Foreclosure Freezes could put Security Clearances at Risk

The Washington Post

 

The sudden moratorium on many foreclosures across the country has unexpectedly put some federal workers and contractors in jeopardy of losing their security clearances because of the heightened uncertainty clouding their finances, according to top lawyers who handle these cases.

Employees with security clearances are monitored by the government for financial problems that would make them vulnerable to bribery or blackmail. And with many financial companies adopting some form of foreclosure freeze in recent weeks, it's taking longer for some delinquent borrowers to resolve their mortgage cases and put their troubles behind them, the lawyers said.

This problem is especially acute in the Washington region, home to nearly a third of the the nation's 854,000 employees with top-secret clearances.

"Resolving debt is more complicated when the lenders are in paralysis," said Dennis Sysko, a national security lawyer in Glen Burnie. "The longer it is unresolved, the longer the cloud remains."

Lawyers in the Washington area said they are starting to field inquiries about foreclosure delays from workers who have security clearances or are trying to get them. Many don't know whether they should be elated or concerned by the turn of events.

"I'm just really confused because nobody has made clear to me what this foreclosure delay means," said Brian Young, a federal employee from Capitol Heights.

Young bought his first home in October 2007 with a first and second mortgage from Bank of America. At the time, he had the interim secret clearance he needed to do his electrical engineering job at a Defense Department agency, he said. He applied for a permanent clearance soon thereafter.

When the permanent clearance did not come through as quickly as he'd hoped, Young said, his pay was cut, and he fell behind on his mortgage in August. He was engaged in talks with his lender to modify his loan when his security clearance was revoked. His supervisors suspended him from his job, citing him as a financial risk, mostly because of his mortgage problems, he said.

Young is appealing the decision. But as he waits, he's fallen further behind on his mortgage and other bills, including child support payments. Bank of America informed him that it would expedite foreclosure and seize his home, but then the lender suddenly announced a halt to all its foreclosure sales nationwide. This week, the bank said that it would restart foreclosures in some states, but not yet in the Washington region.

"This is just dragging everything out, and my credit keeps taking more hits," Young said. "If it helps me in some way, cool. But I just don't know if it does."

The moratorium comes to D.C.

Foreclosure delays started when Ally Financial, formerly GMAC, suspended evictions last month after concerns arose about flaws in court documents used to seize homes. The firm limited its freeze to the 23 states where lenders have to win a court order to initiate a foreclosure. Other major lenders, including J.P. Morgan Chase and Bank of America, also suspended foreclosures in those states.

Virginia, Maryland and the District were not immediately affected by the lenders' actions. But then Bank of America suspended foreclosures nationwide. Others have since selectively halted foreclosures here. And at least two area circuit courts - in Prince George's and Montgomery counties - are reviewing cases for paperwork flaws.

Under government guidelines, the failure of security-cleared workers to live within their means and pay off debt suggests poor self-control, bad judgment and an unwillingness to abide by rules, raising concerns about their ability to protect classified information.

Only a few government agencies make public their decisions to revoke or deny security clearances. Among them is the Defense Department's Office of Hearings and Appeals (DOHA), which reviews cases involving contractors for the Pentagon and about two dozen agencies, according to lawyers.

From January 2006 through June 2010, about 70 appeals involving foreclosures and other distressed sales were considered by that office, and security clearances were revoked or denied in 62 of those cases, according to Sheldon I. Cohen, an Arlington Virginia lawyer who recently wrote a paper about the rulings.

"In many cases, they act as a court of morality," Cohen said.

Based on his study of the DOHA appeals cases in the past 41/2 years, Cohen said that the number of security clearance denials and revocations has kept pace with the number of mortgage defaults, foreclosures and other distressed sales in the country.

'Emotionally charged issue'

The number of security-cleared workers who are in trouble with their loans is not public. But John P. Mahoney, a lawyer at Tully Rinckey in the District, said there is no reason to believe that these employees are insulated from the problems that plague the housing market at large.

"Now they are concerned that their clearance will be pulled or they will be fired because their real estate investments have gone bad," Mahoney said. "It's a very emotionally charged issue, because some of these people have had high-level clearances for decades and never dreamed they would face a problem like this."

Two weeks ago, Mahoney was contacted by a government contractor panicked about the payments she's missed on three investment properties she can no longer afford. She can't refinance or sell the homes because each has lost value.

