The Foreclosure Mess: It’s Even Worse in ‘Nonjudicial’ States
In 23 states, before a lender can foreclose on a homeowner for defaulting on a mortgage, it must take the homeowner to court. As we’ve seen, even with judicial review that process has still been shot through with problems. But for a troubled homeowner in California, Texas and 25 other “nonjudicial” states, the robo-signing scandal and foreclosure mess are even more dangerous because the lender doesn’t have to go to court to foreclose. Fraudulent paperwork can be used with impunity unless the homeowner is in bankruptcy, which is a judicial process, or unless the homeowner is represented in the foreclosure by an attorney who knows what to look for.
Similarly, solving the problem in these nonjudicial, or “deed of trust,” states will be correspondingly harder: Simple solutions like changing the rules of legal practice as New York has done, won’t work. There is an existing solution, however: criminal prosecutions. In California it’s illegal to file the fraudulent documents, and in Texas it sure seems to be. But don’t hold your breath waiting for a massive crackdown.
Meantime, to see why homeowners in nonjudicial states face a more perilous situation (as the pictured protesters in Los Angeles are trying to publicize), here’s a closer look at the problem in both California and Texas, two nonjudicial states that combined are home to 1 in 5 Americans:
Speed Is the Issue in Texas
The Texas foreclosure process is swifter than California’s, much swifter, giving homeowners who don’t declare bankruptcy very little chance to contest the foreclosure, much less discover document fraud. In Texas, a bank that wants to foreclose sends a letter to the homeowner, telling him he’s in default and how much he needs to pay to cure the default. Twenty days after mailing the notice, the bank posts a notice of foreclosure sale at the courthouse, literally tacking it up on the wall, records it at the county office and notifies the homeowner. Three weeks later, the home can be sold. Start to finish, the process takes less than half the time of California’s three-month cure period.
The fraudulent and robo-signed documents show up in the same as in California — in the land records when the deeds of trust are “assigned” to the entity wanting to foreclose. I spoke with three attorneys who deal with these problems in the context of bankruptcy, Karen Kellett and Thad Bartholow of Armstrong Kellett Bartholow, and Pamela Stewart, who has her own firm.
All three see bogus documents including, as Bartholow notes, recent filings from Countrywide Home Loans. Don’t be fooled by the fact that MERS is acting as Countrywide’s nominee: Countrywide doesn’t exist and can’t have nominees. MERS is not acting on behalf of Bank of America (BAC), which bought Countrywide. Stewart noted that she sees problem documentation in 99% of her cases. She also notes that the problems with getting loan modifications done make Texas’s speedy foreclosure process worse:
“Clients are being told by the modification department, don’t worry, we’re working on it, we’re going to do this, while foreclosure side has started and is proceeding with foreclosure. So clients are surprised on Friday or Monday late afternoon — oh sorry, the modification is not approved, foreclosure is going through. And the sale is the next day. And for most of us practitioners, that’s too little time for us to take action.”
Signing at a Faster and Faster Clip
An Addison, Texas, foreclosure attorney appears to be a major robo-signer in Dallas County, executing assignments of deeds of trust and substitutions of trustees for myriad entities he doesn’t work for. According to the Dallas County Records, “Stephen Porter” from the firm Barrett, Daffin, Frappier, Turner and Engle has signed several thousand such assignments in that county alone. A New York judge has held that under New York law, assigning the right to foreclose to your clients — -something you can presumably do only if the other entity is also your client — -is a conflict of interest unless both clients sign off. I called the firm for comment twice, but as of publication have not heard back.
Porter first appears in the records in 1977, but that doesn’t explain why he has signed nearly 8,400 documents in the land records, most of which are assignments and substitutions. Indeed, by January 2006, he had appeared in the records only about 200 times. Starting in 2006, however, his signing practices really took off: over 500 documents in that year alone. This year he’s signed over 3,100 documents through Oct. 27. While that’s not robo-signing on the scale of those who signed hundreds of documents a day, these are filings in only one county, and it’s not even a county in one of the hardest-hit states like California, Florida and Arizona.
