By Theodore Bush
The high number of mortgages in foreclosure attracted new attention last fall when problems in mortgage servicing surfaced. Concerns that documents accompanying judicial foreclosures may have been inappropriately signed or notarized, as well as ongoing judicial debate regarding the role of the Mortgage Electronic Registration System (MERS), have dominated news coverage. Media reports have correctly pointed out that employees of some law firms and lenders were executing affidavits without the requisite personal knowledge of the facts and have also highlighted cases in which foreclosures may have been conducted in violation of the Servicemembers Civil Relief Act (SCRA). Reporters, politicians and community activists have combined these anecdotes regarding improper and illegal activities with their previously held beliefs to determine that not only have lenders made fraudulent, predatory loans, but that lenders are now illegally foreclosing on them.
As a result of theses media reports, members of Congress requested that the United States Government Accountability Office (GAO) prepare a report to address:
- “The extent to which federal laws address mortgage servicers’ foreclosure procedures and federal agencies’ authority to oversee activities and the extent of past oversight;
- Federal agencies’ current oversight activities and future oversight plans; and
- The potential impact of foreclosure documentation issues on homeowners, servicers, regulators, and mortgage-backed securities investors.”
On May 2, 2010, the GAO issued its report, titled “Mortgage Foreclosures: Documentation Problems Reveal Need for Ongoing Regulatory Oversight.”
The GAO report offers a more sober view than many recent news reports regarding the foreclosure process. The review evaluated internal controls and procedures for processing foreclosures and reviewed samples of individual loan files to assess servicers’ compliance with document preparation and file maintenance requirements. According to the GAO, the examinations revealed severe deficiencies in three primary areas, including:
- Shortcomings in the preparation of foreclosure documents, which amounted to a violation of state laws;
- Lack of adequate policies, staffing and oversight by servicers of their internal foreclosure processes; and
- Lack of sufficient oversight of activities of third party providers, particularly foreclosure attorneys.
Examples of the deficiencies included the following:
- Affidavits used in foreclosure that were signed by persons who did not satisfy state law personal knowledge requirements;
- Documents that were not properly notarized;
- Inadequate policies to outline how documents should be legally prepared and notarized;
- Lack of effective quality controls or internal procedures to detect deficiencies in the foreclosure process; and
- Insufficient staffing levels to handle increasing volumes.
However, contrary to popular opinion, while the Review revealed material
weaknesses in the servicers’ overall foreclosure management processes, it is important to note that “examiners generally did not find in the files they reviewed cases in which the borrowers were not seriously delinquent on the payments on their loans or that the servicers lacked the documents necessary to demonstrate their authority to foreclose.” Examiners did find a limited number of cases in which foreclosures should not have proceeded against even seriously delinquent borrowers. In one example, the examiners found poor communication between a servicers’ foreclosure and loan modification department where a foreclosure was initiated against a borrower in a loan modification status. Also, 2 of the 14 servicers reviewed had 50 instances where the servicers proceeded to foreclose against active duty military personnel in violation of the SCRA. As a result of their examinations, regulators are taking formal enforcement actions against each of the 14 servicers.
The GAO report notes that past oversight has been fragmented and acknowledges calls for national servicing standards, including requirements that servicers submit written attestations that the foreclosure process complies with applicable laws and that loan modifications have been pursued wherever economically feasible. The report also notes that future oversight is somewhat in limbo pending the ongoing formation of the Consumer Financial Protection Bureau. While the extent of future oversight of servicing activities has yet to be determined, all of the servicers must comply with the following requirements:
- Enhance compliance and training programs
- Align staffing levels with volume
- Strengthen vendor management processes
- Retain an independent firm to conduct a comprehensive review of past foreclosure activities from January 1, 2009, through December 31, 2010, to identify borrowers who were financially harmed by servicer deficiencies and to remediate those borrowers.
The GAO concluded that delays in the foreclosure process may have both positive and negative effects on homeowners, communities and the mortgage market. Borrowers whose mortgages are in default may benefit from additional delays in the foreclosure process by gaining additional time to bring the mortgages current. However, delays also leave borrowers unsure of how long they may be able to remain in their homes, and they may find it even more difficult to catch up on their payments due to the accrual of additional taxes and insurance. Communities may be harmed by delays in the foreclosure process, because as more properties become vacant, there is a risk of heightened crime, blight and declining property values. This leads to higher policing costs as well as continuing downward pressure on house prices and, therefore, tax receipts.
The GAO recommends that regulators develop and coordinate plans to provide ongoing oversight and establish clear goals, roles and timelines for overseeing mortgage servicers. If national servicing standards are created, the GAO suggests that they include standards for foreclosure practices.
Ted Bush is the Operations Director of Thoroughbred Title Agency, Inc. (TTA), working hand-in-hand with the Real Estate Default Group of affiliate, Weltman, Weinberg & Reis Co., LPA. His responsibilities include overseeing the daily operations of TTA. Ted can be reached directly at 216.685.1054 and email@example.com.