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Faulty Foreclosures

posted by Adam Levitin

Here's a real disconnect in the faulty foreclosure story:

Last week Bank of America announced that it was restarting foreclosures after conducting a thorough review of its foreclosure process in two weeks and found everything to be all right.

Today the Wall Street Journal reports that Bank of America has found problems in 10-25 of the first "several hundred" loan files it has reviewed as it refiles foreclosures.  

So what's going on?  I think the only way to read these two stories together is to conclude that Bank of America didn't actually conduct much of a review during its brief foreclosure freeze.   At best, they engaged in some sampling of loan files, and at worst, they merely reviewed procedures, not actual files.  

Frankly, it was never credible that BofA (or GMAC) undertook a serious review of foreclosure problems.  BofA has taken months, if not years, to achieve a paltry number of loan modifications; why would anyone think that they could possibly give themselves a clean bill of health on foreclosures in a couple of weeks? 

Indeed, everything about this story seemed strange to me and left me wondering why the reporter wasn't more incredulous (maybe he was and BofA just didn't answer).  For example, are there 10 problem loans or 25?  Why can't BofA produce an exact number?  And what sort of problems was BofA even looking for?   If they were only looking for things like missing signatures or misspelled names, of course they would only find a limited number of problems.   But the BofA line seems to be "trust us."  Can anyone really trust mortgage servicers at this point?  

I was glad to hear Ben Bernanke announce this morning that federal regulators would be looking into the faulty foreclosure process.  But how is this inspection going to work?  The only way to actually answer whether we have a systemic faulty foreclosure problem is to have legally trained personnel examine a healthy sample of actual loan files on both the servicer and trustee level.  Is that what the federal bank regulators are going to do?  Do they even have the personnel?   I don't think bank examiners have the training to know what sort of legal documentation and procedures are required to properly consummate a foreclosure; it's just not part of what they do.  And are they going to look at the actual loan files or just talk to the servicers and get reassurances?  

The credibility of the federal response rests on the investigative process; unless there are sufficiently trained personnel looking at the actual files, we won't know the real scope of the problem, and any clean bill of health will be a white wash.  

Comments

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I think there is another reason, one that makes sense to those of us who follow Deep Throat's advice to follow the money. With foreclosures at a dead stop, front line lenders were at risk of facing the mass default declarations that would trigger the web of repos, swaps, and indemnifications that still lies out there like a minefield under the finance and real estate industries. They took a sampling of files, ran it through an army of actuaries, and concluded that the risks of proceeding with foreclosures were less than the risk of not. Or at least the risks of foreclosures were far enough off they were IBG/YBG (I'll Be Gone, You'll Be Gone).

How does a bank employee, trained or not, look at a mortgage assignment and know whether or not it's been back-dated or whether the signature has been forged?

I received foreclosure papers from BofA in which the (defunct) lender's name was misspelled ("Thornbury" for Thornburg).

We signed a Deed-in-lieu on our house just a month or two before this whole storm broke.

Now I'm wondering if we should sue them for the right to get it back, on the argument that they had no standing to foreclose on us in the first place.

Are there any lawyers in IL reading this? Anyone else with a similar story?

I paid my 2nd mortgage off in Jan 2010 and my servicer has sold it twice since then.

Why isn't anyone talking about the role of salespeople and sales arm-twisting in this process? Does somebody one day wake up and say that they want a liar loan and a property they can't afford, or are there people selling these things whose interest is best served when the "suckers" go for more than they can chew on (perhaps because the sales bonus is larger)?

Theo, you raise a viable question. The problem with it is that that particular question belongs in the "Predatory Lending" and/or "Origination" columns. Where the "robo-signing" and additional Mortgage Servicing Fraud issues fall is in the "Mortgage Servicing" column. Two very large, very real, potentially very complex issues to litigate parked so close together that, if one is not careful, they could become the same, even larger, mess to litigate and/or unwind.

Part of the problem with that is that origination and servicing have different rule books that apply to each with some overlapping rules.An absolute potential nightmare, especially whenever your throw securitization into the process.

Quoting from the blog, "BofA has taken months, if not years, to achieve a paltry number of loan modifications."

Actually, Bank of America just completed its 700,000th mortgage modification this week, with 16,500 added in September alone.

http://mediaroom.bankofamerica.com/phoenix.zhtml?c=234503&p=irol-newsArticle&ID=1486736&highlight=

Wow... 700,000 loan mods. HAMP mods or in-house mods? 700,000 x $1000 alone. Nice. 700,000 x $4500.00? Somebody's going to Disney World.

According to the press release, it is 614,000 in-house mods and 85,000 done through HAMP. We don't know what BoA is counting as a in-house mod.

Thank you, Professor. I was hoping that someone would make that point...:)

So BoA made between $85M and $382.5M minimum from HAMP mods. I forget, what is the exact incentive for them to flip borrowers into "in-house" mods as opposed to HAMPs? I know it's money but is it b/c servicers get to pocket any mod money from any securitized loan as "additional servicing compensation" per the PSAs or was there yet another reason?

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