The paperwork scandal that has prompted several banks to halt evictions and review their foreclosure procedures is reminiscent of the predatory lending scheme that inflated the housing bubble.
"It's the same process, falsifying documents to make them look acceptable to someone," said Tom Domonoske, a lawyer and consumer advocate in Virginia. "They're falsifying foreclosure documents so judges will look at them and say, 'Here's an affidavit. It's signed.'"
Domonoske represents Virginia and Donald Naill, who unwittingly found themselves in an exploding mortgage after refinancing in 2006. "I figured they had my taxes, my Social Security number, that they knew everything," Naill told HuffPost last year. She and her husband live on Ordinary Road in Mineral, Va.
The broker who put the Naills in their "stated income" adjustable loan, on which the interest rate and monthly payment jumped dramatically after two years, admitted in a sworn deposition last fall that the loan application was bogus. "It was a stated deal on this particular one, so -- and again, the Naills knew that we was doing a stated deal," the broker said. "So, and of course, we always -- I always, anyway, told my client that, 'If you're getting a stated deal, you know we're stating your income. So you all need to make sure that you're going to be able to abide by making your monthly payment.'"
Several of the nation's largest banks have announced in the last two weeks that they are halting evictions and investigating their foreclosure procedures after employees at "foreclosure mill" law firms admitted in sworn depositions that they never verified information in potentially hundreds of thousands of foreclosure documents.
The bogus loans and bad foreclosure paperwork are both the result of Wall Street's massive appetite for mortgages during the housing bubble, experts say, as banks repackaged mortgages as asset-backed securities and sold them to investors. As mortgages repeatedly changed hands, servicers in many instances lost track of who owned them. In states where foreclosures need a court's approval, servicers now find themselves unable to prove they have a legal right to foreclose.
"The birth of the securitization concept has created both problems," said Jim Kowalski, a foreclosure defense attorney in Florida. "It created a beast that needed to be fed at the front end with sloppy originated loans and a huge beast at the back end with those loans going through the foreclosure process."
Rep. Alan Grayson (D-Fla.) also pointed to securitization in a video explaining the foreclosure paperwork scandal. "Securitizing mortgages was originally a way to take the cost of a mortgage off of a banks' books. From 2005 onward, the securitization chain went out of control and Wall Street wanted as many mortgages as it could get as quickly as possible and as cheaply as possible. In order to allow it to pull out more fees at every link in the chain, these subprime lenders, trusts and banks decided to cut as many costs as possible including the cost of record keeping," Grayson said.
"Obviously the banks do not want to grapple with the consequences of trillions of dollars of securitized mortgages having no legal standing to foreclose, so they have simply created a system where they use foreclosure mill law firms whose business is to forge documents showing or purporting to show they have the legal right to foreclose."
As for the Naills, Domonoske said that their foreclosure, which he is fighting as a contract attorney for the Virginia Legal Aid Justice Center, is not an example of the foreclosure paperwork scandal. But the fact that their servicer, GMAC, suspended foreclosures in 23 states, may help the Naills' case. "Unless and until GMAC Mortgage fixes the problems in its foreclosure process," wrote Domonoske in a Sep. 28 filing, "this Court should allow the legal issues before it to be decided before allowing GMAC Mortgage to engage in this foreclosure."