Ally Financial, one of the first of the residential mortgage servicers to fall ‘victim’ to the robo-foreclosure problem that has spread like a pandemic to the entire mortgage servicing industry, has expanded its review of its foreclosure procedures to cover all 50 states. This is following Bank of America’s immediate decision to halt and review its foreclosure procedures across the entire country. The remainder of the servicing shops, including the recently added PNC and Litton Loan Servicing (Goldman Sachs’ servicing arm) has limited their review and exposure at this point to only the 23 states that have judicial foreclosure processes.
All states handle the process of foreclosure slightly differently, but the major difference is whether the state follows a judicial or non-judicial process for foreclosure. In a judicial foreclosure state, the servicer, acting on behalf of the mortgage loan holder (usually a securitization trust), files paperwork in the county court in which the mortgaged property in default is located. Initial paperwork filed with the court includes a complaint and a Lis Pendens filed with the county land records office. Notice of the action is sent to the defaulting homeowner, usually by service of process. The county court will hear the case, including any issues raised by the defaulted borrower, and enter a judgment. A writ will be issued by the court and a sheriff’s sale will be held for the auctioning of the property.
In a non-judicial foreclosure state, the process works without the intervention of the courts, which means that the defaulting borrower has less of an opportunity for complaint or to question of the process. While non-judicial foreclosure states have an even greater patchwork of procedures that follow varying requirements, the basic pattern is that the servicer just sends a notice, either as a Notice of Default or as a Notice of Sale, to the defaulting borrower. After waiting a statutorily required period of time, the servicer initiates an auction for the property.
In either case, the proceeds from the sale of the property goes to the owner of the property, generally the securitization trust holding the property as REO, as “Liquidation Proceeds” as defined in the Pooling and Servicing Agreement. Cash from the sale of the REO property is paid out to the servicer, the trustee and ultimately the investors pursuant to specific provisions established in the Pooling and Servicing Agreement.
By announcing that it will expand its review – but not its suspension – of foreclosure practices to all 50 states can only mean that the procedures followed by Ally or its outside service providers went beyond improper execution of affidavits and use of notary stamps. Rather, it looks like the entire servicing industry, in their sub-contracting the foreclosure process to law firm foreclosure mills, may have found itself completely disregarding the legal requirements to foreclosure. In non-judicial foreclosure states, such actions could have been so egregious as to prohibit defaulted borrowers to have the ability to question the foreclosure. This is because generally, in non-judicial foreclosure states, the concept of due process (which would include things like improperly signed affidavits and notary stamps) is not a valid defense to a foreclosure. Therefore, to have to question the process of foreclosure in these states would signal an issue to the actual violation of law, and not just due process.
And now it appears that the infamous “coalition of Attorneys General”, last summoned to take down Ameriquest, is being formed again, lead again by Iowa Attorney General Tim Miller. With a players list that will probably include Andrew Cuomo from New York, Ray Cooper from North Carolina, and most of the AGs from the judicial foreclosure states (Florida, New York, Ohio, Illinois, Pennsylvania, New Jersey, Connecticut, Hawaii, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Mexico, North Carolina, South Carolina, North Dakota, South Dakota, Oklahoma, Vermont, and Wisconsin), critical mass could be reached. But unlike actions in the past, this time the attorneys general will be fighting against the entire industry and not a lone rouge mortgage company. An interesting interplay that should be asked in this inquiry is that of the servicer’s actions, either directly or through agents, to foreclose and that servicer’s inability to modify loans under HAMP or their limited refinancing of loans under HARP, as well as their drive to push short sale under HAFA. That will be a telling sign as to their “motus operanti” or “mens rea”.
So, as the cavalry of Attorneys General form to bring their forces to bear against the various servicer Indians that have been accused of plundering the homesteads of defaulting borrowers, let us see if this turns out to be a replay of the “Battle of Little Big Horn.” Because this time, those Indians already own all of the casinos on Wall Street and have been smoking the peace pipe with several of the “White Man” in Washington for years.
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