Bank of America Corp. and GMAC Mortgage may be restarting some foreclosures, but this does not mean their legal problems with bad documents are over.
According to lawyers, supplemental or amended affidavits, which the servicers have begun to file after their process reviews, do not necessarily override the original documents. There is a chance some judges will not approve the new documents or could even demand that entire cases be thrown out and refiled. The legal uncertainty extends to any other servicer following in Bank of America or GMAC Mortgage's footsteps.
"Judges will be a little bit leery, at least initially, as to how they allow some of these suits to proceed," said Jeffrey Taft, a partner in Mayer Brown LLP. "I would expect that judges are going to carefully scrutinize what's been provided in the past and what's being presented now."
Less than a month after putting the brakes on foreclosures, some banks are resuming them in an effort to reassure investors and shareholders that the problems were just a technical glitch. Whether this turns out to be true remains unclear.
Experts contend that, on a case-by-case basis and in the 23 states where foreclosures must be approved by courts, new problems could arise with refiled documents, potentially adding significantly to servicers' legal expenses and further delaying foreclosures.
"It's hard to imagine they could be resuming this so quickly," said John Rao, a staff attorney at the National Consumer Law Center. "We may see a second wave of this, that the steps taken to supposedly address the problems are themselves very suspect."
Just three weeks after Bank of America said it was halting foreclosures in the 23 judicial states (after similar moves by Ally Financial Inc.'s GMAC Mortgage and JPMorgan Chase & Co.), and less than two weeks after it extended its moratorium to all 50 states, the servicer said it was prepared to start resubmitting affidavits in 102,000 foreclosure cases where judgment is pending.
GMAC, for its part, said it is resuming foreclosures as each case is reviewed and remediated if necessary.
Rao and other legal experts said it is possible the new documents will not pass muster in the courts.
"It's awfully likely that the judges will follow case law and rules that have been developed in this area on whether you can essentially amend pleadings," he said.
"If all of a sudden these new affidavits get filed, and it's clear that these others got falsely done or violated court rules, I assume that some courts are going to say, 'Wait a second, you can't just do this,' " he said. "I don't see this as a simple fix to the industry to just submit a new document. "
What's more, the refiling of affidavits does not prevent attorneys from arguing the servicer did not have the right to bring the case against the borrower in the first place, Rao said.
Gina Proia, a spokeswoman for GMAC, said the company's process for remedying potentially defective affidavits depends on what stage the case is in.
"If the case is with the court, it would be notifying the court, withdrawing the existing affidavit and filing a new one and, of course, getting court approval to do that," she said. "We need to seek approval from the court to accept the new or amended affidavit."
She would not comment on whether any court has declined to approve new documents.
"We're not going to move forward on a foreclosure sale based on a defective affidavit," she stressed.
B of A is still reviewing documents in the 27 states where foreclosures are handled outside of court and said it would continue to suspend foreclosure sales in those states.
B of A said it expects only about 30,000 foreclosure sales to be delayed nationwide when all is said and done. This would include cases in which judgment had been granted but no sale scheduled.
Despite the fact that the foreclosure documentation crisis so far only appears to affect a handful of large servicers, the potential cases involved are many.
The self-imposed moratoriums by major servicers affect about 27% of the nationwide foreclosure inventory, according to an analysis this week by Moody's Investors Service. About 38% of foreclosure filings and 41% of the overall foreclosure inventory in the U.S. are in judicial states, Moody's said, citing data from RealtyTrac Inc.
Opinions have varied on what the foreclosure documentation mess will end up costing the industry; legal expenses will be just one part of the tab. Paul Miller, an analyst at FBR Capital Markets, estimated that litigation costs alone could total $3 billion to $4 billion.
Filing fees vary by state but can be hundreds of dollars per foreclosure just to file the initial complaint.
In Cuyahoga County in Ohio, for example, the fee for filing a foreclosure complaint is $475. In Brevard County in Florida filing a foreclosure suit can cost nearly $2,000, depending on the amount owed to the bank.
"The banks have already paid this per case, and now, if the judges are saying, 'No, you have to refile,' well, boom, you've got another filing fee, and that will add up," said Alan Bookman, a lawyer at Emmanuel Sheppard & Condon in Pensacola, Fla., and former president of the Florida Bar Association.
"If you've got thousands [of cases], that's millions of dollars," he said. "And that's just to play the game, if you will. That's just the price of admission."
JPMorgan Chase has already been preparing for an onslaught of legal costs, saying last week that it added $1.3 billion to its litigation reserves to cover, among other things, mortgage-related matters.
Jeffrey Naimon, a partner who represents banks at BuckleySandler LLP in Washington, played down the potential problems that could arise from the new documents, saying servicers are being extremely cautious and diligent in how they handle the process.
"Have the servicers gotten the message that they need to fix their policies? You bet. The servicers are working around the clock," he said. "Everyone is doing this in consultation with local counsel. If the local counsel says, 'Oh, you've got to restart [a case],' they're probably restarting, but that is not usually going to be the case."
Stephen Ornstein, a partner in SNR Denton in Washington, who represents banks and mortgage companies, agreed that servicers would not lift a moratorium on foreclosures if they did not feel the documents they were resubmitting were executed properly, especially knowing all eyes are now on them.
"They're confident that these policies and procedures are compliant with their applicable law," he said; "otherwise, they wouldn't restart the foreclosures."
Naimon added that it is important to resume foreclosures as quickly and smoothly as possible. "If the affidavit is flawed, the right thing to happen is, 'Let's get a new affidavit and move forward,' " he said.
"Otherwise, you're being unfair to the owner of the loan, and you're being unfair to the people in the community who are hurt by extending the real estate overhang."