The contractor, who asked not to be named for fear of losing her job, said in an interview that she has had a security clearance for more than 20 years. She is talking to Bank of America, her lender, about modifying the loans to avoid foreclosure.

"I'm hoping the freeze will work for me instead of against me," she said.

But anything that keeps her from resolving the problems leaves her in limbo. And that means it will take that much longer for her to regain her financial footing, reestablish her credit and reassure the government that she's trustworthy.

"If the foreclosure moratorium continues and she is unable to successfully modify her loans, she's left with the financial concerns that could lead to her termination," Mahoney said. He added, "Action needs to be taken, a government-wide approach, so that people who add value to the government's mission and have a long record of trusted service don't lose their jobs for no other reason than an economic downturn."

Bank Stocks Fall Again

The Washington Post

 

Bank stocks got hammered for a second straight day Friday amid concern that mortgage issuers could face a new wave of red ink related to shoddy lending and foreclosure practices.

The share price of Bank of America, the nation's largest bank, fell 9.1 percent over the past week to close at a low for the year, as analysts said it might have set aside too little money to meet coming costs.

Companies that issued and service mortgages face a triple threat.

First, their efforts to seize and liquidate real estate held by delinquent borrowers may be delayed as they review reports of forged signatures, missing paperwork and other problems plaguing the foreclosures they have initiated.

Second, they could get drawn into a costly legal morass over allegations that they did not properly transfer loan documents when they pooled mortgages into securities that were sold to investors around the world.

Third, they could be forced to buy back billions of dollars of improperly issued loans that were sold to investors, such as the government-backed Fannie Mae and Freddie Mac.

The third issue is far from new, but it became cause for more concern this week as recent disclosures about sloppy or fraudulent documentation in the foreclosure process prompted investors to reassess the potential stakes.

The loan-servicing companies also face a Monday deadline from Freddie Mac to report any problems in their foreclosure practices.

On Friday, Standard & Poor's Equity Research downgraded Bank of America stock from "strong buy" to "hold." The ratings firm said it had "a lower level of confidence" that the bank "has adequately prepared for, and reserved for, future mortgage repurchase demands . . . and for the potential administrative and legal costs of the foreclosure crisis."

In an interview, Standard & Poor's analyst Erik Oja said that the crisis "threatens to morph into something perhaps uncontrolled . . . something very difficult to quantify."

Bank of America is seen as especially vulnerable because it took over Countrywide, one of the firms most heavily criticized for its lending practices during the housing bubble. Bank of America's shares fell 4.9 percent Friday.

As of mid-year, the bank faced unresolved claims that it repurchase $11.1 billion of problem loans, according to its last quarterly report. The bank had put $3.9 billion in reserve to cover such costs.

Bank of America is scheduled to release its next quarterly report Tuesday. A bank spokesman declined to go beyond past disclosures.

Other major banks felt the sting of the foreclosure crisis Friday. Wells Fargo's stock fell 4.6 percent, JPMorgan Chase's fell 4.1 percent, and Citigroup's fell 2.7 percent. By contrast, the Standard & Poor's 500 index, a broad measure of the stock market, rose slightly.

The sharp price movements are partly a reflection of confusion and uncertainty about the scope of the problems and how they will play out. Against that backdrop, a bearish report written in August by a hedge fund called Branch Hill Capital gained widespread attention this week, contributing to the sell-off.

The Branch Hill report said Bank of America could face losses of $74 billion on loan repurchases. The hedge fund disclosed that it was betting that the bank's stock or bonds would decline, and by influencing investors' outlook the report might have helped that bet pay off.

In a rebuttal this week, Oppenheimer & Co. analyst Chris Kotowski said the report was "demonstrably exaggerated and sensational." Oppenheimer disclosed that it, too, might have a conflict because it does business with companies it analyzes.

Fannie and Freddie are threatening to penalize banks if they do not rapidly fix their foreclosure processes.

Delays in foreclosures could cause a profound cash-flow problem for Fannie and Freddie, said Karen Shaw Petrou of Federal Financial Analytics in a report.

The companies have told banks that they will have to pay for any costs the mortgage giants incur as a result of foreclosure delays and are trying to force the banks to buy back billions of dollars of mortgage investments. Goldman Sachs analysts said Friday that these expenses could total $44 billion for the banking industry.