That timeline comports with Kellett’s memory of Texas foreclosures, namely, that prior to 2004 or 2005, it was fairly rare to see problematic documents. The problems exploded thereafter. Says Kellett:
“The situation is completely new. The difference in a nonjudicial state is there’s not affidavits filed with a court; there’s not any process that would allow problems to be discovered. And the reason it’s come to light is in bankruptcy court, where the lender has to establish ‘chain of title.’ And it’s there, through discovery and digging, that the fraud and robo-signing have come to light.”
Largely because the problem is relatively new, and the volume of foreclosures so large and so hurried, it has created myriad other grounds to challenge foreclosures. So, attorneys who seek to reverse foreclosure sales prior to eviction don’t rely on the problematic documents to bring suit. A Fort Worth area foreclosure defense attorney I spoke with says: “Typical grounds for undoing a foreclosure are: Improper notice of the default or foreclosure, misapplication of payments or other servicer mistakes that wrongly trigger default, and improper or unreasonable fees or costs put into the reinstatement amount.”
Cracking Down in Texas
Filing fraudulent assignments and substitutions of trustee and related practices appears to be illegal in Texas, too. State Attorney General Greg Abbott recently wrote a letter to banks saying that if the various practices uncovered in the judicial states occurred in Texas, they would violate a half-dozen state statutes.
In addition to the statutes the AG cited, the practices appear to violate the Texas Penal Code. For example, Section 32.21 deals with forgery and requires that a writing be forged and used to with intent to defraud and harm another. A document executed by Countrywide after its demise appears to meet the definition of forged, and using it to foreclose on someone if the bank doesn’t otherwise have the right to foreclose appears to show intent to defraud or harm. And when related documents, like affidavits, get submitted to the bankruptcy court, it would seem Section 37.02 of the penal code — perjury — comes into play. But I’m not licensed to practice in Texas, and I’m not a criminal lawyer, so I can’t say for sure.
If the Texas AG really wants to know what’s going on in his state, I suggest that rather than listen to whatever the banks say in response to his letter, he takes a close look at the land records across Texas. After all, the banks, which keep changing their stories, no longer have credibility.
MCS Names Steve Porter as General Counsel
Mortgage Contracting Services Names Stephen C. Porter as General Counsel
PLANO, Texas, Jul 07, 2014 –
PLANO, Texas – Mortgage Contracting Services, a nationwide provider of property preservation, inspections and REO property maintenance to the financial services industry, has named Stephen C. Porter as the company’s general counsel. He will work in the company’s Plano, Texas, headquarters.
Mr. Porter previously served as chief litigation counsel at the Addison, Texas, law firm Barrett Daffin Frappier Turner & Engel, LLP. In his new role, he is responsible for consulting with MCS management on all legal matters affecting the company.
“Steve has 23 years of experience working in the mortgage servicing industry, and we have no doubt that he is the perfect person to take the helm of MCS’ legal department,” says company CEO Caroline Reaves. “The mortgage servicing industry is facing an unprecedented regulatory environment, and Steve is more than up to the task of guiding us during this interesting time.”
Mr. Porter earned his Bachelor of Business Administration from Baylor University in 1968 and his Doctor of Jurisprudence from Southern Methodist University School of Law in 1973. He also served as a First Lieutenant in the U.S. Army from 1968-1971, including service during the Vietnam conflict.
Mr. Porter maintains the highest AV rating from the legal ranking service Martindale-Hubbell, and he currently serves as a member of the USFN (America’s Mortgage Banking Attorneys), American Legal & Financial Network and the Mortgage Bankers Association. Mr. Porter is admitted to practice before the U.S. Supreme Court, U.S. 5th Circuit Court of Appeals and the U.S. District Courts for the Northern and Western Districts of Texas.
