As if dealing with the free-falling housing market and the resulting foreclosure crisis wasn’t enough, now we allegedly have infuriating bank and mortgage fraud as well. Several lenders including GMAC, Bank of America and J.P. Morgan Chase & Co. have admitted that they used “robo-signers” to file affidavits in foreclosure actions.
Mortgage servicer employees and, in some cases, lawyers working for the banks admittedly signed documents that authorized foreclosures without actually reviewing the homeowners’ files and loan documents due to the massive number of cases they had to process. They simply operated a production line notarizing filings based on what the bank said was owed and to whom it was owed.
As a result of the robo-signing coming to light, several lenders have stopped all foreclosure actions in order to get a handle on the problem. GMAC halted evictions in 23 states and Fannie Mae and Freddie Mac stopped their own foreclosures until a review was made.
In addition, many title companies are refusing to insure new sales, leading the banks to deny financing and slowing down the process of selling distressed properties even more. Clearly, there will be fall-out from this, but the effect is unknown right now.
And it’s not just the banks in hot water. Class action lawsuits have been filed against Lender Processing Services (LPS), a mortgage processing company which handles foreclosures for every bank in the country. At the heart of the issue is an allegation of illegal fee-sharing with the attorneys who were robo-signing the foreclosure actions for LPS. LPS makes more money from fees it charges attorneys than from fees it charges banks, and billions of dollars in attorneys fees are at stake.
In the wake of the scandal, some are offering suggestions for how to get the country out of this latest foreclosure crisis without further damaging the weakened housing market and economy. One idea is to have the banks certify through a senior officer that they reviewed the internal procedures for foreclosures and that the process is accurate. This idea worked after the Enron and Worldcom scandals when the Sarbanes-Oxley Act required the top officers certify their financial statements.
In the meantime, the Attorney Generals of all 50 states have agreed to launch a joint investigation into the robo-signing mess.