HOW ROTTEN IS THIS APPLE? – ALLY’S DECISION TO REVIEW ALL 50 STATES

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.

AND THE HITS JUST KEEP ON COMING – NO TITLE INSURANCE FOR FORECLOSED HOMES

In an announcement on Friday, Old Republic National Title Insurance told its agents that it would not write policies on foreclosed properties by JPMorgan Chase “until the objectionable issued have been resolved,” as reported in the New York Times. This follows its decision to not write policies on Ally Financial (GMAC Mortgage) foreclosed properties subsequently sold as REO.

So, the title insurer is now questioning whether the title of a sold REO property following a foreclosure is clean. This appears to be an aggressive posture of whether the courts will look at whether the entire robo-foreclosure process invalidates the sale of property due to the improper court filed affidavit. As previously mentioned, it would be draconian for the courts to take such a position. Beyond using some type of argument of “bona fide purchaser for value” to be used by a purchaser of REO property, to unwind all of the REO sales done (HOPE NOW published statistics showing over 800,000 completed foreclosure sales between 3rd Q 2009 to 2nd Q 2010 reported by HOPE NOW servicers) would just destroy the recovery of the housing market.

The ripple effect of all this is starting to turn significantly substantial. As noted in the article, foreclosure prices would drop, as lenders would not be willing to loan against REO purchases without the title insurance. The court system would become even more log-jammed, at a time when budgets are already requiring States to make significant cut-backs. Plaintiff’s attorneys, now smelling the blood in the water, will look to feed off defaulted borrowers in ways the loan modification scams only dreamed of. Servicers, now without an ability to recover its costs from liquidation proceeds on the sale of the REO properties, will be “pressed” to find operating revenue. And, as the mantra for the industry, the securitization investor will be once again be forced to “eat it.” Cash-flows will be limited, the properties that should at least be held as REO, will be stuck in this foreclosure limbo, and any recoveries will be less money to pay off their investment. Losses will creep up the tranche structures.

While October is harvest month, it looks like the capital market fields are still only providing the smallest of yields. The HAMP, HAFA and HARP plantings appear to have been only marginal seeds. And now, it looks like we just got hit with an early foreclosure frost that may kill a good portion of the crop. And wait, we still have to face the ghosts, ghouls and goblins (including those on Capital Hill looking to frighten the securitization market with its new regulations) that will be coming out at the end of the month for their free candy (also known as year end bonuses at the Wall Street Banks).

“CHICKEN LITTLE AIN’T GOT NOTHING ON ME” – THE CONTINUING MORTGAGE FORECLOSURE MESS

Well, as predicted, the regulators are coming out of the woodwork over the robo-foreclosure issue. The OCC, the regulatory agency for banks, is ‘requesting’ that the big boy servicers (BofA, JPMorgan, Wells, Citigroup, HSBC, PNC and US Bank) review their foreclosure practices to see if the person signing the affidavits in foreclosure proceedings had the required knowledge of the facts stated in the affidavit.

To understand the issue at hand, in State’s that have judicial foreclosure, the law requires something like the following:

• The affidavit shall state the facts that establish that the obligor has defaulted in the obligation to make a payment under a specified provision of the mortgage or is otherwise deemed in uncured default under a specified provision of the mortgage.


• The affidavit shall also specify the amounts secured by the lien as of the date of the affidavit and a per diem amount to account for further accrual of the amounts secured by the lien.


• The affidavit shall also state that the appropriate amount of documentary stamp tax and intangible taxes has been paid upon recording of the mortgage, or otherwise paid to the state.


• The affidavit shall also state that the lienholder is the holder of the note and has complied with all preconditions in the note and mortgage to determine the amounts secured by the lien and to initiate the use of the trustee foreclosure procedure.

At issue, then, is what are the requirements of an affidavit. Anderson's Manual for Notaries Public Fifth Edition describes an Affidavit as a "declaration reduced to writing, signed by the affiant, and sworn to BEFORE an officer authorized by law to administer oaths." Blacks Law Dictionary describes an Affidavit as "a written, ex parte statement made or taken under oath BEFORE an officer of the court or a notary public or other person who has been duly authorized so to act."

In several States, notaries are subject to "petty offense" fines for misuse of office. If a notary is signing affidavits without witnessing a signature, the notary is subject to fines.

An affidavit can either be based upon the personal knowledge of the affiant or his or her information and belief. Personal knowledge is the recognition of particular facts by either direct observation or experience. Information and belief is what the affiant feels he or she can state as true, although not based on firsthand knowledge.

So, what does this mean to the servicers? Well, to start, did these servicers have policies and procedures in place that required this two step process, specifically (a) that the affidavit had either personal knowledge or information and belief of the facts in the affidavit, and (b) was the affidavit sworn to BEFORE a notary? Next, were these policies and procedures followed (probably not is what it appears). Lastly, what will be the penalty for failing to following these procedures?

So, it appears that one of the culprits of this new mortgage mess is the notaries working for the foreclosure mills. Like the appraisers of sub-prime mortgage originations past, these “low on the totem pole” service providers just processed without following their own rules. Now it is coming back to haunt the entire industry.