For more than 25 years, MCS has protected and preserved communities across the nation. Some of the largest and most respected banks and mortgage servicers in the industry trust MCS to perform property inspections, property preservation and REO property maintenance services in all 50 states. MCS has a history of providing these services in a highly-regulated environment, the proven ability to handle large volumes of properties, and a record of recruiting and monitoring a substantial vendor network.
The California Foreclosure Process
In California, the basic foreclosure process runs like this: A lender who has a loan that is 90+ days in default contacts the homeowner to “explore options for a borrower to avoid foreclosure,” such as a loan modification. Once contact has been made, or the lender has tried hard enough but failed to make contact, the statutory foreclosure clock starts ticking. Assuming no modification is worked out, 30 days later the lender tells the trustee on the “deed of trust” — the equivalent of a mortgage in judicial states — that the homeowner is in default. The trustee then goes to the land records office and records both a “Notice of Default” and a declaration that the bank reached out to the homeowner but failed to avoid foreclosure.
The lender sends a copy of the notice to the homeowner, which tells her how much she must pay to get out of default and who to contact to pay that amount. The homeowner then has three months to “cure” the default. If she doesn’t, the foreclosure process continues. Once the cure period is over, the trustee records a notice of trustee sale and mails a copy to the homeowner. Twenty days later, the house is sold at auction.
So where does the document fraud and related problems enter the picture?
Robo-signing and Related Fraud in California
I spoke with Walter Hackett, an attorney with Inland Counties Legal Services who had over 20 years of experience in the banking industry before going to law school. Hackett explains that in recent years the foreclosure process has become tainted in several ways. The first issue is unique to California: The declarations that are filed claiming the homeowner was contacted to try to avoid foreclosure have become meaningless:
“The undersigned declares that the beneficiary or its authorized agent has declared that they have complied with California [law] by making contact with the borrower or tried with due diligence to contact the borrower as required by California [law].
Translation: “Somebody talked to the homeowners and couldn’t work anything out, or maybe didn’t talk to them, but tried. We don’t know who called or when, but really, we’re sure somebody did what they’re supposed to do.”
This meaningless filing — that language doesn’t mean the homeowner was really called, much less that the bank tried in any way to avoid foreclosure — reflects the volume of foreclosures and banks’ unwillingness to staff upto do foreclosures well, two primary reasons for robo-signing. Like robo-signed documents, this filing doesn’t reflect personal knowledge by the person signing it. At least, the California declarations are explicit about that lack of knowledge.
Again, It’s About Proving the Right to Foreclose
Hackett explains that the second place the document mess shows up is during the cure period, and it’s classic robo-signing and document fraud. In the mass securitization era, the deed of trust for any given home may have changed hands multiple times, but typically none of those transactions were recorded in the land records. As a result, when the bank that claims to have the right to foreclose decides to do so, the land records almost never show it owning the deed of trust, and thus the bank lacks the right to foreclose. If that problem isn’t fixed, a completed foreclosure could be successfully challenged and undone.
Enter the fraudulent documents.
During the cure period, the bank records an assignment of the deed of trust that gives it the right to foreclose. Sometimes a “substitution of trustee” is recorded, too, replacing the original trustee (traditionally, a neutral third party) with a “trustee” that’s now typically a subsidiary of the foreclosing bank. Or it could be one of the other foreclosure players, such as Lender Processing Services (LPS).
That change is just another way foreclosing entities try to capture every last trickle of the stream of fees that flow from foreclosure. Just as the assignments of mortgage filed in judicial states are routinely robo-signed and otherwise flawed, these assignments of the deeds of trust and substitutions of trustees are often fraudulent. In fact, in Hackett’s experience, less than 5% of these documents are correct. He adds: “This is not about ‘sloppiness’ or ‘cutting corners.’ It’s about a complete disregard for due diligence and accountability for one’s actions, on both a personal and corporate level.”
Unlike in judicial states, however, in nonjudicial states no one looks at the assignments. Although they are publicly recorded, they aren’t sent to the debtor nor presented to a judge. Even if the debtor is represented by counsel, the attorney would be unlikely to review the land records and spot the problem because without special training, most lawyers don’t know what to look for. The only times these documents are scrutinized and possibly exposed are during bankruptcy, when a judge looks at them and usually the debtor has an attorney. In the rarer instances, the debtor has a foreclosure defense counsel that knows how to spot the problem.
