Start Your Engine: foreclosure law

First one, now all. Just as we predicted - fan: meet feces.

Fresh off the presses at Bloomberg:

JPMorgan Based Foreclosures on Faulty Documents, Lawyers Claim

JPMorgan Chase & Co. faces a legal challenge next month that could cast doubt on thousands of foreclosures after a mortgage executive at the bank said she didn’t verify documents used to justify home seizures.

Lawyers for a Palm Beach County, Florida, homeowner asked a judge to throw out a foreclosure as a penalty for misleading the court, according to attorney Tom Ice of Ice Legal PA. They’re citing a May 17 deposition in which the JPMorgan executive said she signed thousands of affidavits and documents supporting the New York-based bank’s claims without personally checking loan records. The court is scheduled to hear arguments Oct. 19.

The Chase Home Finance operation supervisor, Beth Ann Cottrell, said in May she was among eight managers who together sign about 18,000 documents a month, according to a transcript of her sworn deposition provided by Ice. Asked how they were prepared, she said she relied on other people at the firm.

“My review is more or less signing the document unless it’s questionable,” she said. That means, “somebody has a question and brings it to me and says, ‘Beth, can you take a look at this?’”

Inaccurate statements by banks in foreclosure documents may give borrowers who have lost their homes a legal basis to challenge the seizures, derailing resales and casting doubts on property titles. A Florida court sanctioned Ally Financial Inc.’s GMAC Mortgage unit for faulty affidavits in 2006, and the firm suspended evictions in 23 states this month after finding employees still signing affidavits without checking the data.

Titles in Doubt

JPMorgan spokesman Tom Kelly declined requests for comment.

Cottrell didn’t return phone calls to her office requesting comment. A lawyer representing her at the deposition, Joseph Mancilla of the Florida Default Law Group PL, didn’t return calls. Cottrell isn’t named as a defendant.

Cottrell signed the affidavit at issue in the case, dated June 2009, while at her previous employer, an outside servicing firm working for JPMorgan, according to court documents. When signing documents there for the JPMorgan unit, she used the title “assistant secretary and vice president” of Chase Home Finance, according to the transcript. She became a JPMorgan employee about three months after signing the affidavit.

Document signers sometimes endorse affidavits on behalf of other firms as a way to streamline the foreclosure process, said Dustin Zacks, an attorney at Ice’s firm.

JPMorgan was the third-largest U.S. servicer of home mortgages as of June 30, with $1.35 trillion or almost 13 percent of the market, according to industry newsletter Inside Mortgage Finance. Ally is the fifth-biggest mortgage servicer, with $349.1 billion. The other three in the top five are Bank of America Corp., Wells Fargo & Co., and Citigroup Inc.

Title Insurers

“I’m sure a lot of title insurance companies are concerned about the potential liability right now,” as borrowers challenge how banks made statements, he said. “The judges could absolutely hold the bank and attorneys in contempt.”

U.S. home seizures reached a record for the third time in five months in August as lenders completed the foreclosure process for thousands of delinquent owners, according to RealtyTrac Inc.

Ice, the founding partner of his foreclosure-defense law firm in Royal Palm Beach, Florida, said some lenders are accepting voluntary dismissal of their cases.

During the deposition, Cottrell said a staff of in-house specialists scrutinize loan documents and prepare affidavits, the transcript shows. If they have difficulties or questions, they come to her. She signs in a notary’s presence, she said.

‘No Knowledge’

During questioning by Ice lawyer Zacks, Cottrell said she had worked at Chase Home Finance for about eight months, according to the transcript.

“As to everything in the affidavit, did you have personal knowledge?” Zacks asked.

“My own personal knowledge, no,” Cottrell answered.

“You stated ‘That plaintiff is entitled to enforce the note and mortgage,’” Zacks said. “Again, did you have personal knowledge of that?”

“No knowledge,” she answered.

Florida Attorney General William McCollum is investigating three law firms that represent loan servicers in foreclosures, and are alleged to have submitted fraudulent documents to the courts, according to an Aug. 10 statement. The firms handled about 80 percent of foreclosure cases in the state, according to a letter from U.S. Representative Alan Grayson, a Florida Democrat.

Judges overseeing foreclosures in the wake of the housing crisis are growing skeptical of banks, said Christopher L.
Peterson, a professor at the University of Utah’s S.J. Quinney College of Law. A surge in proceedings has helped expose a variety of paperwork lapses, he said in an interview.

