The impact of decisions by three major lenders to review their foreclosure procedures in nearly two dozen states could hinge on reaction by lawmakers, and whether title insurers are willing to continue insuring title on distressed properties and bank-owned (REO) homes.
GMAC Mortgage, JP Morgan Chase and Bank of America are reviewing foreclosure proceedings in 23 states where courts have jurisdiction over foreclosures, following allegations that workers processing files for the companies signed affidavits that contained information they had not personally verified.
When attorneys for homeowners have challenged lenders on such procedural issues in the past, they have mostly succeeded only in delaying, rather than stopping, foreclosure proceedings.
The American Land Title Association, an industry group representing title insurers, expects that in the end, the "robo signing" controversy won’t have a major impact.
Flaws in documentation filed in the foreclosure process should ultimately have little adverse impact on new owners of REO properties or on title insurance claims, the group says.
Homeowners who have purchased foreclosed properties have "numerous defenses" against any claims by former owners, the group said, and "it is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments on the loan subject to the foreclosure."
That’s also the view of Sean O’Toole, founder and CEO of ForeclosureRadar.com, a service that tracks properties through the foreclosure process.
"It’s really just a technical issue where they have to go back, pull those affidavits, and refile them," O’Toole said. "I think a lot of people are making more of this than it really is. What nobody is saying is that these people aren’t making their house payments, and they get foreclosed on. The only thing it is likely to result in is delay."
But Old Republic National Title Insurance Co. has reportedly stopped insuring title for properties foreclosed on by JP Morgan Chase and GMAC Mortgage. Old Republic refuses to confirm or deny those reports, which are based on internal company memos, citing a "policy of not speaking to the press."
If other title insurers follow suit, that would make it difficult or impossible for would-be homebuyers who want to pick up distressed and REO properties at bargain prices to finance their purchases.
O’Toole said Old Republic’s decision alarmed some clients of ForeclosureRadar, who worried that they would not be able to obtain title insurance on homes they bought at courthouse auctions.
But O’Toole said ForeclosureRadar has confirmation from Old Republic that it is still insuring title on foreclosed properties in California and other non-judicial foreclosure states.
"If the title companies said they were going to stop (insuring title on foreclosures) — yes, that would be a big issue," O’Toole said. "The fact that the title companies aren’t doing that means the title company will have to defend the new homeowners."
Title insurers standing ground
So far, other title insurers don’t appear to be eager to follow the lead of Old Republic, the smallest of the "big four" title insurers, in states where courts have jurisdiction over foreclosure proceedings.
Bank of America has identified the 23 states where it is delaying foreclosures: Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.
The nation’s largest title insurance underwriter, Fidelity National Financial Inc., said in a statement that it doesn’t believe that the potential defects in foreclosure documents filed by lenders in judicial foreclosure states will have "a material adverse impact on its title business."
Fidelity said it doesn’t expect additional claims on policies it issues to homebuyers and lenders because "new owners and their lenders would have the rights of good faith purchasers which should not be affected by potential defects in documentation."
The company’s statement offers no explicit guarantee that it will continue to insure title on foreclosed properties, and Fidelity and First American Financial Corp., the two largest title insurance underwriters, did not respond to a request for comment on whether they would continue to do so.
In a statement Tuesday, Stewart Title Guaranty Co. said it is "evaluating the situation with each customer on a state-by-state basis as the laws of each state may vary."
When insuring title on REO properties, Stewart Title will ask for assurances from lenders "that the lender holds the appropriate loan documents and that all required foreclosure processes have been followed in accordance with applicable laws and regulations" before the sale of any REO properties acquired through foreclosure.
The third-largest title insurer, Stewart, said it stands "prepared to handle increases in volumes of home sales and will continue to provide the assurance of a title insurance policy."
REO supply lines
The robo-signing controversy also threatens to crimp the flow of distressed and REO properties onto the market, with lenders already voluntarily withholding some properties from the market in affected states until procedural issues are resolved.
GMAC Mortgage says it has "temporarily suspended evictions and post-foreclosure closings" in 23 judicial foreclosure states while it reviews its procedures.
