Perhaps it was inevitable. The industry that brought us no-doc loans appears to have now brought us no-doc foreclosures.
No-doc loans were a staple of the lending industry in the easy credit years of 2004 – 2007. Simply stated, these were the lender programs that did not require borrowers to provide or substantiate their financial information before getting a loan. If the borrower’s credit score met the lender’s guidelines, that was good enough. These loans became known in the industry as “liar loans” since they implicitly encouraged borrowers to misstate their income, expenses, other important financial information. In short,the lenders didn’t ask, and the borrowers didn’t tell. To buyers wanting to acquire their first home, or homeowners want to “buy up,” it was easy money. The rationale on both sides of the equation was that with real estate values skyrocketing, if the loan became burdensome for the buyer or went into default to the lender – the property could always be re-sold or foreclosed, and there would still be a nice profit. We all know how that story ended.
Now fast-forward to the present, that is, 2.3 million foreclosures later. Lenders are quickly realizing that it was easier and faster to put loans together than to take them apart. The result is that the lending industry has become engulfed in a sea of paperwork. If we are to believe current reports, lawsuits, and depositions, it now appears that some lenders have come upon the idea of “no-doc foreclosures” to avoid those pesky state laws that were put in place to protect borrowers and the quality of the title that results from a foreclosure.
In broad strokes, here’s how it appears the no-doc process works when it comes to foreclosures. I say “appears” because what we are seeing today may be only a very small tip of a very large iceberg. If the reports are correct, some of the titans of the lending industry may be steaming into some very unpleasant waters. I hope I’m wrong.
1. Oregon is a “trust deed state.” That is, loans are secured by trust deeds, as opposed to mortgages. The practical difference is little; but the procedural difference is huge. Under state trust deed law, the borrower is called the “Grantor;” the lender is called the “Beneficiary,” and there is a new party, the “Trustee.” In legal parlance, this 3-party structure is a “legal fiction.” That is, while the record owner of the property is the homeowner, the Trustee is said to hold that title “in trust” until the loan is either paid off or foreclosed. The Trustee only gets involved in two instances: (a) When it is instructed by the bank (the “Beneficiary”) to prepare and record a Deed of Reconveyance, which has the same effect as the old “Satisfaction of Mortgage,” or (b) If the loan falls into default, the lender instructs the Trustee to commence foreclosure proceedings. Technically, it is said that the trustee has the “power of sale.”
2. Since only certain entities are legally permitted to be trustees under Oregon law, 99% of the time the lender initially appoints a local title company to act as the Trustee. As soon as the trust deed heads toward a foreclosure status, the lender then appoints a “Successor Trustee.” Successor Trustees are usually a private company whose sole job it is to conduct the foreclosure proceeding. At the end of the process, either the lender gets the property back following a public auction, or it is purchased by a third party buyer who bids more than the lender’s minimum starting bid. The name of the final document at the end of the foreclosure process is a “Trustee’s Deed” which transfers title from the Trustee handling the foreclosure to either the bank or the buyer.
3. Under Oregon trust deed law, as well as the law of many other states, the foreclosure is by “advertisement and sale.” This means that the Trustee must periodically advertise the foreclosure in a local newspaper of “general circulation” over a certain length of time. There is no court (i.e. ” judicial”) involvement in this process. Rather, in Oregon, it is said that a trust deed foreclosure is “non-judicial.” There are certain statutory cure provisions giving the defaulting borrower (“the Grantor”) the ability to pay the amount in default (not the entire loan balance) plus statutory costs and fees. However, after a foreclosure, the sale is absolute, and the borrower has no right of “redemption,’ i.e. the ability to reacquire the property by paying everything off – as under the old mortgage foreclosure law.
4. Now here’s where the plot thickens: As we know, between 2004 -2007 there was an almost frenetic effort by lenders to resell the loans they were making. Oftentimes there were multiple transfers of a loan over the first year or two. Most borrowers can testify to the numerous notices they would receive from a new bank with instructions to start making payments to them.
5. The problem was that technically, every time a lender transfers their interest in a loan, that event is supposed to be memorialized in a transfer document, known as an “Assignment of Beneficial Interest” – or words to that effect (which I will shorten to “Assignment”). In states using mortgages rather than trust deeds, the mortgagee (i.e. the lender) made the assignment. In theory, if each Assignment was recorded every time a lender sold its interest in a particular loan – as good practice would dictate – the public record would show a “daisy-chain” of successive Assignments from the originating bank to the bank ultimately responsible for commencing the foreclosure.
6. However, being too busy making loans rather than foreclosing them, many lenders failed to prepare the Assignments and/or record them. This was a technical problem that probably would not have surfaced, except for the foreclosure crisis. (This is not to say that the problem was unknown for the last few years. Actually, it was one of those “dirty little secrets” in both the lending and title insurance industries. But as long as trust deeds are foreclosed non-judicially, the only way for borrowers to object – assuming they knew – was to file a lawsuit, which was something few had the appetite for. And in some instances, there have been anecdotal reports of courts exhibiting little sympathy for borrowers raising the issue, since after all, they were in default – so what difference would a questionable foreclosure mean to them? This attitude may be changing today as a result of the recent spate of publicity in the media and over the Internet.)
