Florida Bar News

Who owns the note?

Who owns the note?

Senior Editor

John Adams, as a new lawyer, was very nervous when he tried his first case in court, according to biographer David McCullough.

The future second president of the United States was representing a man whose crops were damaged when a neighbor’s horses broke through a fence.

He lost the case because, in preparing the necessary writ, Adams omitted the required words “the county in the direction to the constables of Braintree.” (Or perhaps that technicality was important because his opposing counsel was the son of the judge.)

There’s an echo of Adams’ woes resounding in mortgage foreclosures and the scandals surrounding faulty paperwork filed in Florida and around the country by lenders and those servicing mortgages.

Questions raised include: How widespread is the problem with “robosigned” documents, that is, foreclosure paperwork signed by people who aren’t familiar with the cases and who haven’t personally verified the information is correct? Or problems with improper notarization of foreclosure documents, with improper service, or with missing mortgage assignments, or in some cases outright forged documents?

What’s the Significance?

Beyond that, are the problems with the documents significant? Are they just technical and don’t affect the underlying failure of the borrower to repay the lender? Is a missing assignment as mortgage notes change hands more or less significant than a robosigned affidavit? Are paperwork snafus significant challenges to the functioning of the legal system that also carry implications on the trustworthiness of the title of foreclosed property?

The answers may well affect the ability of Florida courts to handle nearly 400,000 pending cases. Florida’s court funding is also heavily dependent on forclosure filing fees. The slowdown in filings following the revelations a year ago of paperwork problems turned a surplus in court funding into a deficit and forced the courts to borrow money to finish the last fiscal year and begin the current one.

For the moment, title insurers, key to a functioning real estate market, say they are still underwriting titles for foreclosed properties sold by banks (but not if the banks retain the title). That’s because of Florida case law and what they see as due process protections in the foreclosure process that give foreclosed property owners a chance to challenge.

Boca Raton’s Margery Golant, who defends homeowners in foreclosure actions, said she thinks robosigning is nearly universal in foreclosure paperwork.

“Most of these cases are not litigated. Those that are, the plaintiffs fight tooth and claw to avoid discovery,” Golant said. “They don’t want to explain themselves, and when they do have to explain themselves, they can’t.”

“If you know what you’re looking for, you can find the fraud on the face of the document. It’s systemic,” said April Charney, a Jacksonville Area Legal Aid attorney and acknowledged expert on foreclosure defense. “It’s like paperwork HIV; everyone has the same virus because it was so systemic.”

She said the problem extends beyond foreclosures into the paperwork of most mortgages in recent years, because they were handled the same way to get them ready to be bundled and sold as mortgage-backed securities.

“It’s likely in any residential mortgage loan where there has been some transfer from the originating lender. Then you almost definitely have fraudulent paperwork in the chain of title on that loan,” she said.

The problems also were caused by the Mortgage Electronic Registration System, Charney said. Created by the real estate financing industry, MERS, according to its website, “eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

Instead, MERS keeps track of when mortgages and notes are bought, sold, and packaged into securities.

But MERS never did the proper paperwork to allow participating companies to appoint signers for documents or to legally sign the required transfer paperwork, Charney said, a claim that’s been repeated by others. Some courts in other states, including Michigan and Massachusetts (both have nonjudicial foreclosures) have either questioned or banned MERS or MERS documents from being used in foreclosures. (Two Florida district courts of appeal have upheld MERS participation in foreclosures.)

Michael Redman, a founding member of 4closurefraud.com, a citizen group based in Palm Beach County that helps homeowners fight foreclosures, said there’s no difficulty finding defective paperwork.

“The real question is what is the percentage that’s not affected,” Redman said. “I would say it’s in the high 90 percentile that all of it was affected up to early this year.” Despite claims by major banks that they have overhauled their foreclosure paperwork preparation, “I’d say it’s still questionable,” he added.

(Associated Press, Reuters, and the St. Petersburg Times have all published recent stories claiming that abuses in foreclosure paperwork, which banks said were ended last year, nonetheless are continuing.)

“We used to spend hours upon hours in the file rooms, and it would be rare to find one [a foreclosure] that didn’t have some type of issue,” Redman continued. “Either it wasn’t a verified complaint, or the affidavits of the amounts due and owing were not done under personal knowledge.”

Robosigning was rampant, he added, pointing to depositions where signers admitted they signed hundreds of files a day without personally verifying the correctness of the figures.

Redman blamed the real estate financing system during the housing boom. Mortgage originators were eager to collect fees and less concerned with making sure all the paperwork was correct. Financial institutions were eager to take the mortgages and bundle them into securities and weren’t concerned that all the paperwork done before the securities were issued. Much of it was never done, he claimed.

