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Thursday, October 28, 2010 3:26 PM

Congressional Testimony on Foreclosure Mitigation and Mortgage Fraud

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Inquiring minds are considering the October 27, 2010 Testimony of Katherine Porter Before the Congressional Oversight Panel Hearing on the TARP Foreclosure Mitigation Program

Flawed foreclosures

Robo-signing is only one of a number of alleged deficiencies in foreclosure practices. Several courts have determined that there were serious deficiencies in the foreclosure process.

The concern being raised is that during the securitization process that the transfers from originator to sponsor to depositor to trust (to generalize the parties in a typical process) were not performed or were not performed correctly. A related issue is whether the physical paperwork or electronic records can be located and are accurate. These records are needed to sort out whether the transfers were completed and valid.

I believe the law is somewhat unsettled on what actually must be done via a securitization to complete the transfers correctly. Some have argued that the traditional processes govern. This would mean the note must be negotiated (if a negotiable instrument) or endorsed (if bearer paper) and that the mortgage must be assigned to each party in the securitization process. The latter issue implicates MERS, the Mortgage Electronic Recording System and whether its efforts to declare itself the nominee for the mortgagee and not make public recordation of the assignments are valid. Others believe that the primary issue is whether the note was transferred correctly, on the theory that the “mortgage follows the note” (but it is not clear whether the same rules applies for a deed of trust). But even here, there is disagreement on whether the transfer of the notes needed to have occurred individually, by endorsement (negotiable instrument) or by transfer of possession (bearer paper), or whether the pooling and servicing agreement somehow suffices to effectuate the transfer of the notes to the trust.

The implications of problems with transfer are serious. If the trust does not have the loan, homeowners may have been making payments to the wrong party. If the trust does not have the note or mortgage, it may not have standing to foreclose or legal authority to negotiate a loan modification. To the extent that these transfers are being completed retroactively, it raises issues about honesty in creating and dating the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. Moreover, retroactive transfers may violate the terms of the trust, which often prohibit the addition of new assets, or may cause the trust to lose its REMIC status, a favorable treatment under the Internal Revenue Code. Chain of title problems have the potential to expose the banks to investor lawsuits and to hinder their legal authority to foreclose or even to do loss mitigation.

How Serious and Widespread are the Deficiencies in Foreclosures?

The major unanswered question at this time is the extent and severity of any foreclosure deficiencies. Despite the proclamation of James Dimon, President of JP Morgan Chase that no one has been “evicted out a home who shouldn’t have been,” there seems to be near universal agreement that at least some homeowners have lost their homes without adherence to legal procedures, that the validity of many pending foreclosures is in question, and that servicers may face much more extensive examination of their grounds for future foreclosures.

The banks have repeatedly tried to minimize perceptions about the materiality of their foreclosure deficiencies. JP Morgan Chase has tried to narrow the characterization of the allegations, describing them as “process-oriented problems that can be fixed.”

But Mr. Moynihan’s facts are also completely irrelevant to the concerns about foreclosure process. As I have explained recently:

“Just because the homeowner hasn’t paid his mortgage doesn’t mean anybody in the world can kick him out,” said Katherine Porter, a visiting law professor at Harvard. “The bank has to have the standing to do that.” She added that the bank’s argument was a little like saying that someone who committed a crime shouldn’t receive a trial because he’s so obviously guilty. ...


For at least three years (and probably closer to five years), there have been well-publicized and repeated allegations that mortgage servicers, trusts, and others in the securitization process have engaged in misbehavior or committed mistakes. The concerns about shortcomings in documentation, procedure, and substantive rights are not new. In fact, the current “crisis” has existed for years, as homeowners’ and investors’ rights have been ignored in the foreclosure process. It is very likely that there are thousands, and possibly hundreds of thousands, of families who already have lost their homes were deprived of procedural or substantive rights.
But America does not have to continue in a “crisis.” We do not have to tolerate abuse of the legal system, systematic errors, bloated fees, and chaos in the housing and financial sector. As a society, we have the tools to guard against wrongful foreclosure going forward. These tools include legal reforms and regulatory intervention. The fixes are not simple or cheap fixes, but they are possible. The banks and servicing industry designed and implemented the practices that allow inaccurate and unfair foreclosure procedures to flourish, and it is entirely right that they should have to shoulder the cost, in both time and money, of designing and implementing improved procedures.

Permitting the current situation to continue threatens to undermine the fragile recovery in the financial sector and to further erode the weakness in the housing market. The key task going forward is to provide transparent measures of the depth of deficient paperwork and to provide reliable monitoring of foreclosure processes. Without additional information and reassurance, prospective homebuyers and prospective investors in financial institutions are likely to be reluctant to join together in rebuilding the damage of the housing economy created by the failure of foreclosure mitigation.
The document is a good read (there is much more than the above snips) but I hate reading from Scribd. Instead, I downloaded the document from Scribd and viewed straight from the PDF. There is little new in the document, but it does provide a nice summary as to what the issues are, without a lot of the hype seen in most places.

Mike "Mish" Shedlock
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