At first robo-signing seemed to be just a problem for courts and lawyers — in few situations would foreclosures be reversed. But now the Congressional Oversight Committee says the damage may be far greater than first believed and could impact millions of mortgages as well as mortgage-backed securities worth trillions of dollars.
“In the best-case scenario,” says the congressional Oversight Committee, “concerns about mortgage documentation irregularities may prove overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-related affidavits, but the facts underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.”
Well, of course “this view” is embraced by the financial industry. What else would anyone expect?
“The worst-case scenario is considerably grimmer,” says the Committee. “In this view, which has been articulated by academics and homeowner advocates, the “robo-signing– of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”
The report found that “documentation irregularities could also have major effects on Treasury’s main foreclosure prevention effort, the Home Affordable Modification Program (HAMP). Some servicers dealing with Treasury may have no legal right to initiate foreclosures, which may call into question their ability to grant modifications or to demand payments from homeowners. The servicers use of “robo-signing– may also have affected determinations about individual loans; servicers may have been more willing to foreclose if they were not bearing the full costs of a properly executed foreclosure.
Treasury has so far not provided reports of any investigation as to whether documentation problems could undermine HAMP. It should engage in active efforts to monitor the impact of foreclosure irregularities, and it should report its findings to Congress and the public.”
“In addition to documentation concerns, another problem has arisen with securitized mortgage loans that could also threaten financial stability. Investors in mortgage-backed securities typically demanded certain assurances about the quality of the loans they purchased: for instance, that the borrowers had certain minimum credit ratings and income, or that their homes had appraised for at least a minimum value. Allegations have surfaced that banks may have misrepresented the quality of many loans sold for securitization. Banks found to have provided misrepresentations could be required to repurchase any affected mortgages. Because millions of these mortgages are in default or foreclosure, the result could be extensive capital losses if such repurchase risk is not adequately reserved.”
The report explains that “during the housing boom, multiple rapid transfers of mortgages to facilitate securitization made recordation of mortgages a more time-consuming, and expensive process than in the past. To alleviate the burden of recording every mortgage assignment, the mortgage securitization industry created the Mortgage Electronic Registration Systems, Inc. (MERS), a company that serves as the mortgagee of record in the county land records and runs a database that tracks ownership and servicing rights of mortgage loans.47 MERS created a proxy or online registry that would serve as the mortgagee of record, eliminating the need to prepare and record subsequent transfers of servicing interests when they were transferred from one MERS member to another.
“In essence, it attempted to create a paperless mortgage recording process overlying the traditional, paper-intense mortgage tracking system, in which MERS would have standing to initiate foreclosures.
“MERS experienced rapid growth during the housing boom. Since its inception in 1995, 66 million mortgages have been registered in the MERS system and 33 million MERS-registered loans remain outstanding. During the summer of 2010, one expert estimated that MERS was involved in 60 percent of mortgage loans originated in the United States. Widespread questions about the efficacy of the MERS model did not arise during the boom, when home prices were escalating and the incidence of foreclosures was minimal. But as foreclosures began
to increase, and documentation irregularities surfaced in some cases and raised questions about a wide range of legal issues, including the legality of foreclosure proceedings in general, some litigants raised questions about the validity of MERS.
“There is limited case law to provide direction, but some state courts have rendered verdicts on the issue. In Florida, for example, appellate courts have determined that MERS had standing to bring a foreclosure proceeding. On the other hand, in Vermont, a court determined that MERS did not have standing proved overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-related affidavits, but the facts underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork. The worst-case scenario is considerably grimmer. In this view, which has been articulated by academics and homeowner advocates, the “robo-signing– of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.