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Decoding the Robo-Signing Foreclosure Freeze Mess

On October 11, bowing to increased pressure from state attorney generals about fraud within the foreclosure process, Wells Fargo, Chase and PNC Financial halted foreclosures in 23 states.  Bank of America, the nation’s largest bank, went one step further and temporarily halted all foreclosures across the country.

The allegations against these banks were that they skirted the judicial process in states that required a judicial review of foreclosures.  This means that banks and their legal representatives had to certify that the documents presented were accurate and had been verified before being sent through the legal system for foreclosure.  It was revealed that instead of actually reading and signing the documents, some individuals were essentially hired just to sign documents and certify that they were true on behalf of the banks.  These individuals have been referred to as “robo-signers” and were often tasked with signing hundreds of documents each day.  Robo-signing accounted for many of the horror stories that you may have heard where banks foreclosed on the wrong house.

As a result of this revelation, some judges have called into question all foreclosures that pass through their court rooms.  On October 20, Jonathforeclosed homean Lippman, the Chief Judge in New York, ordered all bank lawyers to certify that the documents that they filed to foreclose on a home were accurate.   Judges have dismissed foreclosure proceedings if lawyers did not certify to the accuracy of the documents leaving homeowners that justifiably should have been foreclosed on, in a home that they have not made payments on – sometimes in years.  Information that should be included in foreclosure documents, but were often missing, included the address of the property, the name of the borrower, and the original amount of the loan.  Homeowners facing foreclosure might welcome this reprieve, but what effect is this having on the overall real estate and mortgage industry?

A major consequence of this foreclosure freeze is the effect that it has had on pending sales of previously foreclosed homes.  According to RealtyTrac’s U.S. Foreclosure Market Report for the third quarter, “foreclosure sales numbers for September show that overall foreclosure sales — including pre-foreclosure sales and REO [bank repossessions] — accounted for 31% of all sales during the month.  REO sales alone accounted for 18% of all sales.  Foreclosure sales in the 24 states most affected by the foreclosure documentation issue accounted for 32%  of all foreclosure sales nationwide, based on the preliminary September data.”  This means that of all real estate sales within September, a full 31% percent occurred from homes that had been foreclosed on.  The full impact of this foreclosure freeze on overall industry sales have not been felt, but will occur in the future.  According to the Mortgage Bankers foreclosure questionsAssociation, while the freeze probably did not affect sales in the third quarter, it will affect the foreclosed home inventory rate in the  fourth quarter and early next year, which may then impact overall industry sales.

But what about home buyers that diligently saved money and shopped around for a home that they could afford; perhaps a previously foreclosed home?  Buyers that were in the processes of purchasing these home are now in a waiting pattern which might cost them money. If buyers had already obtained mortgages and were waiting to close on the home, they stand to lose good faith deposits and may have to pay their own loan originators to keep or lock in their mortgage rates – all without a guarantee that they will end up with the home in the end.  Even new homeowners that closed on previously repossessed or foreclosed homes may not be safe.  Some lawyers report that individuals that had been foreclosed on have contacted them about suing to regain homes that they had lost.  If you are a buyer and concerned about a previous homeowner coming back to sue you, be sure to do a title search and purchase title insurance from a reputable company.

Finally, what about homeowners who are knowingly behind of their mortgages, but the bank is unable to prove to a judge’s liking that they legally own the home?  The jury is still out on what will happen to them.  Allowing a family to keep a home that they have not fully paid for might seem like the the right thing to do, but is stiffing the bank of hundreds of thousand of dollars also fair?  The impact that this might have on our economy remains to be seen.

Has the freeze affected you or your plans?

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5 thoughts on “Decoding the Robo-Signing Foreclosure Freeze Mess

  • In times like these I’m glad I’m a renter. My husband and I went back and forth about buying a foreclosed property, but it all just seemed too complicated and convoluted. So we’ve decided to wait out this mess and see what happens. I don’t necessarily think it’s fair that people are living for free in homes they don’t really own, but I guess once they are finally foreclosed upon (and I do think that will eventually happen) they’ll be facing bigger obstacles.

    • The best advice that I can give is to wait and save your money! There should be larger inventories of foreclosed homes in the near future. But, if you don’t live in the 23 states affected, then by all means, don’t be discouraged. Make sure you have a knowledgeable representative to guide you through the process, purchase title insurance, and you’ll be okay.

  • I just interviewed Nye Lavalle about this, who started talking about mortgage fraud 14 years ago. I believe that people should not be foreclosed on unless the bank can prove they own the note. Nye has evidence that banks sold the notes multiple times, so many parties think they have the right to take the house. What if all of them show up in court to foreclose?

    Title is a complete mess, so he recommends everyone with a house make sure who really owns their note. In many states including Georgia, if you pay off your mortgage to the wrong bank, you still owe the real owner the full amount. That means you will pay it all again if you are not careful.

    Like Little House, I’m glad to be renting for 4 years!

  • One other key piece of information is that title companies are refusing to write policies on homes in foreclosure. So, even if you do get a deal on a foreclosure, you probably won’t be able to get title insurance.

    This mess is going to take a while to sort out and banks are going to lose some money. I don’t really feel sorry for them, because they are bound by the law, just like homeowners.

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