The foreclosure story mortgage lenders fear most

This has been a dark and dusty year for mortgage lenders. There has been the robo-signing scandal, publication of Michael Hudson’s inside tell-all, The Monster, and buy-back claims by investors yelling fraud and asking for billions in compensation. But perhaps the worst news has been saved for last, a little-noticed decision in Ohio that could change the entire foreclosure process, cost lenders billions and remove the traditional right of states to handle foreclosure cases.

According to Ohio State Attorney General Richard Cordray:

“Judge Charles Pater of the Butler County Court of Common Pleas issued an order denying GMAC’s motion to ratify a judgment because ‘neither the Ohio Civil Rules nor the local rules of this court provide a procedure for or authorize a court to “ratify” a final appealable order’ and stating that “the proper course of action would be for GMAC to first file a motion to set aside its judgment and then, once the court grants that motion, to refile its motion for summary judgment with a correctly executed affidavit in support.”

Cordray adds that “it is improper for the plaintiff to ask the court to ratify a foreclosure judgment based on a false affidavit after the fact by simply substituting or supplementing what plaintiff now claims is a proper affidavit.”

Instead, he argues that “vacating the judgment is the proper way to handle these cases, as it removes a judgment based on a false affidavit and gives the homeowner an opportunity to contest a new motion for default or summary judgment.”

Cordray and Judge Pater are saying that as a matter of law robo-signing lenders cannot just change the paperwork for past foreclosure cases when documents were improperly prepared — and neither can courts. Instead, everyone must start from scratch with entirely-new cases. This means — if Cordray’s approach becomes widespread — that tens of thousands of foreclosure cases will have to be unearthed, reviewed and tried again if the original paperwork was faked. Large numbers of people who sought nothing but the best mortgage rates will be watching the process with great interest.

Lender Worries

Not only would new trials on a mass scale be a huge expense to lenders, lenders are unlikely to bat 1,000 and win every case. In those cases where they do lose it will then be necessary to explain how someone was thrown out of their house on the basis of a false affidavit or other error. Given the damage done if a falsely foreclosed owner is found, awards worth millions await borrowers who unfairly lost their homes.

And it could get worse. Imagine if vacated judgments begin to appear in other courts and in other states. Suppose bar associations begin to sanction attorneys who submitted falsified documents to force people out of their homes? And imagine if courts in various states look at falsified affidavits and think in terms of mass perjury?

National Foreclosure Rules

But, most likely, these things won’t happen. There’s now a movement in Washington to “unify” foreclosure standards around the country in the name of efficiency. Instead of 50 sets of state rules there will be one single national foreclosure standard operated from Washington.

Sounds pretty enticing — until you realize that consumers have virtually no rights in Washington and that the federal regulation of loan originations by national banks did absolutely nothing to prevent or stop the widespread use of toxic mortgages.

The movement to remove state-foreclosure courts is now underway. If it happens that state courts are shut down, who do you think will win when the rules are tailored to one party or another? Name one borrower PAC that will contribute to congressional races or impact decisions on Capitol Hill? Just think about the way the bankruptcy process has been distorted by congressional action, much to the joy of credit card companies and student lenders.

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