Major mortgage servicers' internal reviews of foreclosure documents extend far beyond robo-signers' affidavits verifying a borrower's mortgage debt.
Servicers are looking more broadly at all other documents involved in foreclosures, including "lost-note" affidavits and mortgage assignments, to ensure the chain of title actually lets them foreclose on a borrower in default.
The resulting delays will hamper the filing of new foreclosures — not just those already begun — as judges take a tougher stance on documents being used to verify that loan information is correct, and that the servicer has the right to foreclose in the first place.
"The courts are going to be much more skeptical," said Mark Ireland, a supervising attorney in the Foreclosure Relief Law Project, a unit of the nonprofit Housing Preservation Project in St. Paul. "It would be silly to show up in court with a lost-note affidavit when there is widespread evidence of an industry practice that calls into question the affidavits."
Mortgage servicers have filed thousands of lost-note affidavits, which must be signed in the presence of a notary, claiming that the original promissory note on a property has been lost.
Whether such documents will now hold any weight in court is unknown and probably will be decided case-by-case, further delaying foreclosures, lawyers said.
Most states require that all mortgage assignments be recorded through a county registrar. But foreclosure attorneys have identified many cases in which mortgage assignments were signed and notarized years after the date a loan was originated, or where the name of the owner is left blank and no name is given for the assignment. Many Wall Street investment banks issued "blank" mortgage assignments, essentially skipping the physical recording of the documents through a county registrar for the transfer of a mortgage.
Some states have a one-year redemption period during which a foreclosed-on borrower "can say the foreclosure was not done properly and the servicer has to start all over again," Ireland said. "This is a legal grenade."
Patricia McCoy, a law professor at the University of Connecticut, said judges may ask to see a photocopy of the underlying mortgage note or they may go further and ask for the actual note itself.
"I do think more courts are going to be more demanding of the paperwork going forward," she said. "Now the issue is, were these affidavits completed truthfully? Did the servicers actually do their review of the file that they said they did? That is going to cause them to stop in their tracks in many cases."
But McCoy said the court may not extract a pound of flesh from the servicers for their documentation woes.
"I think in many courts the paperwork requirements are so lax that even slightly tightening them should be something that servicers can meet," she said.
Problems with foreclosure documents have led Ally Financial Inc.'s GMAC Mortgage and JPMorgan Chase & Co. to suspend foreclosures in 23 states, and Bank of America Corp. has suspended foreclosures in all 50 states. Goldman Sachs Group Inc.'s Litton Loan Servicing LP has also suspended some foreclosures, and PNC Financial Services Group Inc. is reviewing its processes.
Derrick Gruner, a partner overseeing the banking and lending group at the Pinkert law firm in Miami, said a wide range of documents — affidavits of indebtedness, lost-note affidavits, postdated mortgage assignments — were "being robo-signed," a term used to describe employees who rubber-stamp documents without verifying the information in them or signing them in the presence of a notary.
"When you've got these documents floating out there that are of questionable validity, then the documents have to be authenticated," Gruner said. "On a forward basis, this will shed light on the validity of the documents."
David Wiechel, a lawyer in Springfield, Ohio, has alleged that some law firms representing servicers have fraudulently created documents "from thin air" and backdated mortgage assignments and notarizations to cover up breaks in the chain of title and to establish legal standing to foreclose. Mortgages that have been pooled in mortgage-backed securities have an average of three to nine mortgage assignments showing the transfer of the original note from the originator to various investors and then to a trust's sponsor, he said.
The shoddy document practices call into question the tax-exempt status of real estate mortgage investment conduits, the special-purpose vehicles used to pool mortgages for securitized trusts, he said.
"Frankly, there's a lot of lying going on because the [mortgage] assignments don't exist and some that do exist have been manufactured," he said.
(Citigroup Inc. said Tuesday that it had stopped initiating foreclosures through a Florida law firm, the law offices of David J. Stern, which is being investigated by the Florida attorney general.)
A few analysts have tried to quantify the magnitude of the problem. Paul Miller, an analyst at FBR Group Inc., said foreclosure delays will cost at least $6 billion, or roughly $1,000 per loan for every month that a foreclosure is delayed.
Laurie Goodman, a senior managing director at Amherst Securities Group LP, has estimated that $154 billion of nonperforming loans are affected by the current moratoriums.
"The real wild card is the unquantifiable side effects likely to result from this widespread sloppiness in the foreclosure processes of the largest firms," Goodman wrote in a report Tuesday. A "broad questioning of the title-transfer procedure" would cause a further slowdown, she wrote.
A crucial problem, she wrote, is the way that servicers chose to cut costs by using Merscorp Inc., the Vienna, Va., company that runs the mortgage industry's electronic loan registry system. The system let mortgage lenders reassign loans on the registry but not through county recorders.
The paperwork needed to transfer ownership and maintain a legal chain of ownership "was often neglected by sellers-servicers," she wrote. "Servicers cannot prove to the courts that they have a valid ownership and right to foreclose," Goodman wrote, "and the appropriate affidavits are being contested in court. To clean up the matter, servicers may need to redocument the transfers and refile the appropriate assignments, presumably at a large cost to the servicers and investors."