Fannie and Freddie maintain that they were sold the disputed mortgages on deceptive grounds - and that the banks that sold them the loans should be held responsible for the resulting losses. But the industry has resisted efforts by Fannie and Freddie to obtain documents that would show whether the investments were aboveboard.

The Federal Housing Finance Agency, which oversees Fannie and Freddie, recently subpoenaed 64 firms for loan applications, property appraisals and other documents that would show whether Fannie and Freddie or the banks ought to be liable for losses on the mortgage securities.

Bank Foreclosures Reach New Record

ABC 

 

The nation's foreclosure epidemic gathered steam in September, with banks taking over more than 100,000 properties for the first time. Overall, filings rose 3 percent, according to RealtyTrac, an online service that tracks foreclosure rates.

More than 930,437 properties were hit a foreclosure filing in the third quarter of the year -- that includes a default notice, repossession or scheduled notice. The filings are a 1 percent decrease from the same period in 2009. Homeowners experiencing foreclosure filings increased by 4 percent compared with the second quarter.

Foreclosures are expected to fall following the decision by several of the largest lenders to halt filings after it was discovered that paperwork for many loans is missing or incorrect.

"We expect to see a dip in those bank repossessions — and possibly earlier stages of the foreclosure process — in the fourth quarter as several major lenders have halted foreclosure sales in some states while they review irregularities in foreclosure-processing documentation that has been called into question in recent weeks," said RealtyTrac CEO James J. Saccacio.

The foreclosure crisis in the U.S. began in 2007, when the stock market collapsed and unemployment began climbing to the highest levels since the Great Depression of the 1930s. Home prices collapsed in many states including California, Florida, Nevada and Arizona. Homeowners either couldn't pay or walked away from their mortgages, leaving the lenders with properties worth far less than the amount owed.

Now foreclosures have become a huge part of overall sales. For the month of September, foreclosed property made up 31 percent of home sales. The 24 states with the most foreclosure documentation problems account for 32 percent of all foreclosure property sales, according to RealtyTrac.

In the third quarter, one in every 139 housing units received a foreclosure filing. Nevada continued to reign as the state with the highest foreclosure rate with one in every 29 homes in some stage of going back to the lender. Next is Arizona, where one in every 55 homes have received a foreclosure filing. In No. 3 Florida, foreclosures affect one in every 56 homes.

For the first time ever bank repossession reached six figures with more than 102,134 homeowners losing their property in the month of September. The record numbers come after the Obama administration's Home Affordable Modification program sank to a 10-month low in August.

The program meant to save homes only assisted 33,000 homeowners. In 2009 President Obama vowed to help up to 4 million homeowners through the program, but only a little more than 10 percent or 449,000 homeowners have received assistance.

In the third quarter a few states like Vermont and North Dakota escaped the bleak housing news. The two ranked 48 and 49, respectively, for foreclosure filings. Homeowners in West Virginia were the safest of all 50 states with only one in every 2,383 receiving foreclosure filings.

Yesterday, the attorneys general of all 50 states announced an investigation into whether sloppiness or deceit led to the latest episode of the national foreclosure drama, further threatening the recovery of the U.S. housing market.

"This is not a silver bullet to keep millions of Americans in their homes," said Iowa Attorney General Tom Miller, who's heading the bipartisan investigation. "This is a chance to right the law and get the process right, a chance to have some extra time ... and maybe a chance to do some modifications."

Statements from Miller and other state investigators said the initial focus will be on whether industry employees -- so-called "robo-signers" -- signed off on thousands of foreclosures every month without reviewing the files as legally required.

"Robo-signing is the one [problem] ... we're most concerned about," Miller told reporters late Wednesday, but he added, "We're not ruling out other issues."

The immediate goals of the investigation appear to be a halt of improper foreclosures and a review the past and present mortgage service practices, investigators said.

"We want this to never happen again," Miller said. "We will try to do this as quickly as possible." In courts throughout the nation, homeowner attorneys have alleged that lenders forged signatures and improperly notarized documents in the rush to foreclose on homeowners.

The joint investigation into the practices of the booming mortgage-servicing industry could pressure financial institutions to rewrite a sea of corrupt paperwork.

Previous calls for a nationwide foreclosure moratorium had industry insiders worried but the states stopped short of requesting such a measure.