“Early in the process the judges were very cavalier and they just took the financiers’ word,” Peterson said. “Now there are enough disputes out there about ownership of loans that the judges are starting to feel like they need to hold the financial institutions to the basic rules of evidence.”

From Barclays' Jasraj Vaidya, who states: "At this stage, we are unable to ascertain what that exact issue might
be. What is certain is that foreclosure timelines in those states for
GMAC loans will be extend further, potentially adversely affecting their
eventual severity" which echoes verbatim what Zero Hedge suggested a week ago on the Florida Judge news: "The implications for the REO and foreclosures track for banks could be
dire as a result of this ruling, as this could severely impact the
ongoing attempt by banks to hide as much excess inventory in their books
in the quietest way possible." Jasraj also notes: "Using publicly available data from HUD and RealtyTrac, we have created a list of judicial foreclosure states. These are states where judicial foreclosures are most common and in which the lender has to appear before a judge and obtain a court order before initiating foreclosure proceedings against the delinquent borrower. Such states tend to have much longer foreclosure timelines than non-judicial states. What is striking about the list of states in the GMAC announcement is that all but one (North Carolina) are judicial states. Also, all judicial states in the country but one (Delaware) are in the GMAC list. This would hint at some potential issues with judicial states that is driving the GMAC directive." In the meantime, class actions lawyers across the country will not be sleeping for days.

Full Barclays report:

It was reported on Bloomberg today that GMAC has sent a memo to all brokers suspending all foreclosure activity against delinquent borrowers in 23 states. Further action has also been frozen on all properties for which foreclosure has already been implemented. Any buyers of those properties face an extension of the closing date by 30 days and have the option to cancel the agreement to purchase.

Most likely an issue with judicial states

Using publicly available data from HUD and RealtyTrac, we have created a list of judicial foreclosure states. These are states where judicial foreclosures are most common and in which the lender has to appear before a judge and obtain a court order before initiating foreclosure proceedings against the delinquent borrower. Such states tend to have much longer foreclosure timelines than non-judicial states. What is striking about the list of states in the GMAC announcement is that all but one (North Carolina) are judicial states. Also, all judicial states in the country but one (Delaware) are in the GMAC list. This would hint at some potential issues with judicial states that is driving the GMAC directive.

A recent news report provided some hints at the type of issues with judicial foreclosures that servicers may look to avoid before it become a larger issue. The Florida Attorney General recently announced an investigation of the three largest foreclosure law firms in the state. These firms represent the lenders, and there have been question about claims of note ownership put forth by these firms during foreclosure proceedings. A clean record of note ownership is lost or hazy in many cases, due to multiple transfers of the notes. The moratorium can be an attempt on the part of RFC to ensure that the process does not have significant flaws that can leave it open to legal action in the future.

At this stage, we are unable to ascertain what that exact issue might be. What is certain is that foreclosure timelines in those states for GMAC loans will be extend further, potentially adversely affecting their eventual severity.

Can it also be a lawsuit in the making?

Given that the directive spans multiple states, and given previous experience with Countrywide, there is always the possibility of some multi-state settlement in the works for various disclosure issues with lending practices. However, we found some major omissions when we compared the list of states in the GMAC announcement with those involved in the Countrywide announcement. California, Nevada and Michigan - three states with significant mortgage volume, as well as distressed mortgages - are missing from the announcement. This makes us a little skeptical whether this is indeed a class action lawsuit in the making on the lines of the Countrywide one. On the other hand, the Countrywide list ballooned from 11 states initially to 42 states and DC finally, so one cannot yet rule out multi-state action. However, given greater evidence about judicial states, we still believe that to be the primary driver of this directive.

GMAC volumes in the non-agency securitized space

We used LoanPerformance to get a quick estimate of the volume of GMAC serviced loans in each of these states. Overall, we find that about 30% of the outstanding balance of GMAC-serviced loans falls within these 23 states. However, the share of delinquent loans within these states is higher: about 40% of GMAC delinquent loans falls within these states, with a higher concentration in alt-A and subprime.

Effect on housing

Implementation of this foreclosure moratorium, depending on its length and extent, could be a mild positive in the near term. A reduction in REO supply and foreclosure sales by GMAC would take out some distressed supply from the market. The effect of this announcement is similar to what we have earlier described for various loan modification efforts. It prevents more REOs from hitting the market and, thus, artificially skews the mix of distressed properties in the sales metrics. Reduction in the share of REO sales in overall sales has the effect of a stronger reading on the home price indices. However, this comes at the cost of a larger shadow inventory of non-performing loans, which continues to create pressure on home prices for an extended period.

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