“The problem is there’s no way to fix it without making it [paperwork] up,” Redman said. “It was never properly securitized and transferred.”

The website associated with Redman’s group claims to have uncovered evidence that many mortgage originators stopped conveying the notes accompanying mortgages at the height of the housing boom in 2004-05. In most states, including Florida, possession of the note is necessary to show the entity bringing a foreclosure action actually has the right to collect that debt.

‘Fraud of the Week’

The site also began a feature called “Fraud of the Week,” where it takes 10 randomly selected foreclosure cases and prints the most “egregious” paperwork deficiency — the assumption being there will be no problem finding multiple problems in any selected 10 cases. One problem highlighted by the site last year was a case where two different entities filed “wet ink” signed notes claiming to own the same mortgage. 4closurefraud.com concluded the signatures actually were copies run through a computer to add the blue color and make them look original.

There has been no formal study of foreclosures filed in Florida to determine the extent of the paperwork problems, but the Attorney General’s Office has undertaken several investigations of law firms and private companies that prepare foreclosure documents.

Jennifer Krell Davis, press secretary for Attorney General Pam Bondi, said 11 investigations have been started, and one of those, against a law firm, has been settled. That law firm, which cooperated in the probe, paid $2 million and agreed to follow certain practices in foreclosure cases.

“Our investigations are ongoing,” Davis said. “We would not be able to provide any conclusions regarding how widespread these document issues are.”

A coalition of all 50 state attorneys general is negotiating with banks and other mortgage financiers for a national settlement over problems caused by bad foreclosure paperwork.

“The Florida Attorney General’s Office has been actively engaged in the ongoing multistate settlement discussions and is working to ensure that the terms of that settlement will improve the foreclosure process moving forward,” Davis said.

John O’Brien is the register of deeds for South Essex County in Massachusetts and has gained national attention for his criticisms of foreclosure paperwork filed with his office. Most notably, he called his office a “crime scene” because of paperwork.

O’Brien had a forensic audit performed on 2,000 documents filed in 565 mortgage assignments on 473 “unique” mortgage cases by J.P. Morgan Chase, Wells Fargo, and Bank of America. Among the findings were that owners could be determined only on 60 percent of the properties, and particularly problematic were those that had MERS paperwork or were owned by federal government-sponsored entities, such as Fannie Mae or Freddie Mac.

Of all the assignments examined, only 16 percent were valid, and another 8.7 percent were questionable. Seventy-five percent were invalid. The audit found 27 percent of the invalid assignments were fraudulent, 35 percent had been processed by robosigners, and 10 percent violated the Massachusetts Mortgage Fraud Statute.

“How can I record something done by a robosigner?” O’Brien said. “This is a nightmare, and I honestly do not know what the solution is.”

O’Brien has taken the unusual step of publishing a list of known robosigners and refusing to accept any paperwork with their signatures. Instead, he returns it to the lender, along with an additional affidavit for the lender to certify there is nothing wrong with the paperwork. None of the affidavits have been signed and returned, he said; rather, the lenders have executed new paperwork with other people signing the affidavits and related paperwork. O’Brien said he forwards those redone filings to the state Attorney General’s Office for investigation of possible fraud.

Nonjudicial Foreclosure

Curtis Huertel is the register of deeds for Ingham County in Michigan, which includes the capital of Lansing. Michigan, Huertel said, is a nonjudicial, foreclosure-by-notice state. Many of the larger banks delegated their foreclosure work to MERS — until an appellate court in April found MERS foreclosures illegal in Michigan. The court said that MERS, as a recordkeeper, did not actually have a financial interest in the notes, which is required in Michigan to use its nonjudicial foreclosure process. Nor, the court said, could it be given that interest under state law.

The case may still be appealed to the Michigan Supreme Court.

“MERS was given signing authority by the banks to pretty much handle the work. The word they use is ‘nominee,’” Huertel said, adding that term is somewhat vague since it doesn’t specify that MERS is the servicer of the mortgage. “Loans go into the MERS system; they can be transferred from one bank to another. They were given signing authority, authority to do the transfers, and authority to do the foreclosures.”

It’s not an inconsiderable problem since, Huertel said, MERS has handled about 35 million mortgages, or about half of the residential market in the U.S. That it may have recordkeeping problems is not surprising, he added, because it had, until recently, about 65 employees. It recently added about 2,000 lawyers as “vice presidents,” Huertel said, to help with the paperwork, but that caused controversy because in some cases it hired lawyers in firms that also were representing MERS in foreclosure cases.