Elected officials are also jumping into the fray, with state attorneys general demanding proof that lenders are complying with state law, and members of Congress asking federal regulators to do the same.
That’s sparked a debate over whether a slowdown in the flow of foreclosed properties would help some distressed markets, or simply prolong the housing recovery by artificially propping up prices.
"I guess the question is, ‘What’s the benefit of having delayed those foreclosures?’ " O’Toole said.
"When you talk to people about whether it’s a good time to buy, their primary concern is the shadow inventory question. Uncertainty like that makes markets fragile, not healthy. Our goal right now should be to clean out this inventory.
"It always surprises me when I see agents and other folks out there excited that the lenders are getting caught, that the process is slowing down," O’Toole said.
"If the market stays like this for 10 years, it’s great for (ForeclosureRadar), but I’d rather see the Band-Aid ripped off. Instead, we’ve got this government and even industry push to slow down foreclosures, keep inventories low, and support prices. Yet those are the things keeping us from having a housing recovery."
Keith Fleischer, a Weston, Fla.-based broker who’s been specializing in REO and distressed properties for nearly 20 years, said he’s already seen lenders postpone listings of several REO properties scheduled to hit the market in South Florida, removing them from their "pre-list" inventory.
"They’ve been shelved, or put on hold," Fleischer said. "It’s definitely hit the pause button for everybody. There’s talk that there will be a lull in the flow (of REOs) at the end of the year."
In the short run, Fleischer said, that could be good if it allows excess inventory to be burned off.
"If the supply and demand pendulum swings again, we might actually see a slight uptick in value," he said. "As embarrassing as this might be for them, banks might welcome (the slowdown), because it gives them a chance to regroup and batten down the hatches."
In the long run, if the robo-signing controversy stops foreclosures moving through the system entirely, "We’re going to bog down the economy," Fleischer worries.
Cliff Roe, broker-owner of Seminole, Fla.-based Cliff Roe Realty Inc., said that while it’s "too early to do much more than speculate or apply common sense" to the robo-signing controvery, he’s already seen 25 percent of the 200 REO properties he’s representing placed on hold.
"Each day we acquire more properties and have individual properties moved from ‘market’ to ‘don’t market, maintain,’ " Roe said. "It’s early in the process but I expect at least 80 percent of my properties to be placed on hold."
Roe said that as commissions dwindle, many brokers specializing in REOs will be forced to lay off experienced workers and have difficulty keeping up the weekly property inspections required by lenders.
"Several brokers are refusing to take new listings because they can’t afford to maintain without income," he said. "I haven’t reached that stage but I just opened two new offices, which carry fixed overhead, with little hope of any of the assignments turning into active listings. The question we all face is: ‘How long can we hold out?’ "
Roe sees one possible way out: a judgment declaring all closings finalized through a certain date — "otherwise the system fails."
Fleischer said that if there’s an upside to the crisis, it’s that loan servicers may spread their foreclosure workload in judicial foreclosure states out among more law firms.
Even before the robo-signing scandal started making headlines, there were issues with many files handled by the law firms embroiled in the controversy in Florida, he said.
Most were small issues that could be handled with an addendum, but in some cases, files had to be pulled and the foreclosure process started over.
"If they spread it out, it will serve everybody a little better," Fleischer said. "These (law firms) got way too big way too fast, doing everything they (could) to hammer stuff through the system."
If worse comes to worst and title insurers balk at insuring title on foreclosures, Fleischer said, the government might have to step in as it did to ensure that Florida homeowners continued to have access to homeowners insurance after Hurricane Katrina and other costly storms.
Fleischer said he and his family live in a home that was foreclosed on eight years ago, and that he wouldn’t balk at buying now.
"I would buy it today," he said. "I wouldn’t hesitate."
Sharon Lachowicz, an agent who’s specialized in South Florida REOs for 26 years, said the robo-signing scandal has only added to uncertainty in her market, which is still recovering from the impact of the Gulf oil spill.
"I would say buyers and investors are skeptical about everything," Lachowicz said. "We’ve never had them so skittish."
Lachowicz, of United Realty Group/BPO Brokers, said distressed properties are practically the only homes selling in her market.
