems, in the form of negative headlines, begin to appear. It’s a “one-sided approach to cost-cutting,” but the ultimate costs can be very high indeed once regulators and the public discover that foreclosure processors have been cutting crucial corners. “Something tells me that bank executives are now rethinking that strategy.”