Evidence of sloppy mortgage servicing practices should come as no surprise to anyone who has paid attention to the industry during the foreclosure crisis.
But GMAC Mortgage's admission this week that certain foreclosure-related documents were not verified or signed in the presence of a witness has thrust the issue of inadequate documentation back into the spotlight.
Consumer advocates are using GMAC's problems as evidence that homeowners are being wrongly foreclosed on. Industry lawyers say focusing on such processes is nothing more than a tactic for borrowers' attorneys to prolong foreclosures and make more money off their clients.
One reason GMAC may be getting so much attention is its close relationship with the government. The lender's parent company, the $177 billion-asset Ally Financial Inc. has received about $17 billion in bailout funds, giving the government a 56% stake in the auto finance company (once a unit of General Motors Corp.).
But it's widely believed that GMAC is far from alone in having such procedural problems.
"The servicing model is not built around providing careful fact-checking. It's a high-volume, fast-paced, cost-cutting procedure," said Katie Porter, an associate professor at the University of Iowa College of Law. "This is not a one-bad-apple problem. This is a defective barrel."
Porter said the buzz around GMAC could lead some servicers to beef up internal oversight.
"Certainly somebody in legal has been scrambling at the other servicers checking up on what they do, making sure they change their processes to make sure they don't get nailed," she said. "Becoming a notary would be a great industry right about now."
Still, Porter said she doubted such moves would suffice to remedy the problem.
"It's left up to the states, but these are national banks so when the states have gone after these guys, we've had preemption arguments," she said. "It doesn't sound like there is any regulator coming in looking over their foreclosure files, making sure they're compliant."
News reports surfaced Monday saying GMAC had halted all residential foreclosures in 23 states, citing a leaked memo the company had sent to its foreclosure vendors last week.
Those reports prompted GMAC to issue a statement clarifying that it had told vendors to halt evictions of homeowners and sales of seized properties — not initiation of foreclosures — while it addresses "a potential issue that was raised in a number of existing foreclosures challenging the internal procedure we used for executing one or more judicially required forms."
GMAC spokeswoman Gina Proia said the company had remedied "the procedural defect" three months earlier, but is now reviewing all the foreclosure cases tied to those affidavits to make sure there weren't any inaccuracies.
The problems at GMAC may have been brought to light by the deposition of a single employee, Jeffrey Stephan, a team leader in the company's foreclosure department who oversaw the execution of certain court documents, including affidavits. An affidavit must be signed in the presence of a witness, like a notary public. In the 23 states where the courts handle foreclosures, affidavits are used to state such things as borrower information, the loan balance and amount of delinquency.
During the deposition, in a case in which GMAC was the plaintiff, Stephan admitted to effectively rubber-stamping thousands of affidavits a month without verifying the information in them or signing the documents in the presence of a notary.
Proia confirmed that the defect GMAC discovered was related to affidavits that "may have been executed without direct personal knowledge of the information in the affidavit. A number of the affidavits were not signed in the physical presence of a notary."
But she said the defect was not related to the actions of a single individual — implying it was a companywide problem.
Proia stressed that GMAC's review "has revealed no evidence of factual misstatements or inaccuracies concerning details in these affidavits, like loan balance or delinquency," but that GMAC is "observing an abundance of caution," nonetheless.
"We are reviewing every affidavit in those 23 states even though we know not all of them are going to be affected, so we can preserve the integrity of the process," she said.
Proia said the process "has since been modified" but would not elaborate.
Several consumer advocates said they felt validated by this latest example of a servicer misstep and were hopeful it could lead to real change.
"We as a group of lawyers for two years now have been saying there is a lot of stuff wrong," said Roy Oppenheim, a foreclosure defense lawyer in Weston, Fla. "We feel unbelievably vindicated … because we have been screaming and calling from the tops of the hills that this process has to stop."
"It's been a sickening process of fraud on the court for a number of years," agreed Richard Kohn, an attorney for the Legal Assistance Foundation of Metropolitan Chicago. "I think this is sort of like taking the lid off the garbage can. … I think the judges are waking up to what's going on."
But industry advocates argue that procedural challenges simply delay the inevitable.
"These cases typically are ones where the borrower is not contesting the content of the affidavit so ultimately the result of these kinds of challenges is to restart the foreclosure process but not have any real effect on the outcome," said Thomas M. Hefferon, a partner at Goodwin Procter LLP in Washington.
"These types of challenges are similar to the ones that have been raised about the standing of trusts, criticisms of MERS, and the chain of documentation."
John D. Chludzenski, the president of the Mortgage Bankers Association of Florida, agreed, saying sometimes the sanctity of the contract that was signed gets overlooked.
"A borrower should not be able to forgo this obligation [to pay the lender] because the original note could not be produced while there is plenty of documentation within the loan file to substantiate an obligation exists," he said.
Kohn said he doesn't deny that borrowers must uphold their obligation to pay the mortgage. His goal, he said, is to try all avenues to keep the borrower in the home.
"Our approach is not simply to try to stall things as long as we can," he said. "It's to try to fight for a legitimate modification that the borrower under all the Treasury guidelines [for the Home Affordable Modification Program] is entitled to, but unfortunately rarely gets."