Officials at two major banks admit that they filed fraudulent documents in hundreds of thousands of foreclosure actions. African-American and Latino borrowers are roughly 75% more likely than white borrowers of similar economic backgrounds to face foreclosure. Cases against subprime lenders for mortgage discrimination are proceeding in courts across the country. Isn't it high time to admit that mortgage lending in the United States and the foreclosures that have followed are so tainted by fraud, abuse and illegality that a moratorium on all foreclosures, everywhere, is the only just response?
Seismic tremors ran through the financial industry last week as two banks--Ally Financial (formerly GMAC) and JPMorgan Chase--admitted to filing fraudulent documents in potentially hundreds of thousands of foreclosure cases. This is likely the greatest fraud ever perpetrated on the courts of this country. These banks have agreed to halt foreclosures in the courts of 23 states (in the remaining 27 states, foreclosures do not need court approval). And the jury is still out on whether more banks will come forward with similar admissions. In fact, late in the week, without admitting any wrongdoing, Bank of America announced it would also halt foreclosures in the same 23 states to review its foreclosure practices.
The problems arise from the court documents the banks and the mortgage servicers file when pursuing foreclosures. These documents must contain allegations that the lender holds a mortgage on a property and that the bank's records indicate that the borrower is delinquent on that mortgage. Bank officials must confirm the allegations in these documents under oath and sign them in front of a notary. Effective advocacy by a handful of lawyers for borrowers uncovered the following: that bank officials falsely alleged that they had reviewed bank records in preparing the documents; that these officials claimed to have signed the documents (when, in fact, an electronic signature was often used); and that notaries were nowhere to be found when the documents were prepared. In other words, bank officials lied through their teeth: first when they alleged to have reviewed bank records, next when they said they had signed the documents, finally when they said they did so in front of a notary.
Such fraud on the court could serve as grounds for both contempt charges and criminal penalties, and its disclosure has led these banks to halt foreclosure proceedings in nearly half of the states. In terms of criminality, the Secretary of State of Ohio has referred thousands of these "robo-signed" files to the local federal prosecutor for possible criminal prosecution. A federal bank regulator has urged the seven largest banks to confirm the legitimacy of their foreclosure processes and Fannie Mae and Freddie Mac have asked their army of over 1,000 loan servicers to review their foreclosure practices as well. In California and Arizona, states not covered by the three banks' voluntary foreclosure ban because court approval is not required for foreclosures in those states, elected officials have asked banks to suspend their foreclosure operations to afford officials an opportunity to determine whether bank practices there were plagued by problems similar to those exposed in the judicial foreclosure states. But the fraud and abuse does not stop with foreclosure filings.
A recent study by the Center for Responsible Lending revealed that African-American and Latino borrowers are roughly 75% as likely as white borrowers to face foreclosure, even controlling for borrower characteristics. This should come as no surprise once one realizes that during the height of the mortgage frenzy African-American borrowers were 70% more likely to be saddled with subprime loans as whites of similar income. For the African-American middle class it was even worse. The New York Times found that African-American borrowers in New York City earning $68,000 yearly were five times as likely to be steered into subprime loans as white borrowers of similar, and even lower, incomes.
These discrepancies have led to lawsuits by private litigants, state attorneys general and even cities, seeking compensation from subprime lenders where lending patterns had racial overtones. Recent victories in these cases may pave the way for more litigation exploring this issue. In Baltimore, where elected officials sued Wells Fargo over allegations of discriminatory lending patterns in the city, a federal judge recently found the plaintiffs' claims "theoretically viable." In order for their case to proceed, the plaintiffs must now offer specific details to support their claims, which they should be able to do. Similarly, in a lawsuit against GreenPoint Mortgage Funding for racial steering of subprime loans, the trial court there recently recognized the case as a national class action, meaning that all African-American and Latino borrowers steered to subprime loans by that bank have a chance to prove that they were the victims of discriminatory lending.