"The worst thing anybody could do right now is impose a lengthy moratorium on foreclosures, particularly if it results in people not being able to sell properties that have already been foreclosed on," said Rick Sharga, vice president of the real estate data firm RealtyTrac. "Right now, foreclosure properties represent about 30 percent of all home sales, and to take 30 percent of sales out of the housing market at a time when it's already unstable could have pretty disastrous results."

The Obama administration Monday rejected calls for a nationwide moratorium on foreclosures amid growing concerns about the market's recovery.

A moratorium would help families on the verge of losing their homes, but Sharga and other industry experts said it would lead to a backlog of homes on the market and further depress prices.

Even with tight lending standards, the nation is on pace to sell 4 million properties by the end of the year. That's way down from the peak of the housing boom when over 6 million were sold annually, however.

"The housing market is trying to recover ... but right now these technical delays are causing additional uncertainly," said Lawrence Yun, chief economist for the National Association of Realtors. "Some potential buyers may not want to enter the market now. And that will hold back the recovery time."

In recent weeks, major lenders such as JPMorgan Chase, Ally Financial's GMAC Mortgage unit and Bank of America have conceded that paperwork supporting an unknown number of foreclosures contain errors ranging from wrong dates to forged or inconsistent signatures. In some instances, mortgage company employees signed foreclosure documents without first verifying the information in them.

In response, the banks have suspended tens of thousands of pending foreclosures. Bank of America, for example, has suspended all its foreclosures in 23 states.

Foreclosure Probe by 40-State Coalition Expected

LA Business

About 40 state attorneys general are expected to announce a joint investigation into faulty foreclosures as early as Tuesday morning, following Monday’s Columbus Day holiday.

Several media outlets are reporting the anticipated investigation, which would place further pressure on the nation’s largest banks to follow Bank of America’s lead in declaring a nationwide foreclosure moratorium.

Lenders face mounting criticism over how they’re handling home foreclosures, often using automated processes to speed completion of the documentation needed to recover possession of homes from delinquent borrowers.

Iowa Attorney General Tom Miller is leading talks with his counterparts in other states to announce the probe as soon as Tuesday, Bloomberg News reported over the weekend, citing a source with direct knowledge of the matter.

Bank of America said Oct. 8 that it was halting foreclosures in all 50 states. No timetable for resuming foreclosures was provided by the bank, but it’s hard to imagine the nation’s largest bank triggering a tsunami of foreclosures ahead of Santa’s arrival.

Previously, BofA, J.P. Morgan Chase & Co. and Ally Financial, formerly GMAC, all agreed to foreclosure moratoriums in the 23 states that require judicial review as part of the foreclosure process. California is not one of those states.

Bank of America’s decision to halt all foreclosures nationwide is likely to be followed by other large banks as they face growing political pressure.

But on Oct. 8, Wells Fargo said it has no plans to halt foreclosures.

Also that day, Senate Banking Committee Chairman Christopher Dodd said he will hold a hearing on Nov. 16 to investigate allegations of improper and fraudulent mortgage servicing and foreclosure proceedings.

“American families should not have to worry about losing their homes to sloppy bureaucratic mismanagement or fraud,” Dodd said.

Flawed Foreclosure Documents Thwart Home Sales

NY Times

Richard Clark, left, with his agent, Kevin Corasio, 
is trying to buy a foreclosed home in Florida. 

Amanda Ducksworth was supposed to move in to her new home this week, a three-bedroom steal here in central Florida with a horse farm across the road. Instead, she is camped out with her 7-year-old son at her boss’s house.

Like many buyers across the country, Ms. Ducksworth was about to complete the purchase of a foreclosed house when it suddenly went off the market. Fannie Mae, the giant mortgage holding company that buys loans from commercial lenders, is pulling back sales of homes that might have been foreclosed in bad faith.

“I gave up my rental thinking I would have a house,” said Ms. Ducksworth, a 28-year-old catering assistant. “Now I’m sharing a room with my son. What the hell is up with that?”

With home sales this past summer at the lowest level in more than a decade, real estate is ill-prepared to suffer another blow. But as a scandal unfolds over mortgage lenders’ shoddy preparation of foreclosure documents, the fallout is beginning to hammer the housing market, especially in states like Florida where distressed properties are abundant.