"I haven’t sold a house to a regular buyer in six or eight months — only investors," she said. "I know several investors who bought 10, 15, 20 properties last year are not purchasing any properties right now."
If a would-be buyer asked for her advice about the robo-signing controversy, Lachowicz said, "I think it’s something they need to be aware of. They may want to ask an attorney for advice, if there needs to be some kind of addendum in the contract or at closing, to make sure everybody knows everything that’s going on with the transaction."
Political fallout
Even if title insurers, homebuyers and investors decide it’s safe to continue doing business in REOs, the likelihood of intervention by state and federal officials seems to grow by the day. That increases the chances that the conterversy will also affect non-judicial foreclosure states in which most foreclosures are handled outside of the court system.
More than 30 House Democrats from California signed a letter Monday urging federal regulators to investigate loan servicers’ handling of foreclosures, saying it was "time that banks are held accountable for their practices that have left too many homeowners without real help."
U.S. Sen. Robert Menendez, D-N.J. has asked lenders for proof that they have implemented safeguards "to prevent unjustified rubber-stamp foreclosures" in the future.
Menendez — chairman of the Senate Banking Committee’s housing subcommittee — has also requested that the Government Accountability Office look into the adequacy of federal oversight of mortgage companies.
The "robo-signing" scandal has also attracted the attention of attorneys general in states including California, Florida, Massachusetts, Delaware, Connecticut, Texas, Ohio, Colorado, Illinois, Iowa, and North Carolina.
California Attorney General Jerry Brown, who is running for governor, has sent letters to GMAC Mortgage parent Ally Financial and JP Morgan Chase demanding that they prove they are in compliance with California law, or stop foreclosing on homeowners.
Texas Attorney General Greg Abbot has sent letters to 30 loan servicers calling on them to halt foreclosures and sales of foreclosed properties until they have completed a review of their foreclosure processes.
North Carolina Attorney General Roy Cooper said today that his Consumer Protection Division is investigating 15 lenders, including Bank of America, Wells Fargo and CitiMortgage, to ascertain if they failed to complete proper reviews while signing off on large numbers of affidavits related to foreclosure properties.
Ohio Attorney General Richard Cordray, who last week asked Ohio judges to conduct special reviews of all foreclosure cases involving GMAC Mortgage, said in a statement that he plans to announce a lawsuit today against "a national loan servicer for fraudulent practices potentially involving hundreds of Ohio mortgage loan foreclosures."
In a conference call with investors today, Lender Processing Services’ president and CEO, Jeffrey Carbiener, said the robo-signing controversy appears to be having a greater impact on properties already in the foreclosure process or held by banks, and may not slow the flow of delinquent loans into foreclosure.
LPS, which provides technology and services that are used to service about half of U.S. mortgages, held the conference call after the company’s stock was hit by concerns that LPS could face liability from robo-signing lawsuits, or lose revenue if foreclosures slow.
On Monday, the company issued a press release it said was intended to address "recent mischaracterizations in the media regarding the default-related services LPS provides to mortgage lenders," including work performed by subsidiary Docx LLC.
LPS acknowledged that a Docx manager allowed a subordinate to sign off on assignments of mortgage prepared for two loan servicers in 2008 and 2009, but said LPS immediately took remedial action to correct those assignments when it learned of the practice.
LPS is also facing a lawsuit, filed in U.S. Bankruptcy Court in Mississippi, over a fee-splitting arrangement with law firms that received referrals from LPS in bankruptcy and foreclosure cases. Carbiener said the company won a similar lawsuit in Texas two years ago.
As for the future, "It’s only a couple days into this thing, so there’s really no way to accurately gauge any of these potential proposals that we’re hearing being bounced about at the state level, at the federal level, through legal channels," Carbiener said.
"But what we’re hearing from our customers and from what we’ve read in these early proposals is that they’re more likely to impact foreclosures that are already in process or are potentially completed and the properties are still held by the banks," he said. "And they’re not necessarily impacting the new flow of (properties) into the foreclosure process, which is a good sign for us."
If that turns out to be true, Carbiener said, "then we should continue to see the new flow come into the foreclosure process, and seriously delinquent loans shifting into foreclosure, which should fuel our revenue streams."