7. Today, in Oregon and across the country, lenders must follow very specific state laws to foreclose their trust deeds. This requires that the lender currently owning the loan must commence the foreclosure. The process usually starts with the lender appointing a “Successor Trustee” whose sole job it is to do the advertising, mailings, and conducting the public sale.
8. But without the county records showing the name of the current lender, it became necessary for each bank to search their old files for the actual assignment of the loan facing foreclosure – and if there wasn’t an Assignment document, they had to create one. This could be done in at least three different ways:
(a) Prepare an Assignment and back-date it, which would require some serious collusion, since it meant the Notary Public had to violate their statutory obligations by permitting a fraudulent date to be entered instead of the actual date of signing. It could also mean that the Notary failed to verify the actual authority of the signer, as discussed below when a Power of Attorney was used.
(b) Alternatively, the lender could simply create, sign and record the Assignment shortly before the foreclosure was started. However, this too was misleading, since upon recording it indicated to the world that the lender had just “bought” that loan and was now recording the Assignment – when in fact, the loan had been purchased years earlier. The remarkable thing about this alternative, was that it flies in the face of common sense. Today, when one sees an Assignment that was recorded days or weeks before a foreclosure was commenced, it raises an obvious question: “Why would a bank purchase a loan that was already in default and not performing?” Of course, they wouldn’t. The truth is that the loan was sold to the bank years earlier “off the record,” but in order to commence the foreclosure, an Assignment needed to be prepared and recorded so the bank could commence the procedure.
(c) One or more unsigned Assignments could be prepared in advance, and if/when it became necessary to record, the identity of the assigning bank and/or the assignee bank would be completed and signed later. This is similar to (b), above, except that the document is simply held by one of the banks or servicers, for later use. Of course, it may be that the assigning bank may ignore all of the intervening unrecorded assignments (if any) and just assign directly to the bank currently owning the loan, in order to initiate the foreclosure. In Oregon this is arguably in direct violation of ORS 86.735 which provides that a trust deed foreclosure must first be preceded by the recording of “(t)he trust deed, any assignments of the trust deed by the trustee or the beneficiary and any appointment of a successor trustee…” in the country where the property is located.
9. If this was the end of the story, perhaps sloppiness or shortcuts could be forgiven, assuming no laws were broken. But according to reports in papers such as the Wall Street Journal, it is more than mere sloppiness. Being too busy to attend to the technicalities of state foreclosure laws themselves, lenders delegated these responsibilities to subordinates, assistants, paralegals, and third party providers. Thousands of foreclosures a month meant thousands of documents that needed signing. The result, which is just now surfacing, is that lenders have used “robo-signers” (either inside or outside the bank) whose sole task it was to sign thousands of documents, such as newly created Assignments, even though they spent no time verifying the accuracy, legality, or correctness of what they are signing. One robo-signer has the dubious distinction of putting her signature to approximately 18,000 documents a month. Recent reports and litigation support the contention that this practice has resulted in several foreclosures being filed that were based upon fraudulently prepared and incorrect documents. It has resulted in potential court sanctions being levied against lenders and their lawyers.
10. In some cases, the person signing on behalf of the bank did so in the capacity of an “attorney-in-fact” for the bank – meaning that they were specifically delegated that responsibility by an officer or other executive-level person inside the bank. However, upon further inquiry, it has been discovered that the “attorney-in-fact” did not even work for the bank, and perhaps never had a signed power of attorney from the lender at all.
What does all this mean – is it a big deal? The answer is “yes,” it is a very big deal. Falsely signing a document, falsely notarizing a document, falsely back-dating a document, and falsely representing that you’ve thoroughly reviewed certain facts before signing, are all big deals under both state and federal law. And this includes not only the lenders and their robo-signers, it also includes the lawyers and law firms representing them when a foreclosure is commenced. Whether it be lender or lawyer, the buck must stop somewhere. What’s more, these fraudulent acts – if true – will ultimately cast a shadow over the marketability of the title to many foreclosed properties.
As they say in the media, “this story has legs.” I doubt we’ve heard the last of it.
Update: As of Friday, October 8, 2010, the nation’s largest lender, Bank of America, halted all foreclosures nation-wide. In a news release by Associated Press, a BofA spokesman said: “Our ongoing assessment shows the basis for our past foreclosure decisions is accurate.” I’m not quite sure what this means. While the “basis” for the foreclosure decisions may have been correct – that is, the borrowers were in default – the processing used to conduct the foreclosures appears seriously flawed. If Machiavelli was right, and the ends do justify the means, then the banks have nothing to worry about; the halt will only be temporary. But I’m betting that the American public, especially those who have received the run around for months from lenders offering loan modifications in name only, have run out of patience. When the dust settles on this debacle, the Little Big Horn will look like a minor skirmish in comparison.
