New Point of Foreclosure Contention: Default Notice
The five largest servicers of residential mortgages including B of A and Wells may be the first to settle with 50 state attorneys general who are investigating foreclosure practices.
The testimony in a New Jersey bankruptcy case could complicate foreclosures by Bank of America, which acquired Countrywide in 2008.
At a hearing in which protestors attempted to shout down a witness from JPMorgan Chase & Co. as he testified on ongoing foreclosure problems, lawmakers were clearly worried that there were still more damaging revelations to come.
The top servicers are doing quality-control reviews of their procedures. Bank of America, for instance, has relocated affidavit signers to the same rooms where notaries sit.
Both industry representatives and many consumer legal advocates agree that the crucial documentation should be aggregated in the hands of trust document custodians and that it should be retrievable.
As the foreclosure document scandal reaches the "material weakness" level for the largest banks, attorneys representing foreclosed borrowers want to hold servicing executives personally liable for overseeing processes such as robo-signing.
A widely used third-party registry of mortgage assignments has found itself at the center of the foreclosure controversy amid allegations that its service is part of the faulty foreclosure practices plaguing the industry.
As questions have mounted about the legality of thousands of foreclosures across the country, lawmakers have ratcheted up the rhetoric in criticizing lenders and urging them to take actions to help homeowners. But a key issue remains: What will Congress do about it?
As servicers look more broadly at all documents involved in foreclosures, the resulting delays will hamper the filing of new foreclosures not just those already begun.
The documentation problems forcing mortgage servicers to freeze foreclosures might have been avoided had the companies invested more in technology and hiring — before and after the housing bubble burst.
Last year's robo-signing scandals delayed tens of thousands of foreclosures in the 23 states where the process is handled in court. A new controversy could complicate foreclosures in the other 27 states.
At issue is the notice of default, the first letter that a mortgage lender or servicer sends to a homeowner who has fallen behind on payments. The notice typically starts the formal foreclosure process in nonjudicial states such as California, Arizona and Nevada.
Every notice of default has a signature on it. But just like the infamously rubber-stamped affidavits in the robo-signing cases, default notices, in at least some instances, have been signed by employees who did not verify the information in them, court papers show. In several lawsuits filed in nonjudicial states, borrower attorneys are arguing that this is grounds to stop a foreclosure.
"Whoever signs the NOD needs to have knowledge that there is in fact a default," said Christopher Peterson, an associate dean and law professor at the University of Utah.
The suits also argue that the default notices are invalid because the employees who signed them worked for companies that did not have standing to foreclose.
In a lawsuit against Wells Fargo & Co. in Nevada, an employee for a title company who signed default notices admitted in a deposition this month that he did not review any documents or know who had the right to foreclose.
"They are starting foreclosures on behalf of companies with no authority to foreclose," said Robert Hager, an attorney with the Reno, Nev., law firm Hager & Hearne, representing the borrower in the case. "The policy of these companies is to just have a signer execute a notice of default starting foreclosure without any documentation to determine whether they are starting an illegal foreclosure."
The Nevada nonjudicial foreclosure statute requires that the company signing a notice of default have the authority to foreclose, Hager said.
In a deposition on Jan. 4, Stanley Silva, a title officer at Ticor Title of Nevada Inc., said he "technically signed" default notices for clients, which were often acting as agents of other parties, which in turn worked for others.
"The person at the bottom of the chain, by executing the document, has taken an action on behalf of all of them through their various agency agreements," Silva said. In one case, for example, he said he had signed "on behalf of Ticor Title of Nevada, who is agent for LPS Title, who is agent for National Default Servicing."
"Who is agent for Fidelity National?" Hager asked. "Apparently, yes," Silva replied.
"Which is a servicer for Wilshire?"
Silva said under oath that he never reviewed any documents or knew what company was the holder of the original note at the time he signed the notice of default. He said he signed about 200 default notices over a four-year period.
When asked by Hager if he signed notices of default "without verifying the accuracy of the information," Silva replied: "Correct."
Representatives for Wells Fargo did not return calls seeking comment. The intermediaries that Silva mentioned in his testimony either did not return calls or declined to comment.
Walter Hackett, a lawyer with Inland Counties Legal Services, in San Bernardino, Calif., and a former banker with Bank of America Corp. and Union Bank, has filed several cases contesting notices of default, on the grounds that the employees signing such notices were working for companies that are not the noteholders — or even their appointed agents.
"A huge percentage of notices of default and notices of trustee sales are legally questionable and probably void," Hackett said. "Nobody with the authority to trigger the nonjudicial foreclosure process is triggering it — only third parties who claim they have the right to do so are triggering it."
After a notice of default is sent to the borrower and filed at the county recorder's office, a notice of sale is typically published in the local newspaper and the sale of the property often takes place without the borrower even knowing the home has been sold to another party.
O. Max Gardner 3rd, a consumer bankruptcy attorney at Gardner & Gardner PLLC in Shelby, N.C., said the default notice is "the key legal document that is sent to the borrower" before a notice of sale.
Thousands of judicial-state foreclosures were halted last year after several banks including Ally Financial Inc.'s GMAC Mortgage and Bank of America Corp. admitted that employees had signed affidavits without reviewing the documents. In several judicial states, including New York and Florida, sloppy paperwork by servicers has led courts to require that companies verify they have all the proper documents, including proof they own the mortgage before foreclosing.
This month, in a closely watched case, the Supreme Judicial Court of Massachusetts (a nonjudicial state) rejected claims made by U.S. Bancorp and Wells Fargo that the banks, as securitization trustees, did not have to prove their authority to foreclose on two separate homes.
Peterson, the law professor, said one difference between the notice of default cases and the widely publicized robo-signing incidents is that in the latter, affidavits are given to judges whereas the notice of default is not strictly a legal document.
But consumer lawyers said homeowners face a bigger legal burden in nonjudicial sates because they have to file a lawsuit against the holder of the note to bring any action in court.
"Because there's no court reviewing anything in nonjudicial states," abuses are "probably even more rampant," Gardner said. "This is just another example of robo-signing in a different context."