Since Hackett knows what to look for, what does he see? Well, he sees robo-signing: One common name he’s spotted is “Bethany Hood,” an LPS employee signing in the name of MERS (the Mortgage Electronic Registration Systems). He also sees defunct entities, such as Lehman Brothers, rising from the corporate grave to assign deeds of trust. In a variation on that theme, he sees assignments where the original, now-defunct lender’s name is changed slightly. For example, he’s seen an assignment by “Quicken Loan Funding,” when the real originator is “Quick Loan Funding”. Finally, a relatively recent fraudulent innovation is filing the assignment after the foreclosure sale has occurred, meaning, the foreclosing bank has sold a house it didn’t legally have a right to sell.
Other kinds of improper practice predate the current foreclosure mess, but they exacerbate it. For example, the amount of money the debtor has to pay to cure the loan, which is stated in the Notice of Default, is usually inflated with charges the bank isn’t allowed to include. The extra fees make foreclosure more likely, since they make curing the default even harder. A study published in the Texas Law Review, which looked at foreclosures in nonjudicial states that were brought before a judge in a bankruptcy, found illegal and improper fees rampant, plus myriad other problems. Again, in the typical nonjudicial foreclosure, the wrongful nature of these fees would never be exposed.
Although the notice the lender records isn’t sworn under oath, like court filings are, it is a felony in California to record a false or forged document (see California Penal Code Section 115, particularly 115.5). So, conceptually it seems very simple to end these practices in the state — start enforcing, on a mass scale, those provisions of law. Or, since California doesn’t have any money to plow into a massive enforcement campaign, perhaps Attorney General and gubernatorial candidate Jerry Brown can dig up enough fraudulent records to leverage a big settlement from all of the servicers. Or maybe that’s just California Dreamin’.
#DidYouKnow The SEC brought several cases arising out of alleged misrepresentations and omissions made in connection with the structuring and issuance of MBS and CDO securities. In 2010, the SEC sued Goldman Sachs and an employee Fabrice Tourre (cont’d) #GoldmanSachs
— LawsInTexas (@lawsintexasusa) August 11, 2019
…for allegedly failing to disclose to noteholders of the Abacus CDO that a short investor had played a significant role in selecting the CDO’s assets. News of the lawsuit caused Goldman Sachs stock price to fall approximately 13%—a market capitalization loss of $14.2 billion.
— LawsInTexas (@lawsintexasusa) August 11, 2019
Texas Attorney General Sends 30 Banks Demand Letters To Halt Foreclosures
By Brian “Newman” Rayl
On October 6th, 2010, Texas Attorney General Greg Abbott sent letters to 30 banks demanding that they halt foreclosures, short sales, and evictions. The letter was in reference to claims from multiple sources that a number of banks have been “robosigning” files involved in these processes illegally. According to the letter sent to Bank of America (NYSE: BAC) from the Attorney General’s office:
“We know that you are aware of the issues raised when Ally Financial, Inc. announced that it was suspending foreclosures on certain properties in 23 states. Bank of America subsequently announced a similar move, again in the 23 “judicial foreclosure” states, apparently because you had the same issues with certain of your employees, referred to as “robosigners.” They had engaged in practices concerning the execution of documents which were used in foreclosures, among which were these:
- Signing thousands of documents per month
- Signing documents without reading them
- Signing affidavits which falsely claim personal knowledge of facts
- Signing affidavits which falsely claim the affiant reviewed the attached documents
- Notarizing documents prior to signing by the signer
- Notarizing documents when the signer was not present before the notary
- Filing documents with records attached that did not correctly reflect loan payments, charges and advances
The Attorney General’s letter goes on to say that if any of the above took place within the state of Texas, the banks would be in violation of a number of state laws including the Texas Deceptive Trade Practices Act, the Texas Debt Collection Act, the Texas Penal Code, the Texas Property Code, the Texas Government Code, the Texas Constitution, and the Texas Rules of Civil Procedure.
