The "internal procedure" problems that GMAC Mortgage referenced have become popularly characterized as "robo-signing"—the practice of having a small number of individuals sign a large number of affidavits and other legal documents submitted to courts and other public authorities by mortgage companies to execute foreclosures. Several employees and individuals with power-of-attorney signing authority for major servicers, including GMAC Mortgage, J.P. Morgan Chase, and Wells Fargo, have been deposed as part of foreclosure contests. Some of these depositions raised concerns as to whether individuals who claimed in sworn affidavits to have personal knowledge of facts necessary to legally foreclose on a property actually had that knowledge; assignments and sales of interests in mortgages were properly executed; legal documents were properly notarized in accordance with state law; and, as a result, mortgage companies had met the necessary requisites to foreclose on certain properties. In other words, they do not believe anyone has been wrongfully foreclosed upon or evicted, but that some of the paperwork that must be filed to complete a foreclosure in certain states may not have been properly reviewed or notarized by their employees. In actuality, these procedural defects have the potential to undermine the legitimacy of the foreclosure process in both judicial and nonjudicial states and create a cloud over the legal title of homes and, depending on the facts and circumstances of each case, could result in judicial sanctions, civil penalties, and even criminal prosecutions. It is unclear whether or not the procedural problems masked substantive problems, such as a failure to transfer interests in a mortgage properly, thus calling into question true ownership of mortgages, in certain instances. Even if substantive problems do exist, it may be possible to rectify deficiencies in many, if not the vast majority, of cases to allow for the completion of a foreclosure. Correcting these problems would come at a cost by potentially causing significant delays in the completion of the foreclosure process, even for properties in which foreclosure is inevitable. This report seeks to shed light on some of these uncertainties by explaining the mortgage market process and some of the legal agreements entered into between market participants; explaining the legal procedures of typical judicial and nonjudicial foreclosure statutes; explaining some of the procedural problems that have surfaced during the implementation of foreclosure proceedings that drove some mortgage servicers to pause foreclosure sales and evictions; analyzing how the increasing complexity of the secondary mortgage market over the last 10 to 15 years may have led to or exacerbated these procedural problems; and addressing some of the potential substantive errors that could have been hidden by the procedural problems and the legal effect these problems could have on homeowners, lenders, and other mortgage market participants.
During the summer of 2010, several employees and individuals with power-of-attorney signing authority for major servicers, including GMAC Mortgage, J.P. Morgan Chase, and Wells Fargo, were deposed as part of foreclosure contests. These depositions raised concerns about what has been characterized as "robo-signing"—the practice of having a small number of individuals sign a large number of affidavits and other legal documents submitted to courts and other public authorities by mortgage companies to execute foreclosures. As a result of these depositions, many have questioned whether individuals who claimed in sworn affidavits to have personal knowledge of facts necessary to legally foreclose on a property actually had that knowledge; whether assignments and sales of interests in mortgages were properly executed; whether legal documents were properly notarized in accordance with state law; and, as a result, whether mortgage companies had met the necessary requisites to legally foreclose on certain properties. In response, several major mortgage servicers temporarily halted foreclosure sales to review their internal foreclosure procedures.
These procedural defects have the potential to undermine the legitimacy of the foreclosure process and could result in judicial sanctions, civil penalties, and even criminal prosecutions. The servicers in question do not believe they have wrongfully foreclosed upon or evicted anyone, but that some of the paperwork that must be filed to complete a foreclosure in certain states may not have been properly reviewed or notarized by their employees. Whether or not homes have been wrongfully foreclosed upon is unknown at this time. It also is unclear whether or not the procedural problems masked substantive problems, such as a failure to properly transfer interests in a mortgage, thus calling into question true ownership of mortgages, in certain instances. Even if substantive problems do exist, it may be possible to rectify deficiencies in many, if not the vast majority, of cases to allow for the completion of a foreclosure. Correcting these problems would come at a cost by potentially causing significant delays in the completion of the foreclosure process.
This report seeks to shed light on some of these issues by explaining the mortgage market process and some of the legal agreements entered into between market participants; explaining the legal procedures of typical judicial and nonjudicial foreclosure statutes; explaining some of the procedural problems that have surfaced during the implementation of foreclosure proceedings that drove some mortgage servicers to briefly halt foreclosure sales and evictions; analyzing how the increasing complexity of the secondary mortgage market over the last 10 to 15 years may have led to or exacerbated these procedural problems; and addressing some of the potential substantive errors that could have been hidden by the procedural problems and the legal effect these problems could have on homeowners, lenders, and other mortgage market participants.