Sloppy paperwork exacerbates the foreclosure crisis
Sloppy paperwork exacerbates the foreclosure crisis
‘People weren’t paying attention to the paperwork, and they are trying to fix it during the foreclosure process’
As Florida courts use a special state appropriation to attack a backlog of foreclosure cases, a major company has at least temporarily halted foreclosures after admitting it took shortcuts in preparing the necessary paperwork.
GMAC Mortgage, which received $17 billion in federal support and is now part of Ally Financial, took the action after an employee acknowledged in depositions that the company did not follow the letter of the law in preparing foreclosure paperwork.
The employee said he signed thousands of foreclosures each month without personally knowing that all the information in the files was correct and that his signature was notarized later as part of the paperwork process. GMAC Mortgage halted foreclosure actions in Florida and 22 other states that require foreclosures to go before a judge.
The halt affects only GMAC mortgages, but the company also handled foreclosure paperwork for Fannie Mae and Freddie Mac, the federally backed companies that play a huge role in the housing market.
Shortly after GMAC announced it’s action, JPMorgan Chase and Bank of America announced they were halting foreclosures for the same reason.
“Right now, it’s too early to tell anything,” said Kris Slayden, who oversees foreclosures for the Office of the State Courts Administrator, about what effect the suspensions could have on the state courts. “We’re hearing bits and pieces. We’re going to get together next week [early October] on this issue.. . . We’re going to do our best to identify the cases that might be affected by this. But we can only do what we’re informed about.”
The Legislature earlier this year allocated $9.6 million to the courts and clerks to attack a backlog of over 500,000 foreclosure cases. The GMAC action came as Slayden and other court officials were working to put together a report on how the first three months of that program fared.
“The report looks at what our target is, how many cases we have disposed of in July, August, and September, and looks at the cases that were cleaned up prior to the initiative and what the backlog is today,” Slayden said. The report is expected to be ready later this month.
She said at the start of July, the backlog was around 550,000 cases.
The revelation by the banks came as judges and some lawyers said the huge number of foreclosure cases was resulting in sloppy paperwork, which was hindering attacking the backlog. Figures from the 12th Circuit showed more than 20 percent of the cases over a three-week period had paperwork or procedural problems that caused them to be removed from a special docketed system to speed up foreclosure cases. Those numbers generally did not include the types of problems revealed by GMAC.
The GMAC process was detailed in a September story in The Washington Post and followed up by stories in the Post, The New York Times, and other newspapers. An article in the Orlando Sentinel reported that 940 cases in Palm Beach County and 865 in Broward County were affected by GMAC’s litigation moratorium. The Post also reported that an employee of JPMorgan Chase said in a deposition that she signed off on thousands of foreclosure cases without verifying the documentation.
The articles also contributed to a debate between plaintiff and defense lawyers in foreclosure cases, with defense lawyers saying the paperwork problems infringe on homeowners’ rights and plaintiff lawyers and lenders saying the problems are only technical and didn’t affect the underlying validity of the mountains of foreclosure filings.
Eleventh Circuit Judge Jennifer Bailey oversees foreclosures for her circuit and also chaired a special committee for the Supreme Court that recommended the now-in-place foreclosure mediation program for homeowners. She offered an explanation for growing indications of paperwork problems with foreclosure cases, pointing to the practice of the last decade of bundling mortgages into frequently traded securities, instead of banks or other institutions holding mortgages individually.
“It’s like stock. If you have a retirement account, none of us actually have stock certificates anymore. We get brokers’ statements. We don’t ever see paper; we get a notice of confirmation,” she said. “In many ways during the mortgage securitization process, that is what was happening. These things were being shifted around electronically, and frequently what happened is the paperwork didn’t catch up.
“In all this flying around, people weren’t paying attention to the paperwork, and they are trying to fix it during the foreclosure process instead of before filing the foreclosure process.”
Complicating the issue were banks and the law firms handling foreclosures for them that weren’t ready for the tidal wave of foreclosures.
“The business model that the large foreclosure firms established was at a time when Miami-Dade County had 5,000 to 6,000 foreclosures, instead of 70,000 to 80,000,” Bailey said. “The business model did not adapt.”
The judge doesn’t have to look far to see the problems. She said there’s one case before her where the bank official signed the paperwork in California, but the signature was notarized in Florida. She’s seen other cases where lawyers drop off stacks of papers, without stapling anything together or putting the documents in any kind of order.
Paperwork difficulties are not a problem exclusively for plaintiff firms. Bailey said many defense firms are signing up multiple clients and then filing identical motions seeking to delay foreclosures, without considering the individual facts of a case. That’s something 15th Circuit Judge Meenu Sasser, who oversees foreclosure dockets there, has also seen.