But subprime lending did not just occur along racial lines. In many instances, it was also riddled with fraud. Banks like Bank of America and Fremont Bank have been forced, through litigation, to agree to modify fraudulent mortgages, with BofA agreeing to set aside $8.4 billion to modify subprime loans, the largest settlement in a predatory lending suit in U.S. history. Fremont Bank, sued in Massachusetts by Attorney General Martha Coakley, must seek judicial approval if it wishes to foreclose on any subprime loan with predatory features in that state, even though judicial approval is not generally necessary when foreclosing there.
With all of these questions about the legality of mortgages and the legitimacy of foreclosure filings, how much is too much? Simply put, it's time for a blanket moratorium on foreclosures. Such a moratorium could be accomplished by state legislatures, even Congress. But passing legislation to mandate a ban at this time may be difficult, if not impossible. A more likely ally in such an effort is state judicial systems, which are not only inundated with foreclosure filings to the detriment of other cases on their dockets but have also been victimized by the robo-sign scam and face the prospect of being perceived as doing the bidding of the banks despite the fraudulent nature of bank filings. While the Florida Supreme Court has rejected Rep. Alan Grayson's (D-FL) request for a moratorium on all foreclosures in the state due to the robo-signing scam, the Attorney General of Connecticut and Senate hopeful, Richard Blumenthal, has made a similar request to the Connecticut court system, but has yet to receive a response.
If state judicial systems as a whole will not halt foreclosures, individual judges have the power to bring about a shutdown of the system on their own. Indeed, trial judges have nearly unfettered discretion to control their court calendars. What we need is a little judicial moxie to staunch the torrent of foreclosures. Judges can suspend cases indefinitely if they have any doubts about court filings, or fear borrowers have been the victims of discrimination or fraud. They can also give litigants a date to return to court that is months into the future: enough time for borrowers to consult with attorneys to review their pleadings and court documents. In states where banks do not have to go through the courts to carry out their foreclosures, lawsuits, like those filed against Bank of America and Fremont Bank, could prevent banks from pursuing non-judicial foreclosures where they are tainted by fraud or discrimination.
County officials can also get creative: non-judicial foreclosures often need approval from local government officials, like county clerks. These officials too can delay approval of requests for foreclosure auctions coming across their desks. Since banks have filed fraudulent documents with the courts, it is likely that they have also done so with local officials. Such fraudulent filings would give these officials grounds for rejecting or delaying foreclosure auctions, offering another avenue to achieve a foreclosure moratorium.
Some might argue that a moratorium on foreclosures would amount to a borrowers' holiday: license for homeowners to stop paying their mortgages. But the moratorium would not have to be permanent. A temporary moratorium, one that lasted a few months, would give judges, court personnel, borrowers' attorneys and the staff of lenders and servicers the opportunity to assess the legality of foreclosure processes and even the underlying mortgages.
Regardless of the duration of the moratorium, a halt to foreclosures is necessary to ensure that the judicial system is not used to perpetuate and endorse fraud, and that our courts honor the due process rights of homeowners. Such a foreclosure moratorium would also apply pressure on banks and loan servicers to modify more loans, a step that is necessary to reduce the housing stock on the market, and bring borrowers' debt in line with the value of their homes. The Obama Administration's voluntary HAMP initiative has not come close to bringing about the four million mortgage modifications originally envisioned for the program. The threat that federal regulators, state attorneys general and other officials will review bank practices, and that some bank officials may face civil or even criminal penalties, may be just the pressure that is needed to break the back of the foreclosure crisis. At a minimum, it would ensure due process in the courts and bring some peace of mind to millions of borrowers who would prefer to stay in their homes, pay their mortgages and move on with their lives.
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This is just postponing the inevitable.
Consider the plan by the banks from the beginning to use other people's money to finance home purchases made by shaky borrowers on bad mortgage documents. The banks then became the servicers (not the note-holders) and collected fees, and now, when they foreclose, they generally don't have standing and even go so far as to falsify documents. Massive fraud on the front end and the back end. With a shadow inventory of maybe 7 million homes, if even 10% of borrowers who were foreclosed upon move to vacate the judgments, we're looking at years of litigation and the potential implosion of the banking system, to say nothing of the title issues and a complete halt of the real estate market.
Think it through and you can see why the media hasn't caught up with coverage. They simply don't understand how enormous the problem really is.
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