The banks that received the Texas Attorney General’s demand letter are:
- American Home Mortgage Servicing, Inc. (AHMIQ.PK)
- American General Finance, Inc.
- AmTrust Mortgage Corporation – Owned by New York Community Bank (NYSE: NYB)
- Aurora Loan Services, Inc.
- Bank of America (NYSE: BAC)
- Carrington Mortgage Services, LLC
- Cenlar, FSB
- JP Morgan Chase & Co. (NYSE: JPM)
- CitiMortgage, Inc. (NYSE: C)
- EMC Mortgage Corporation – Owned by JP Morgan Chase (NYSE: JPM) after the acquisition of Bear Stearns
- First Horizon National Corp. (NYSE: FHN)
- Ally Financial, Inc. – Formerly GMAC
- Home Loan Services
- HomEq Servicing, Inc. – Sold by Barclays PLC (NYSE: BCS) in May 2010 to Ocwen (NYSE:OCN),
- HSBC North America Holdings, Inc. (NYSE: HBC)
- Litton Loan Servicing, Inc.
- MGC Mortgage, Inc.
- Midland Mortgage Company
- MorEquity, Inc. – owned by American International Group (NYSE: AIG)
- National City Mortgage c/o PNC Financial Services Group, Inc. (NYSE: PNC)
- Nationstar Mortgage Company – owned by Fortress Investments (NYSE: FIG)
- Ocwen Loan Servicing (NYSE: OCN)
- OneWest Bank Group LLC
- PHH Mortgage Services Corporation
- Saxon Mortgage Services, Inc. – owned by Morgan Stanley (NYSE: MS)
- Select Portfolio Servicing, Inc.
- Vanderbilt Mortgage and Finance, Inc. – a Birkshire Hathaway (NYSE: BRKA, BRKB) Company
- Washington Mutual (OTC: WAMUQ.PK) – now owned by JP Morgan Chase (NYSE:JPM)
- Wells Fargo & Company (NYSE: WFC)
- Wilshire Credit Corporation – a subsidiary of International Business Machines Corp. (NYSE: IBM)
Some banks had already started halting the processes, such as Bank of America and Ally as mentioned in the letter. There is no guarantee that these banks will actually stop processing these items, and some banks have already come out and said publicly that this letter will not affect their business at this time. A demand letter is not the same as a law, but it is clear that the state of Texas is taking these accusations seriously and has grounds to file suit against these banks on behalf of the citizens of Texas.
Foreclosure sales go forward as Texas AG pushes moratorium
HOUSTON CHRONICLE / SAN ANTONIO EXPRESS-NEWS
Oct. 5, 2010, 11:55PM
It was the first Tuesday of the month, and foreclosure auctions typically scheduled for that day in Texas went on as usual in Harris County and elsewhere, a day after the state attorney general asked that foreclosure procedures stop for review of documentation processes.
Attorney General Greg Abbott on Monday asked 30 lenders to put foreclosures on hold on the heels of foreclosure suspensions in at least 23 other states amid allegations of “robosigning” — processing documents without required review and notarization.
Two major lenders on the list, JPMorgan Chase and Bank of America, declined to comment on Abbott’s request. A Wells Fargo spokeswoman said in a written statement that it doesn’t plan a foreclosure moratorium.
“As a standard business practice, we continually review and reinforce our policies and procedures; if we find an error or if an improvement is needed, we take action,” she said.
Abbott said Tuesday evening that Ally Financial, a major national lender, has agreed to suspend foreclosures in Texas. Ally Financial prompted a nationwide focus on robosigning after an employee admitted signing documents without looking at them or getting them properly notarized.
Abbott said he didn’t expect the letters his office sent out earlier in the week to halt Tuesday’s scheduled foreclosure sales because they had already “moved so far along the process.”
