If things weren’t bad enough already, some banks decided to shortcut the foreclosure process by filing false affidavits with the courts. One foreclosure processor testified that he signed and notarized 8,000 court petitions a week without reviewing the documents. Judges get angry when they are presented with false documentation. Several lenders then halted foreclosures in the 23 states where only the Circuit Court can authorize a foreclosure. (In the other 27 states a foreclosure can be initiated without court approval.) Soon thereafter, the Attorneys General of the other 27 states began inquiring whether the problem was more widespread. In an abundance of caution Bank of America then halted foreclosures in all 50 states.
The problem is this. For years mortgages have been aggregated and securitized into mortgage trusts and sold as bonds. The right to collect the interest and principal may have changed hands several times. The original documents are supposed to reside in the trust and records of transfers and assignments are supposed to be recorded in an electronic database called MERS. But apparently the record keeping is deficient and sometimes the original documents or the ownership of the mortgage can’t be determined. Banks are not supposed to proceed with the case until all facts are determined, the documents reviewed, and the required legal requirements met. Banks are currently clogged with foreclosures and have hired outside contractors to handle the paperwork, often at a inadequate level of compensation to insure proper compliance.
What is the situation in Maryland? We are probably in a better place. First, the volume of foreclosures is well below the national average. Secondly, the lender can usually initiate a foreclosure without obtaining court approval. Lastly, the state initiated a new foreclosure law in 2009, which should prevent some of the paperwork abuses occurring elsewhere. Now a lender desiring to initiate a foreclosure needs to submit a package of documents to the court and make certain representations regarding their accuracy. More recently the Maryland Court of Appeals initiated a new rule that permits the Circuit Courts to audit these submission for accuracy.
What are the possible consequences if this drags on for months? Most experts agree it would be a major setback in clearing out the backlog of foreclosures and restoring the market to normalcy. Banks will see their administrative and legal expenses skyrocket, mortgage losses will continue to pile up, lenders will have a reduced willingness to lend, and sales will decline as foreclosed properties are withdrawn from the market.
What is the worse case scenario? States regulate real estate transactions, not the Federal Government. Experts agree than the modern system of mortgage securitization, asset assignment and loan ownership may not meet the strict requirements of all 50 States. The current mess could erupt into a “food fight” where state legislators and plaintiff’s attorneys throw sand into the gears of the foreclosure process. If that happens expect the federal government to step in and restore some degree of order. But that could take months.
Calmer heads have suggested that rather than a nationwide foreclosure moratorium, lenders should immediately correct their administrative procedures and make additional guarantees to the courts that property rights have been respected. Hopefully the Maryland foreclosure procedures will allow local lenders to continue to conduct foreclosure actions in an expeditious and responsible fashion.