The Work

October 14, 2010 11:47 AM

Fifty State AGs Take On 'Robo-Signers' in Foreclosure Probe

Posted by David Bario

Last Friday, we wrote about the burgeoning scandal involving so-called foreclosure mills--tiny law firms where "robo-signers" improperly signed massive numbers of foreclosure affidavits. We called it the biggest, and possibly murkiest, legal story to cross our desks in two weeks. 

Now the story's getting even bigger--and it's looking more and more like an avalanche of litigation is inevitable. On Wednesday the attorneys general of all 50 U.S. states announced that they had joined together to investigate home foreclosure practices. And as Reuters reported Tuesday, the class action plaintiffs bar is already licking its chops. 

In their announcement of the probe, the AGs cite evidence that "a number of mortgage loan servicers have submitted affidavits or signed other documents in support of either a judicial or nonjudicial foreclosure that appear to have procedural defects." Specifically, the AGs assert, "it appears affidavits and other documents have been signed by persons who did not have personal knowledge of the facts asserted in the documents."

The AGs allege that the loan servicers not only couldn't vouch for the authenticity of the documents they signed, but also signed many of the affidavits without a notary public present. "This process of signing documents without confirming their accuracy has come to be known as 'robo-signing,' the AGs say. "We believe such a process may constitute a deceptive act and/or an unfair practice or otherwise violate state laws."

The 50-state foreclosure mill investigation will be led by an executive committee comprised of AGs from 11 states: Arizona, California, Colorado, Connecticut, Florida, Illinois, Iowa, New York, North Carolina, Ohio, Texas, and Washington. 

As we reported previously, at least four major lenders--including Bank of America, JPMorgan Chase, Ally Financial Inc., and PNC Financial Services-- have halted foreclosures in the wake of robo-signing revelations. And the private lawsuits have already begun to fly: In Florida, where foreclosures have been especially thick, firms like Greenberg Traurig and Morgan, Lewis & Bockius are lining up to defend clients from individual homeowner suits. 

Our colleague Alison Frankel of the Litigation Daily reports that even before the state probe was announced, the allegations were generating plenty of work for lawyers advising lenders and other financial institutions. Andrew Sandler of the financial services boutique BuckleySandler told Frankel that half of the 100 lawyers at his firm are engaged in work related to mortgage industry investigations.

"This is a very serious enforcement, litigation, and public policy set of issues," Sandler told the Lit Daily. "It's going to keep lawyers throughout the [financial services] industry busy for a significant amount of time."

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The fun is just beginning. Under Div. 3 of the UCC, in most states the only persons who can enforce notes are (i) holders, (ii) non-holders in possession with rights of a holder, and (iii) persons not in possession who have rights to enforce note. Since many [most?] notes have been "lost" [shredded along with the rest of the file?], a preliminary but major aspect of a F/C action should be proving the right to enforce, which means proving loan ownership, which is a BFD in many instances. Non-holders in possession [typically, loan servicers] have to prove they have the rights of a holder, which means having valid powers of attorney from the loan owners, but proving who the owners are is commonly also a BFD. In states that allow private foreclosures, like California, courts have not figured out but soon will that only a holder is entitled to privately foreclose because the trustee is not a fact-determining person who can make a decision as to whether a non-holder in possession has the rights of a holder. Ergo, non-holders must judicially foreclose. Then, in states with set-off statutes [like California], time-barred claims of makers [e.g., RESPA or TILA or Elder Abuse], debtors can assert the set-offs, possibly in an amount that there is no default. And even if the owner is a holder, in California the trust deed has to have been duly assigned of record to the holder before private foreclosure is allowed [CCP 2943], a procedure which isn't done under MERS. [MERS was established so the securitization industry could bypass the recording, Division 3, agency, and foreclosure laws of the 50 states to facility the ease of securitization and bigger profits for securitizers; not nice.] And if Barry O signs legislation blessing MERS and use of electronic records in foreclosures, he will truly be a lame duck president.

The comment that I just posted had an error. It mentioned CCP 2943. It should be changed to CC 2932.5. Thank you.

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