But he warned that lenders not totally confident in their foreclosure practices should comply with a moratorium.
“If our investigation turns up evidence indicating that these financial companies or employees were engaging in fraudulent activity, we’ll put the full weight of Texas law against them in a Texas courtroom, seeking the highest possible penalties,” the attorney general said.
The Harris County monthly foreclosure auction went on as scheduled at the Family Law Center downtown.
Amanda LeCureux, managing partner of The Woodlands-based Foreclosure Information & Listing Service, said the turnout of prospective buyers may have been reduced by uncertainty about Abbott’s instructions, but that no sales were pulled.
LeCureux expressed skepticism that the attorney general has the authority to order a halt on the foreclosure process, and that his action so far seems to be a request for voluntary compliance although the letters to lenders are couched as demands.
Jeff Boyd, a former deputy attorney general in Texas, said Abbott can try to force the lenders to comply by seeking a court order.
The Texas Deceptive Trade Practices Act — which the state contends some companies may have violated if their employees engaged in robosigning — allows consumers to recover attorney fees and damages.
The act also empowers the attorney general to seek court injunctions to stop behavior or likely behavior it believes is unlawful, and to seek civil penalties. The court also can order return of money or property.
“That’s the No. 1 consumer protection statute in Texas,” said Houston attorney Reid Wilson, managing shareholder with Wilson, Cribbs & Goren.
Jay Farwell, an attorney with the Gardner Law Firm in San Antonio, said he was struck by the suggestion in the letters from the Attorney General’s Office that loan servicers may have taken such shortcuts as signing affidavits without personal knowledge of the facts.
The 23 other states caught up in the robosigning review so far require judicial foreclosures, meaning lenders must seek court orders to foreclose. Texas has no such requirement.
“It’s a big deal,” Farwell said of Abbott’s letter to the lenders. “They may have the right to foreclose, but they have to do it in the correct way. A nonjudicial foreclosure is a powerful resource for the mortgage companies but they have an obligation to exercise it correctly.”
Also asked halt to sales
In addition to asking the 30 lenders to suspend foreclosures, the attorney general also asked them to halt sales of properties already lost to foreclosure.
But that might be more difficult than stopping future foreclosures.
“What’s in the pipeline can stop,” said San Antonio-based real estate attorney Carl Pipoly. “I can’t imagine that you could go back and look at what’s already been foreclosed. From a practical standpoint it could be a nightmare.”
Consumer advocates, however, said Abbott’s move could bring relief to homeowners who have been wrongly foreclosed on or who were rejected for loan modifications.
Lawyer Robert Doggett of Texas RioGrande Legal Aid said it’s unrealistic to expect lenders to implement a moratorium with only one day’s notice, but he hopes they’ll start to comply soon.
He noted that Bank of America and Chase suspended some foreclosures in other states in response to the Ally Financial disclosures.
“Wouldn’t those same policies and activities be going on here?” Doggett asked.
But the possibility of a halt on foreclosures has some who make a living off the process on edge.
Most real estate companies in Houston have some involvement in the foreclosure business, said Michael Weaster, a Realtor who specializes in selling foreclosures for banks. These and related companies could suffer under a prolonged foreclosure moratorium, he said.
Admit Stephen C. Porter resigned or retired due to the sheer volume of civil actions #BDF had to defend naming him as a serial “robo-signer” as he had “robo- signed” so many #foreclosure documents while at BDF. #fakedocs #DOJ #LenderProcessingServices #TrumpRecession pic.twitter.com/jsqjCm4fSr
— LawsInTexas (@lawsintexasusa) August 16, 2019
Admit that you as an #attorney cannot avoid liability on the ground that you were acting as an agent for your client if you knowingly commit a #fraudulent act that injures a third person. Toles v. Toles (Tex. App. 2003); Likover v. Sunflower Terrace II, Ltd (Tex. App. 1985). #law pic.twitter.com/QH5Mhfdz3y
— LawsInTexas (@lawsintexasusa) August 16, 2019