A study of California foreclosures released late yesterday found that 99% of the files examined had some sort of irregularity and 84% of them had “one or more clear violations of law.” The study provides fresh evidence, to some, that the $26 billion foreclosure settlement withBank of America and other big lenders was just a down payment on their ultimate liability for “robosigning” and other illegal acts.
But let’s look at the report, and who wrote it. It’s byAequitas Compliance Solutions, a Newport Beach, Calif. firm that says it specializes in “complex litigation, investigation and internal audit issues” for regulators, investors and homeowners. In other words, Aequitas earns its keep by finding errors in mortgage paperwork for lawyers and regulators. It also has a unit that does court- or regulat0r-appointed compliance monitoring of lending institutions — a growing business as regulators crack down on mortgage servicers and get them to sign settlements that require continuing oversight by outside entities. Under the national foreclosure settlement, banks agreed to hire North Carolina’s former banking commissioner, Joseph Smith, as an independent monitor .
There’s nothing wrong with this, and I’m not suggesting Aequitas was biased or found irregularities that weren’t there. But readers should always consider the source. And once again, while the report found extensive errors, they were almost entirely upstream of the homeowners who were failing to make their payments on time. The closest thing to an error that directly affected a borrower was the failure to properly give notice of default “in person or by telephone.” In 6% of the foreclosures, Aequitas found no affidavit attesting to compliance with this requirement under California law. Does that mean that notice wasn’t given, or that the affidavit was missing? And does it mean that any of the 6% were not in default, and only found out they were going to be foreclosed when a sheriff walked up their driveway? The report doesn’t say, but I doubt it.
What Aequitas did find was a laundry list of technical violations in how the paperwork accompanying a foreclosure was processed. Seventy-five percent of the foreclosures had an error in the assignment of the deed of trust, meaning the handoff between one lender and another was botched in some way. This would be of concern to investors who own the underlying notes — but has there been a single case of an investor suing because the collateral ended up in the wrong hands? Aequitas found that in 27% of the foreclosures a trustee or servicer signed an assignment of the deed of trust, instead of the original owner of the note, for example. That couldmean that somebody snuck into the courthouse and stole a deed of trust that actually belonged to somebody else. Has it happened? Does it affect in any way the rights of the homeowner who isn’t paying his mortgage? The only way I can think of is if the homeowner wants to delay the foreclosure by asserting legal errors in the process.
The firm also found a number of foreclosure sales that occurred less than 20 days after the Notice of Trustees sale, casting doubt on the legitimacy of the title transfer to the new owner. That would be a problem for whoever buys the house from the bank. And there’s a thing called title insurance to cover that, I believe. (Though in Massachusetts, it could be a problem.) But no matter, it is a problem, and the banks could be liable for the damage it causes.
Aequitas also found widespread problems relating to MERS, the nationwide database for mortgages that lenders use to streamline foreclosures. In 58% of the sales, the beneficiary listed in the Trustees Deed Upon Sale conflicted with the investor information in the MERS database, the firm found. The report doesn’t explain how the discrepancy could cause a homeowner to be illegally sold out of his house.
Aequitas notes in the introduction that bankers complain “inadvertent violations should not provide windfall benefits to reckless borrowers.” That ignores the important role of California law as a last line of protection for borrowers against abusive practices by lenders, Aequitas notes. California, like many other states, allows banks to include clauses in mortgages allowing for non-judicial foreclosures with less court oversight. That comes at a cost, Aequitas notes — as would requiring every mortgage to allow only judicial foreclosure. Foreclosures in New York City have virtually ground to a halt as judges question the paperwork and require lawyers to personally attest to its accuracy.
Conservatives typically are accused of elevating legal process above substance, of looking only at whether the courts followed the rules and not whether the outcome was just. In this case, the roles are reversed. As the Aequitas report shows, the foreclosure process was “utterly broken,” with missed handoffs and improper documentation nearly every step of the way. Homeowner advocates want to use those errors to slow down foreclosures, distribute $1,500 checks to people who already lost their homes, and impose tougher regulations on lenders. As Aequitas puts it:
What’s at stake here is more than merely fairness and minimal due process. Foreclosures impact not only homeowners, but also entire communities and housing markets. The integrity of California’s record title system is also at stake because the validity of title for subsequent purchasers is dependent on those that precede it.
It’s the conservatives who are saying wait: Despite the errors who was actually hurt? The law makes for ironic role reversals.