“This crisis takes a situation that’s already bad and kind of cements it into place,” said Joshua Shapiro, chief United States economist for MFR Inc., an economic consulting firm.

Three major mortgage lenders — Bank of America, GMAC Mortgage and JPMorgan Chase — have said they are suspending foreclosures in the 23 states where they first need a judge’s approval. They are also waving off Fannie Mae from selling any of the foreclosed homes whose loans they sold to Fannie.

The companies say they are reviewing their operations after disclosures that employees signed documents without determining the accuracy of the material, as is required by law.

Those reviews are throwing into limbo hundreds of thousands of foreclosures and pending home sales, analysts estimate, though the lenders and Fannie Mae have been mostly silent about precise numbers and other specifics.

More broadly, the revelations about the sloppy paperwork are emboldening homeowners and law enforcement officials in many states to question whether lenders rightfully hold the notes underlying foreclosed properties — further chilling the housing market.

Distressed properties, many of which are in foreclosure, make up about a third of all home sales. “Foreclosures are going to slow to a crawl,” said Guy D. Cecala, publisher of the trade magazine Inside Mortgage Finance.

Of the 23 states where foreclosures need court approval, Florida has by far the most trouble — about a half-million cases clog its courts — and the moratoriums are having a noticeable effect.

Because most lenders sold their mortgages to Fannie Mae, it is largely that company that has been sending e-mails to real estate agents about putting off deals and removing houses from the market. In most cases, the agents are being told the freeze will last 30 to 90 days, but agents say there is no way to know for sure.

A snapshot of the problems can be seen at the real estate agency that sold Ms. Ducksworth her home, Marc Joseph Realty, based in Fort Myers.

The agency had 35 deals that were supposed to close this month. As of Thursday, Fannie had postponed 11 of them. Another handful of homes that did not have offers or were being prepared for market had also been withdrawn.

“If this wipes out half my inventory, that’s a scary thing,” said Bill Mitchell, the agency’s closing coordinator.

As he spoke, his computer pinged and another message from Fannie came through about withdrawing a house. It had the subject line, “Unable to Market Notice.”

Another client of the agency, Richard Clark, is caught in the foreclosure vise on both ends.

A delivery truck driver, Mr. Clark has gone through several rough years: his wife lost her banking job and they eventually separated; a vending business did not succeed; he fell behind on his home payments; and CitiMortgage rebuffed his efforts to restructure the mortgage.

With the prospect of being tossed out of his house in a foreclosure of his own, Mr. Clark, 62, cobbled together $58,000 — most of it from his parents — and successfully bid on a house in North Fort Myers that was in foreclosure. His offer on the house, with three bedrooms and two baths, a Jacuzzi tub in the master bedroom and a Key lime tree in the backyard, was finally approved on Oct. 1.

“It’s been a rocky two years,” Mr. Clark, a stocky man with a short pony tail, wire-rim glasses and a gold hoop earring, said while touring the rambling one-story home. “It’s a dream house for me.”

At least, it was. On Tuesday, Fannie suspended the deal. Mr. Clark said he did not know what to do. “I’m kind of hoping I have a place to live,” he said. “Now, who knows?”

It is possible the foreclosure on his current house in nearby Cape Coral — he has a court hearing on Dec. 7 — will also become caught up in the current problems, but Mr. Clark said he was not pleased by the prospect of staying there any longer.

“I’d rather just get on with it, get on with my life,” he said.

In the states far from Florida where foreclosures are an equally large problem but there is no judicial review — Nevada, Arizona and California — there were early signs this week that the document crisis was spreading. The only time a foreclosure in those states enters a courtroom is when the borrower sues the lender, something few of those in default have the money or the will to do.

In a telephone interview on Wednesday, Gary Kent, a foreclosure specialist in San Diego who has 80 listings, said he had not heard from Fannie or any lender about withdrawing a property. All his deals were on track, Mr. Kent said.

But a few hours later, Mr. Kent said he had received an e-mail about removing a home that was under contract.

The message was from his title insurer, who said that Pittsburgh-based PNC Bank was imposing a 30-day moratorium on all foreclosure sales. (PNC declined to comment to a reporter.)

Mr. Kent’s confidence was shaken. “My buyer’s upset, my agent’s upset and I’m a little nervous,” he said.

Several factors are likely to delay many more foreclosed houses from reaching the market and finding new owners.

