In the wake of the robo-signing scandal that broke last fall, one of the drumbeat-steady excuses you heard from the banks and their PR machines was that, despite what they called “procedural irregularities”, all the foreclosures were justified. No one, they claimed was thrown out on the street by mistake.
Well, now we know that their cries of “harmless error” were nothing more than a load of bull.
The Office of Thrift Supervision, the Office of the Comptroller of the Currency, and the Federal Reserve jointly announced today that eight loan-servicing banks and two service vendors must pay back borrowers who suffered financial harm due to the “Unsafe and Unsound Foreclosure Practices” of these companies. Here’s the cast of characters:
The eight banks:
The two service vendors:
According to the report, these ten organizations represent 65 percent of the servicing industry, or nearly $6.8 trillion in mortgage balances. Here’s the core finding of the joint investigation:
The reviews found critical weaknesses in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party law firms and other vendors. These weaknesses involve unsafe and unsound practices and violations of applicable federal and state laws and requirements, and they have had an adverse effect on the functioning of the mortgage markets. By emphasizing speed and cost efficiency over quality and accuracy, examined servicers fostered an operational environment contrary to safe and sound banking practices.
Other findings include:
- Examiners found that most servicers had affidavit signing protocols that expedited the processes for signing foreclosure affidavits without ensuring that the individuals who signed the affidavits personally conducted the review or possessed the level of knowledge of the information that they attested to in those affidavits.
- Examiners found that most servicers had inadequate staffing levels and training programs throughout the foreclosure-processing function and that a large percentage of the staff lacked sufficient training in their position.
- During the foreclosure-file reviews, examiners compared the accuracy of amounts listed on the servicers’ affidavits of indebtedness with documentation on file or maintained within the electronic servicing system of record. For most of the servicers, examiners cited the lack of a clear auditable trail in reconciling foreclosure filings to source systems of record.
- The servicers reviewed generally showed insufficient guidance, policies, or procedures governing the initial selection, management, or termination of the law firms that handled their foreclosures. Many servicers, rather than conducting their own due diligence, relied on the fact that certain firms had been designated as approved or accepted by investors… Where monitoring of law firms was conducted, it was often limited to things such as responsiveness and timeliness, checking for liability insurance, or determining if any power of attorney given to the firm remained valid rather than assessing the accuracy and adequacy of legal documents or compliance with state law or designated fee schedules.
In other words, perjury, incompetence, and sloppiness. But that was just the servicers and the foreclosure mills. The feds also took a peek into MERS… and didn’t like what they found.
- Servicers exercised varying levels of oversight of the MERS relationship, but none to a sufficient degree.
- Deficiencies included failure to assess the internal control processes at MERS, failure to ensure the accuracy of servicing transfers, and failure to ensure that servicers’ records matched MERS’ records.
- Other deficiencies included the failure to conduct audit reviews to independently verify the adequacy of and adherence to quality-assurance processes by MERS.
In other words, the records of MERS—whose sole purpose is to keep track of who owes what to whom—can’t be verified as accurate. If those findings are correct, it’s a disaster for anyone who owns or wants to own a home, because it means that nearly half of the homes bought and sold in the last decade have uncertain, unmarketable title.
Banks to Foot the Bills for Wrongful Foreclosures
The regulators recommend several remedies to fix the problem. They include:
- Creation of compliance programs to prevent future misconduct
- Independent audit of foreclosures from 2009 through the present
- Single point of contact for borrowers negotiating loan modifications
And according to the announcement from the Federal Reserve, these groups must:
provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process
In other words, pay back the homeowners any damage they’ve suffered. Finally, some acknowledgement that yes, there were in fact people who shouldn’t have been foreclosed on—and the ones that did the foreclosing owe them something back.
The report itself is here: Interagency Review of Foreclosure Policies and Practices [PDF]. And anyone who’s at all active in foreclosure defense needs to grab a copy, read it, and understand it—becuase it might be the key to winning your foreclosure case. Here’s why.
This Report Blows Away Business Records
Anyone dealing with any of the above organizations will want to make a copy of this report, get the judge to take judicial notice of it, and use it as a bludgeon anytime the plaintiff tries to introduce evidence based on their business records—which is nearly always.
What good will this report do? The business records exception, found in Florida Statutes, § 90.803 (6) (a), contains an important exception. The records are admissible upon proper groundwork being laid “unless the sources of information or other circumstances show lack of trustworthiness.”
And here, three separate organs of the federal government have said, in effect, that the business records of these companies are at best, suspect, and at worst, completely unreliable. That, to me, says “the sources of information or other circumstances show lack of trustworthiness.” Which means those records should not be admissible in any proceeding.
And that ought to blow the foreclosure plaintiff right out of the water.