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Legal issues might slow the rise in foreclosures [ClearOnMoney]
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Legal issues might slow the rise in foreclosures

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Commentary

Legal issues might slow the rise in foreclosures

24 Sep 2010 by Jim Fickett.

There are longstanding legal issues both in the mass transfer of millions of mortgage loans into asset-backed securities, over the last decade or so, and in the current handling of foreclosure paperwork. These issues are bubbling to the surface, and it is possible that they could slow the foreclosure process enough to affect the market.

Ally Financial, formerly GMAC, has been much in the news in the last few days, because some of their documentation for foreclosures was incorrectly executed. Ally is no small player, but the story is really bigger than Ally, and could be important industry-wide.

Without getting into too much detail, there are two main issues. The first is that during the securitization boom, ownership of millions of mortgages was changed multiple times and, because it takes time to record a change in ownership at a local courthouse, corners were often cut. An October 2009 article in the New York Times, and an August 2010 article from Yves Smith at Naked Capitalism give a good sense of some of the sloppy practices and issues. The result of these rushed ownership changes is that now it is sometimes difficult or impossible to prove (sometimes even to determine) who is the current owner of a loan. Clearly it is difficult to foreclose if there is no legally valid record of who owns the loan.

The second issue is that today, as Ally, Fannie and Freddie, and the big banks process thousands of foreclosures per day, corners are again cut, and incomplete, incorrect, or fraudulent paperwork is used in the foreclosure process. The particular issue with Ally is that at least one official apparently signed affidavits requiring personal review of the details, but in such quantity that personal review could not possibly have occurred.

It is odd how some issues stay just below the surface for a long time and then pop into national prominence. All this has actually been an issue during the whole foreclosure crisis, but the problem at Ally has put it on the front page.

Ally itself brought the issue to the fore this past Monday by stopping all eviction actions in 23 states. Ally claims there are just a few technical issues with the documentation, but many doubt the issues are superficial.

How big is the story? Ally stopped evictions in states where foreclosures involve a suit in court (so-called “judicial foreclosure” states). However today Yves Smith pointed out that California, a non-judicial state, has taken action against Ally. According to the Sacramento Bee,

California officials today demanded that Ally Financial Inc. stop foreclosing on homes in the state, citing reports indicating the big mortgage lender is violating the law.

The cease-and-desist letter, issued by Attorney General Jerry Brown, came as officials in several other states began investigating Ally's operations.

The controversy stems from a Florida court case in which an Ally official reportedly testified that he signed thousands of documents in foreclosure cases without even reviewing the homeowners' loan documents.

According to Brown, California law forbids a lender from issuing a notice of default - the first step toward foreclosure - unless it can show it has tried to contact the borrower.

It would be somewhat surprising if the problems were limited to Ally. There have been many stories over the past 3 years suggesting hurried and superficial processing of thousands of foreclosures, and the Washington Post reported on Wednesday:

The problems in the nation's foreclosure system are much wider than those exposed at Ally. Court documents and interviews with lawyers and legal experts show that forged documents and faked signatures are common in foreclosure files while an overwhelmed legal system looks the other way.

More directly, on Tuesday the Washington Post also reported that Ally itself service loans for many other lenders, so that Ally's procedures may turn out to affect loans more widely:

Spokesmen for Fannie and Freddie confirmed Tuesday after inquiries from The Washington Post that they use Ally, formerly called GMAC, to oversee some mortgages. The companies have launched internal reviews to assess the scope of any potential issues.

If more state governments jump on the bandwagon, this might get to be a big enough issue to noticeably slow the rise in foreclosures. It is not there yet, but it's something to keep an eye on.