Revelations that the nation’s biggest banks may have fudged crucial documents in their rush to reclaim tens of thousands of homes have the public in an uproar. Foreclosures and the paperwork nightmare have attorney generals from all 50 states conducting sweeping investigations into the industry’s foreclosure practices. The nation’s top financial regulators have also ordered reviews. And Bank of America, JP Morgan Chase, GMAC and other big banks announced a few weeks ago that they were halting foreclosures in much of the country.
But now, banks are slowly getting back into the foreclosure business. And on Wednesday, Shaun Donovan, the secretary of housing and urban development, tried to ease concerns by saying that none of the problems threaten the health of the financial system.
The foreclosure crisis seems to be either in meltdown or in repair. Which is it? An overview here:
How can Bank of America and GMAC halt foreclosures, then resume them a few weeks later?
It’s something of a public relations game. Before announcing the freeze, the banks were fairly confident that the foreclosures were valid — even if some of the paperwork was in error. But they still needed to show that they were taking the problems seriously.
Behind the scenes, the banks dispatched hundreds of lawyers and executives to review, correct and resubmit the proper documents. The preliminary reviews suggested that the problems were not as deep as they feared, giving them the confidence to resume evictions.
How big is the problem?
Nobody really knows. Four of the 10 largest banks are examining hundreds of thousands of cases, and refiling when appropriate. Laurie Goodman, an analyst at Amherst Securities, estimates that as much as $154 billion of mortgages could be exposed.
What exactly were the problems?
Many banks were plain sloppy. They allowed a single employee to sign off on thousands of documents attesting to information he or she did not know to be true — “robo-signing.” Some legal documents were incorrectly notarized.
And computers got the best of them. Many banks relied on an electronic mortgaging filing system to stand in for them in the foreclosure process. Now lawyers for homeowners are disputing whether that filing system kept proper track of the paperwork and can have a legal claim on the property.
So, who is the victim here?
So far, there are few reports that banks have mistakenly foreclosed on a homeowner. In many of these cases, borrowers are more than a year behind on their payments, and do not currently live in the home.
If it’s a bad loan, then why worry about a glitch in the paperwork?
It’s a longstanding requirement — going back to William the Conqueror — that banks prove their ownership of the mortgage. Consumer advocates say that giving troubled borrowers due process is a matter of fairness.
Some suspect that the banks cannot validate the accuracy of their foreclosure documents because the paperwork on the original mortgages was missing or never submitted. If that’s the case, the courts may not look kindly on the omission, and that glitch could turn into a nightmare.
Who is really at fault?
The foreclosure system, which became like Lucy and Ethel, overwhelmed at the chocolate factory. As millions of homeowners fell behind on their mortgage payments, the banks were overwhelmed. Their loan collection operations were designed to process regular payments, not handle the specialized needs of troubled borrowers.
Computer systems were outmoded; the staff lacked the training and numbers to respond properly to the flood of calls. Traditional checks and balances on documentation slipped away as filing systems went electronic, and mortgages were packaged into bonds at a relentless pace. To make matters worse, many tasks were outsourced, with little oversight by the banks or their federal regulators.
The banks say they tried valiantly to cope, including hiring more employees. Even so, many acknowledge that they were caught flat-footed.
What does the mess mean for the thousands of people on the verge of losing their homes?
For most troubled borrowers, not much. Foreclosures may be delayed, giving some troubled homeowners at least a few more weeks of relief — and perhaps more, if they have an aggressive lawyer.
So, why is this mess important?
An industrywide moratorium, or lengthy delays, could seriously hamper a recovery of the housing market. Many areas hit hardest by the housing crisis, like California, had been seeing an increase in foreclosure sales — a sign that the market was starting to heal. Homes that sit in foreclosure, especially vacant ones, can depress property values and consumer confidence.
That, in turn, could ripple through the economy. Banks concerned about the value of their own real estate portfolios might pull back sharply on lending, triggering a repeat of the credit crunch.
That is why the Obama administration wants the foreclosure system back on track — and to stamp out calls for a national freeze.
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