The foreclosure mess
Image via WikipediaTalk about a financial scandal. A consumer borrows money to buy a house, doesn't make the mortgage payments, and then loses the house in foreclosure—only to learn that the wrong guy at the bank signed the foreclosure paperwork. Can you imagine? The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.They could more properly be compared to Congressional representatives who vote for legislation they have never read. It will certainly have a much wider effect than some defective mortgage papers.
The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington's financial crisis of the week.
In the 23 states that require judicial foreclosures, lenders seeking to seize property from a delinquent borrower must file a summary judgment motion in court. Typically, this document must be signed in the presence of a notary by a "witness" who has reviewed the relevant documents and confirmed that the borrower is in default and the lender owns the mortgage.
Recently GMAC Mortgage, whose parent Ally Financial is majority-owned by the U.S. government, suspended foreclosures in those 23 states after acknowledging that in some cases notaries may not have been present and the signers may have relied upon others to review the documents instead of doing it themselves. Bank of America and J.P. Morgan Chase then halted their own foreclosures in those 23 states to ensure they are following the letter of the law, and yesterday BofA announced its moratorium is now nationwide.
We're not aware of a single case so far of a substantive error. Out of tens of thousands of potentially affected borrowers, we're still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home. Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven't paid.
In their zeal to find and prosecute the great bank defendant, state Attorneys General aren't waiting to see if anyone within their borders was actually harmed. In a civil suit, Ohio's Attorney General Richard Cordray has even charged an Ally employee with fraud for signing the documents without reading them. In a Journal interview, Mr. Cordray compared the employee to Nazis at Nuremberg who claimed they were just following orders.
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However the real problem with sloppy paperwork is not for the defaulting party. The bank is required to make certain representations and warranties to any buyer of the property as well as to a mortgage insurance company that is guaranteeing the buyer that he is getting good title with no defects. I think what caused the halt was that some insurers were balking at the paper work the banks were giving them. That could be a significant problem for the transfer of title to the property. The defaulting party should have no rights in that particular argument.
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