As if the sub-prime mortgage crisis followed by a collapse of the housing market wasn’t enough. Behold the foreclosure crisis sparked by Jeffrey Stephan, head of Ally’s (formerly GMAC) foreclosure document processing team.
Stephan admitted under oath to having signed off on documents that he had not reviewed for 10,000 foreclosure cases per month for the last five years. To make matters worse, all such documents had been notarized in Pennsylvania, even though they were being used in foreclosure cases in many different states.
Since different states have different standards for notary approval, these documents should have been unacceptable in the vast majority of state courts. Even the notaries failed to do their jobs.
Following Mr. Stephan’s lead, other employees at Ally revealed that they had submitted faulty affidavits when foreclosing on an unknown number of homes.
This process was coined “robo-signing” as employees rubber-stamped thousands of foreclosure documents without checking the information. It has resulted in Ally suspending foreclosure evictions in 23 states.
Following Ally’s transgressions, Bank of America and J.P. Morgan Chase also suspended evictions in the same states after realizing they too were guilty of employing “robo-signers.” Bank of America suspended foreclosures nationwide shortly thereafter, followed by PNC and mortgage servicer Litton Loan Servicing. This has of course raised the question, “Will there be a foreclosure moratorium nationwide?
The backlash has been severe. State attorney generals in six states are demanding foreclosure moratoriums, and the Ohio attorney general filed suit against GMAC calling it “the tip of the iceberg of industry wide abuse.” Class action lawsuits are being filed left and right in neighborhoods across the country.
Even Congress has become involved, invoking Attorney General Eric Holder to have the Justice Department investigate. All in all there is the sense that families have been forced out of their homes without following due process. The Obama Administration is looking into the situation, and there is speculation that the government will launch a formal investigation.
David Axelrod, Senior Advisor to President Obama, stated that the Administration is pressing lenders to review their foreclosures to determine which ones have flawed documentation. Nevertheless, he stated that a nationwide foreclosure moratorium would be an overreaction because there are valid foreclosures that should go forward.
Despite the banks’ attempts to defend their actions, insisting that most people who have faced foreclosure were legitimately behind on payments, the dominoes continue to fall. Title insurers Old Republic National and Stewart Title have made it nearly impossible for agents to underwrite policies on foreclosed properties owned by the implicated banks.
Although many had hoped for the housing market to bounce back, it is thought that this crisis will only delay recovery, particularly if a nationwide moratorium is ordered. Banks and lenders will have to review paperwork for hundreds of thousands of mortgages, as well as revisit their foreclosure protocols and process.
As a result, the market will likely continue to lock up. According to Dorothy Buse, a Coldwell banker real estate agent in Orlando, Florida, out of the 200 foreclosures she had listed for sale, 40 are now in the foreclosure freeze; of the 40, 12 that were already under contract and are now on hold.
As more faulty documentation is exposed, inventory will be taken off the market. Housing market experts believe that a lengthy foreclosure moratorium could help tip the economy back into recession and delay the housing recovery for years. In fact, in the past seven recessions, housing has been the catalyst to pull the economy out of recession.
We will have to wait and see.