“There’s sloppy paperwork on both sides; people not complying with the rules of civil procedure, people filing late affidavits. We just don’t tolerate it,” Sasser said. “We’ve hired the case managers with the funds provided to us by the state and we have case managers check every case file before we go to summary judgment.”
Both circuits have used the special state money to hire case managers to review files, which has helped improve paperwork, end cases where attorneys don’t attend hearings, catch service and notification problems, and move cases.
But Bailey noted that screening won’t catch a problem like that revealed with GMAC, where a company employee verifies personal knowledge of the case that he or she actually does not have.
“It’s an issue that needs to be taken seriously. There are a lot of firms working off a volume model for both plaintiffs and defendants,” she said. “Every case deserves a lawyer and representation that addresses the individual merits of that case. The affidavits in support of or in opposition to summary judgment should be addressed to the individual characteristics of that case by individuals knowledgeable about that case.
“I’m not sure the business model that treats all these cases the same by the plaintiffs’ law firms, by the defendants’ law firms, and by the service firms, serve the court system, the stockholders, the taxpayers, and the people of Florida well. This may be an opportunity for everyone who is a stakeholder in the system to reevaluate their approach.”
Boca Raton attorney Margery Golant once worked for a major mortgage servicing company. Now she defends property owners facing foreclosures. She rejects contentions that problems like those revealed at GMAC are merely technical.
“That’s saying all the due process and procedural matters are just technical,” she said.
She said the GMAC disclosure is only the tip of the iceberg.
“This is extremely pervasive; it’s the norm. They have people who sign these things who claim to be vice presidents of Chase or Citibank, but they’re not. We call them fake vice presidents.
“They’re not on the payroll.. . they’re usually low-level clerks. They don’t know anything; they’re professional signers,” Golant said. “It’s a huge issue, and it’s an issue that the defense bar has been raising for quite a while, and the judges have been looking at us funny.”
One partial reason why it hasn’t come up before, she said, is the majority of mortgages have been uncontested, so the paperwork hasn’t been challenged much.
Golant noted the Florida Attorney General’s Office is investigating four major plaintiffs’ foreclosure law firms over document problems, as well as one company that prepares foreclosure paperwork for lenders.
Shortcuts are unacceptable, she said, because the mortgage system has become highly computerized, resulting in mistakes that are difficult to correct or bring to the attention of lenders.
“I have cases where people were not in default when the foreclosure was started,” Golant said. “There are still certainly people who don’t have money and can’t pay. But many are not in that category, and that’s why it is essential the strict due process be adhered to. But with the volume, that’s difficult.”
It’s also important to observe due process because of other problems Golant said she’s seeing in the system.
One is that process-servers have become as overwhelmed as other parts of the foreclosure system, she said, and consequently many property owners aren’t getting served, even though servers claim notification has been delivered.
“These people are out there running roughshod, filing false returns or filing a non-service and saying the defendant was not available to service and setting it up for service by publication,” Golant said. “I have a case where the return by the process service is completely dishonest; he made representations that are provably and absolutely not true.”
Many owners could have cured overdue payment problems but failed to get the required pre-suit notice of foreclosure, she said. And owners with legitimate defenses are handicapped when service is faulty, as are those where a foreclosure was filed in error, she added.
Another problem stems from insurance. Lenders require that owners maintain insurance. But if an error accidentally lets that insurance lapse for a few days, the lender can bring in an insurer, with the premiums passed to the property owner.
The problem, Golant said, is that “force-placed” insurance typically has premiums several times that of the prior insurance. In one case, she said, it was 10 times the previous premium. One of her clients saw his monthly payment go up about $800 because of force-placed insurance.
Frequently, she said, the problem is a minor mistake by owners, faulty record-keeping by the mortgage servicer, or even the insurance company not notifying the owners of time for renewal. Then the lenders force the new policy without notifying the owner or giving the owner a chance to correct the problem.
Golant also echoed what other judges and lawyers have said: A hurried foreclosure process with suspect paperwork only causes further burdens on the court system because it could cloud titles to affected properties. One major mortgage service company requires buyers of foreclosed property to waive all claims to defective title if a problem develops, she said.
“They know they’re not doing it right,” Golant said.
The solution, she said, is to make sure every case follows proper procedures and has correct paperwork, even if that means taking longer to work through the foreclosure backlog. The alternative could have negative impacts on property values and create legal problems that could take 25 years to resolve.
“The fact that the foreclosure plaintiffs are in a hurry doesn’t mean the courts have to be. It would really make much more sense to say, ‘Take your papers back, go away, get your act together,’ and then set another hearing,” Golant said. “The foreclosure firms hire people; they hire people as inexpensively as they can. They’re trying to do it the cheapest and fastest way they can, and the problems ultimately land in the laps of the judges, and ultimately all of us.
“The sense of urgency comes from the foreclosure plaintiffs’ side, and I think the first step is not to buy into that.”