The ruling by the Michigan court on MERS foreclosures caused a huge problem. Homes in the middle of foreclosure were in some cases given back to owners who had already vacated — and after the homes had been empty for months or even years with resulting maintenance problems.

As for people who bought foreclosed homes from MERS before the ruling, Heurtel said it’s likely those sales will be considered final, although the owners may have to bring actions to quiet titles.

Aside from the MERS problems, Heurtel said he’s seen robosigned documents, fraudulent signatures, and notary fraud, although he hasn’t been able to do a forensic study. When he finds a questionable record, he forwards it to the Michigan Attorney General and the FBI. He also said under Michigan law he cannot refuse to record a submitted document “irregardless of whether there’s fraud.”

(Florida’s clerks of courts say they’re caught in the same bind. They have no statutory authority to refuse a filing and no authority to screen them for accuracy or fraud. Even if they did, they don’t have the money to pay for such reviews.)

Loss of Faith in the System?

Golant, the Florida attorney who defends foreclosures, said the paperwork problems have implications both for property owners and for the legal system. Improperly done foreclosures may create difficulties for subsequent owners if the title is challenged. There’s also a question about whether shoddily done foreclosures undermine faith in the legal system.

“The whole machinery of foreclosure just totally, obviously disrespects the legal system,” Golant said. “They’re producing what looks to be legitimate documents which are meant to fool the legal system. When you have people swearing that they’re vice presidents of companies they don’t work for, and when they are swearing they have personal knowledge of facts when they don’t, it undercuts the entire legal system.”

O’Brien, the Massachusetts deed recorder, put it like this: “What I’m trying to point out to people is whether people make their mortgage payments or not, you do not go into a court of law and try to take someone’s home away with fraudulent documents. That’s not what we do in America, but that seems to be the case here.”

Redman, of 4closesure.com, said citizens’ confidence in the legal system is being damaged, and homeowners would never be able to get by with sloppy paperwork and questionable signatures if they were suing the banks.

“If they did a tenth of what’s being done to them, they would be prosecuted,” Redman said.

Future Titles in Question

Goland and Charney said there also are implications for subsequent owners of foreclosed properties, because an improperly foreclosed home can lead to title questions.

Alan Fields, executive director of the Florida Land Title Association, said alleged problems in the foreclosure process, from faulty documents to charges that some homeowners were never served with papers, are being closely watched by title insurers.

He said much will depend on what Attorney General Bondi finds in her ongoing investigations of paperwork irregularities.

In cases of questionable service, “there’s no due process if you haven’t served someone,” Fields said. “Any sale affected by that kind of failure can potentially be set aside at anytime in the future.”

Robosigning, he added, is a concern because it could lead to the wrong entity foreclosing on a property, while “there is a real owner of the mortgage still out there who can show up at a later date.”

For the moment, title insurers in Florida are continuing to issue policies on properties sold following a foreclosure.

“The case law in Florida is fairly supportive that once you completed a judicial foreclosure, the bona fide purchaser is protected from having their foreclosure transfer overturned,” Fields said. “The case law is fairly strong on that, but it’s also fairly old, dating back to the Depression. Here we have a different fact situation. One judge saying, ‘No, I’m going to set aside these foreclosures even though they’ve been sold,’ it would lock up all the foreclosure sales in Florida because no one would insure them.. . . Right now, most banks are able to find someone, after a facial review of the file, willing to insure it.”

However, he added, it’s different if banks keep the title. Then insurers aren’t willing to step up because the banks do not have the protection of being a bona fide purchaser.

For those looking to purchase foreclosed properties, Fields said getting title insurance will remove the risk associated with any future challenge.

Pat Jones, associate general counsel and vice president for underwriting for Attorneys’ Title Fund Services, said while robosigning and other document problems “are troublesome, we have not heard of many instances where the information on the affidavits is flawed or inaccurate as to the indebtedness itself. The improper execution of documents in a foreclosure action is not something that a title examiner can readily identify.”

Due process protections of the foreclosure process are important, she said, because it means that owners have been served and have a chance to challenge the validity of a foreclosure, including supporting documents. That’s one reason that judicial foreclosures, in the Fund’s opinion, are more worthy of underwriting than nonjudicial foreclosures.

“The Fund firmly believes judicial foreclosure gives borrowers every opportunity to raise all defenses, procedural and substantive, that they might have to an attempted foreclosure of their property,” Jones said.

“It is those due process protections that provide confidence to purchasers of foreclosed property.”