Another party to this trouble is the in-house foreclosure group heads at the servicing companies that signed the affidavits. Did they even have personal knowledge (doubtful) or a good faith information and belief of the facts stated in the affidavit? Again, it will be based upon the policies and procedures in place at these organizations. Whether there was “up-the-line” reporting from the person handling the foreclosure to the person signing the affidavit will be key.

So, as more of the servicers get taken behind the wood-shed, plaintiffs’ attorneys will have a field day with this and the regulators will continue to make political hay. Meanwhile, Joe Homeowner who is in default on his loan gets to watch TV rent free and the securitization investor will be flipping the bill for it all. Maybe hedge fund investors will start to see this . . .or maybe not. Maybe they need more write-offs.

ROBO-FORECLOSURES – A PANDEMIC IN THE MORTGAGE SERVICING INDUSTRY

JPMorgan Chase announced today that they too may have been part of the robotic foreclosure process that Ally Financial acknowledged is a major issue for them. In a memo distributed last night, JP alerted its attorneys that employees in its foreclosure operations may have signed affidavits without the required personal knowledge.

As the third largest servicer in the country, with over $1.3 trillion in its servicing portfolio, even a 0.1% impact would be huge. And that percentage is not out of the realm of financial impact to the company. Litigation exposure, on both the default borrower side as well as investor backlash, together with any regulator penalties, could cost the company millions. JP has taken the same “stiff upper lip” posture as Ally, claiming that the factual information given in the affidavits was accurate and was not affected by whether or not the signer knew the details. So, it will come down to the courts to decide what type of penalty to impose.

And like Ally, JP is now requesting that courts not enter judgments on pending foreclosures until they figure out what was done and how to fix it. Well, there goes securitization investor cash-flow some more as foreclosures get put on extended hold. This will also cost JP money, as it too now has to wait for its reimbursement of funds in the securitization cash-flow waterfall.

It seems that in their race to foreclosure, proper processes were laxed (kind of like the underwriting standards that got the industry into the mess to begin with). I guess it is just boils down to a question of when does “volume–izing” the mortgage industry (be it in origination or servicing) cause policies and procedures to get tossed out of the window.

Well with GMAC Mortgage and JP Morgan now on the hot seat, that just leaves Bank of America, Wells Fargo (that now includes anything from Wachovia), Litton (a/k/a Goldman Sachs), Saxon (a/k/a Morgan Stanley), and all the little fellas (Carrington, American Home, HomEq, etc.) to get put on the rack. And in a politically charged year, the politicians should have a field day with this (unless, of course, they had a “Friend of __________ Loan”). We have already seen California Attorney General Jerry Brown, now running for “Governor Moon Beam – Part Deux,” chime in yesterday.

MORE CRACKS IN THE SYSTEM – ROBO-FORECLOSURES BY SERVICERS MEAN LESS $ TO INVESTORS

Moody’s, the now ever vigilant rating agency, has caught wind of the failure of servicers to properly follow legal procedures when foreclosing on properties. In an announcement this week, the rating agency has decided to review Ally Financial (f/k/a GMAC Mortgage) for downgrade following the servicer's acknowledgement that they may have not been properly preparing foreclosure documents.

In what is commonly referred to as “Robo-foreclosures,” Ally Financial appears to have been filing foreclosure affidavits in court that were not signed by persons with actual knowledge of the facts required for such paperwork. In addition, affidavits were not notarized in the presence of the notary. In its response, a spokesman for Ally was quoted in an article for HousingWire as saying that the substantive content of the foreclosure paperwork, such as loan balance, delinquency and note and mortgage information, did not appear to have been misstated or inaccurate and that Ally believes “that the substantive content of the affidavits in question were factually accurate.” Naturally, it is Ally’s interpretation of what is ‘accurate substantive content’ and what was just ‘procedural errors’ – like due process. And hey, that notary thing – really – it’s like the corporate seal – does anyone really think it’s important these days? And what is it now, a buck? I remember when it was $0.25!

In an attempt to rectify the situation, Ally has suspended evictions on foreclosures where a faulty affidavit was detected. Whether they are closing the barn door after the horse got out is pretty clear. More important is the impact this will have on the securitization structures. With approximately $380 billion under servicing management as of July 31, such a hick-up in foreclosures will mean less money coming back to investors as this mess is fixed. And with plaintiff attorneys more than happy to run cases like this into court and tie up liquidation of the REO property, it looks like everyone, other than the delinquent borrower who will be getting a continuing free ride due to Ally’s slip-up, will be taking it in the shorts. Even Ally, as first in line to receive reimbursements from liquidation proceeds, will have to now wait for their money as these foreclosures are cleaned up. Moody’s will be looking at any rating impact based, at least in part, on this new timeline for foreclosures and REO liquidations and its legal and financial impact to Ally. Should be interesting to see what Ally's policies and procedures said about this.

Maybe GMAC can get some additional TARP money to help out. They still have a few more days before TARP goes away.