Law enforcement officials in several states, including Texas, Maryland and Connecticut, are demanding a suspension of foreclosures until lenders can prove they are using legal methods.

It is unclear how many lenders will go along.

In a move that sets up a potential showdown in Texas, one major lender, CitiMortgage, is arguing that it is being considered guilty until proven innocent by the state attorney general.

“We have no reason to believe our employees are not following our process, and therefore have no reason to stop foreclosures,” a Citi spokesman said.

Another factor is the reaction of the title insurers, who defend homeowners in disputes over a home’s ownership. Lenders require title insurance before approving a mortgage.

The crisis took many title insurers by surprise, said Kurt Pfotenhauer, the chief executive of the industry’s trade group, the American Land Title Association.

One possibility the title insurers are discussing is obtaining warranties from lenders against errors in their foreclosures. Every title insurer, Mr. Pfotenhauer said, “understands there is a brand new risk that has to be evaluated. It’s not at all clear that courts across the country are going to be reversing their earlier decisions on foreclosures. But we don’t know.”

In the meantime, buyers like Ms. Ducksworth here in Ocala are at a loss for answers.

“She’s in a mess, actually,” said Jim Haston, Ms. Ducksworth’s agent.

“I really don’t know what to tell her,” he said.

Obama Won't Sign Bill Affecting Foreclosures

The Wall Street Journal

 

President Barack Obama won't sign into law an overlooked piece of legislation that critics say would make it easier for banks and others to process foreclosure proceedings without human signatures, a person familiar with the matter said.

Mr. Obama will send the bill back to Congress using a process known as a "pocket veto." It's his second pocket veto, but the first one designed to scotch a bill the White House opposes. In December, Mr. Obama declined to sign a spending bill the White House said was unnecessary because Congress had passed another.

His decision comes amid growing complaints from lawmakers that the administration and regulators haven't done enough to intervene in a scandal tied to thousands of foreclosures that critics argue were processed with improper documentation.

 Ally Bank, Bank of America Corp. and J.P. Morgan Chase & Co. have halted foreclosures in 23 states in recent weeks to review how many documents tied to these foreclosures might have been filed improperly. A central issue is the practice of "robo" signing, when documents are signed quickly by computers or people who don't review the documents.

The bill in question, HR 3808, passed the Senate on Sept. 27 by unanimous consent. The House passed the bill by voice vote in April. Many bills that aren't considered controversial pass this way, with members of both parties essentially letting it move through Congress without debate.

The bill is called the Interstate Recognition of Notarizations Act of 2009, and it was authored by Rep. Robert Aderholt (R., Ala.). A spokesman for Mr. Aderholt didn't return a call for comment.

The bill was co-sponsored by Reps. Bruce Braley (D., Iowa), Michael Castle (R., Del.), and Artur Davis (D., Ala.).

The bill would require state and federal courts to "recognize any notarization made by a notary public" licensed in any state. This would include electronic signatures. The bill would have been a big win for businesses who complained it was too easy for people to challenge notarized documents in court when notaries were licensed in different states.

"This legislation will help businesses around the nation by eliminating the confusion which arises when states refuse to acknowledge the integrity of documents notarized out of state," Mr. Aderholt said when the bill passed the Senate. "This bill offers a common-sense solution to a problem that is more widespread than is generally recognized."

It is unclear how the bill might have affected the current foreclosure scandal, but liberal groups have insisted in recent days that Mr. Obama veto it. A spokesman for Mr. Aderholt said: "Contrary to some blogs and reports, there is absolutely no connection whatsoever between Congressman Aderholt's legislation and the recent foreclosure-documentation problems."

Ohio Secretary of State Jennifer Brunner said Tuesday if the bill became law it would make it harder for consumers to challenge foreclosures.

The bill raised difficult policy decisions for government officials. Some argue it should be easier for banks and others to process documents electronically to help reduce the backlog of foreclosures and help the housing market. But there have also been questions about the loan-servicing and foreclosure-processing industry, which is loosely regulated and now faces accusations of fraud.

Attorney General Eric Holder said Wednesday that the Financial Fraud Enforcement Task Force was looking at the issue, but it is unclear if prosecutors have opened a formal investigation into the matter.

