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:
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 up to 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'.
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.