Ally Suspends Evictions Over Allegations of Foreclosure Fraud

Washington Post

Some of the nation's largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork - an admission that may open the door for homeowners across the country to challenge foreclosure proceedings.

The legal predicament compelled Ally Financial, the nation's fourth-largest home lender, to halt evictions of homeowners in 23 states this week. Now it appears hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.

As head of Ally's foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate. He was also required to sign the documents in the presence of a notary.

In a sworn deposition, he testified that he did neither.

The reason may be the sheer volume of the documents he had to hand-sign: 10,000 a month. Stephan had been at that job for five years.

How the nation's foreclosure system became reliant on the tedious work of a few corporate bureaucrats is still a matter that mortgage lenders are trying to answer. While the lenders may have had legitimate cause to foreclose, the mishandling of the paperwork has given homeowners ammunition in their fight against foreclosure and has drawn the attention of state law enforcement officials.

Ally spokesman James Olecki called the problem with the documents "an important but technical defect." He said the papers were "factually accurate" but conceded that "corrective action" may have to be taken in some cases and that others may "require court intervention."

Olecki said the company services loans "from hundreds of different lenders," but he declined to provide names.

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.

Ally, Fannie and Freddie - all troubled mortgage companies that received extraordinary bailouts by the federal government during the financial crisis - declined to say how many loans might be affected. The Treasury Department, which owns a majority stake in Ally and seized Fannie and Freddie in 2008, also declined to comment.

Fannie and Freddie, created by Congress to finance mortgages and encourage homeownership, have in recent years been repossessing houses at record numbers. Fannie alone reported recently that 450,000 of its single-family loans were seriously delinquent or in the foreclosure process as of June 30. That's nearly 5 percent of the loans it guarantees.

Lawyers defending homeowners have accused some of the nation's largest lenders of foreclosing on families without verifying all of the information in a case, but it has been hard for them to stop foreclosure proceedings.

Ally's moratorium comprises only the 23 states - none in the Washington area - that mandate a court judgment before a lender can take possession of a property. But if Stephan signed documents related to foreclosures in states without this requirement (it's unclear whether he did), it could help a much broader range of borrowers.

Iowa Assistant Attorney General Patrick Madigan, chair of a national foreclosure prevention group composed of state attorneys general and lenders, said the fallout from the Ally review could be enormous because Stephan's actions could be considered an unfair and deceptive practice.

"If servicers are submitting court documents that aren't true or that have not been verified, that is of great concern," Madigan said.

Stephan's job at Ally was arguably one of the least enviable in the mortgage business: formally signing off on foreclosure papers that his company would submit to the courts to get approval to evict delinquent homeowners and resell their homes.

From his office in suburban Philadelphia, Stephan oversaw a team of 13 employees that brought documents to him for his signature at a rapid clip. Stephan did not respond to messages left at his work and home.

His official title was team leader of the document execution unit of Ally's foreclosure department, but consumer advocates call him the company's "super robot signor" or "affidavit slave."

In sworn depositions taken in December and June for two separate court cases involving families trying to keep their homes, Stephan revealed his shortcuts when reviewing the files. He said he would glance at the borrower's names, the debt owed and a few other numbers but would not read through all the documents as legally required. He would then sign them. The files were packed up in bulk and sent off for notarization several days later.

Stephan testified he did not know how the "summary judgment" affidavits he signed were used in judicial foreclosure cases.

At the rate Stephan was reviewing files, if he worked an eight-hour day he would have had an average of only 1.5 minutes for each document.

"A ridiculous amount of time for something so critically important," said Thomas Cox, an attorney in Maine who was one of those who deposed Stephan. He added that Maine and Florida law enforcement officials are investigating the matter.

Stephan was the only employee signing papers for foreclosures that were to be submitted to courts that did not involve bankruptcies. The latter cases, which were more complex, were handled by a separate department.

Olecki said Stephan still works for Ally but added, "We cannot comment further about his position."

While several large lenders contacted by The Post declined to talk about the document review process for foreclosures, attorneys working on behalf of homeowners said the setup at Ally was not unusual.

Christopher Immel, an attorney in Florida who deposed Stephan for a case in Palm Beach County, said he thinks Stephan was not a rogue employee but one that was performing his job responsibilities as the company told him to do.

"GMAC has a business model to do this, and Stephan was just one small part of it," Immel said. "He was under the impression it was okay to do this."