High Court's Low Opinion of Foreclosure Practices

Apparently the Massachusetts Supreme Court neglected to read the bipartisan memo reminding politicians and judges to refrain from doing anything that might upset the banks.

Most judges have shown extraordinary deference to bankers, even amid growing evidence that those bankers haven’t been following the law in pursuing foreclosures.

That may be beginning to change, in the wake of a Massachusetts ruling against banks in a closely watched foreclosure case.

Right now the decision only has force in Massachusetts. But as other cases challenging foreclosures make their way through the courts across the country, other judges are likely to be guided by it. In addition, the ruling will also provide guidance for lawyers posing legal challenges to other mortgages scrambled in the securitization process.

The Obama administration has consistently downplayed evidence of rampant fraud and sloppiness in the way banks split up, packaged and sold off mortgages to investors in the heat of the housing bubble.

Almost all subprime mortgages as well as millions of conventional mortgages originated before the meltdown were securitized and sold to investors. Securitized mortgages account for more than half of the $14.2 trillion in the total outstanding U.S. mortgage debt.

Bankers have tried to dismiss these problems with what’s known as the securitization process as a matter of mixed-up paperwork that can be straightened out.

But the highest level court to examine the issue thus far took the issue much more seriously. Last week the Massachusetts Supreme Court invalidated what had become a common practice – banks seeking to foreclose on properties without properly holding ownership of the promissory note and mortgage as part of the securitization. The court  focused heavily on the use of the power of sale contained in mortgages; the same power exists in the vast majority of California deeds of trust.

Ruling in a closely watched case, the high court rejected arguments by U.S. Bancorp and Wells Fargo & Co. that they didn’t have to prove their authority to foreclose. The banks had argued that evidence that they intended to transfer ownership was enough to establish their standing to foreclose.

The ruling makes dense but fascinating reading, with some passages coming through loud and clear even if you’re not steeped in real estate law.

The justices stressed they weren’t creating any new interpretation of law. “The legal principles and requirements we set forth are well established in our case law and our statutes,” wrote Justice Ralph D. Gants. “All that has changed is the (banks) apparent failure to abide by those principles and requirements in the rush to sell mortgage-backed securities.”

Banks have argued that their “pooling and servicing agreements” allowed them to transfer mortgages to securitized trusts “in blank” without specifying whom the new owner would be.

But the justices ruled in U.S. Bank v. Ibanez that the “foreclosing party must hold the mortgage at the time of the notice and sale in order accurately to identify itself as the present holder and in order to have the authority to foreclose under the power of sale...”

In a concurring opinion, Justice Robert Cordy wrote: “There is no dispute that the mortgagors (borrowers) had defaulted on their obligations.”

But that’s not the legal standard. “Before commencing such an action...the holder of an assigned mortgage needs to take care to ensure that his legal paperwork is in order,” Cordy stated.

The ruling could lead to an increase in complicated and expensive litigation, if those whose homes have already been foreclosed on sue to challenge the financial institutions’ authority to conduct the foreclosures. Investors may also sue, contending that the banks didn’t properly document the ownership trail on the mortgages contained in a particular investment pool.

Can banks go back in and straighten out their securitization mess? So far the banks are downplaying the significance of the ruling. But untangling the paperwork may not be so easy. Many of the entities that created the securitized pools have gone bankrupt or dissolved into other businesses. At the very least, it could pose a costly and complicated process for the bankers, one that would entail taking a hard look at the details of the deals that led to the country’s financial collapse.

Around the Web: Now, They Won't

I remember when the Obama administration burst into office leading the nation in its campaign mantra: Yes we can. Later they adapted a new mantra to acknowledge how bad the economy was but how hard they were trying to fix it: It could have been worse. After the Democrats got walloped in the midterms, the president adjusted with his latest mantra: this was the best I could do.

Now his treasury secretary has offered the administration’s latest spin: No, you can’t.

Tim Geithner, the architect of so much of the administration’s no questions asked bailout of corporate America, is refusing homeowners facing foreclosure access to legal assistance to fight to save their homes, Zach Carter reports at Huffington Post.

Democrats from foreclosure-ravaged states are working on legislation that would overrule Geithner’s edict but the leadership isn’t interested.

This in spite of the massive failure of the administration’s foreclosure relief program, even when mortgage servicers are wrongfully attempting to throw people out of their homes.

According to a recent survey, banks started foreclosure proceedings against 2,500 homeowners while they were in the process of getting their mortgages modified.

When it comes to fixing the inadequate programs they’ve offered to fix the foreclosure mess, the Obama administration has offered a consistent mantra: No, we won’t.

Meanwhile, the state attorney general leading the 50-state investigation into the foreclosure scandal, Tom Miller, has some pretty tough talk.

Unlike the Obama administration, Miller comes right out and says that the mortgage principal should be reduced as part of any settlement with mortgage servicers. “One of the main tools needs to be principal reductions, just like in the farm crisis in the 1980s,” Miller said. “There should be some kind of compensation system for people who have been harmed. And the foreclosure process should stop while loan modifications begin. To have a race between foreclosures and modifications to see which happens first is insane.”

And yes he will, Miller insists, put financial criminals in jail.

Don't Foreclose on the Rule of Law

As the foreclosure process implodes in the U.S., the big banks and their defenders are scrambling to defend the mess they’ve created, dismissing serious legal issues as mere technicalities.

I covered courts as a reporter for years and I learned something about legal technicalities.

What I learned was that whenever some lawyer started dismissing some legal rule as a technicality, they were about to try to heave some of their adversary’s fundamental rights out the window.

In the foreclosure mess, those adversaries would be the banks’ former business partners, their borrowers, the people they loaned money to.

Now the big banks are trying to dismiss the rules that govern the foreclosure process as legal technicalities.

Take for example the Florida case in which a judge ruled earlier this year that a document that was supposed to show that U.S. Bank owned the mortgage in December 2007 wasn’t created until the following year. The document filed by the bank, the judge wrote in March, “did not exist at the time of the filing of this action…was subsequently created and…fraudulently backdated, in a purposeful, intentional effort to mislead.” She dismissed the bank’s case.

The bank’s lawyer blamed carelessness. He explained: “Judges get in a whirl about technicalities because the courts are overwhelmed....The merits of the cases are the same: people aren't paying their mortgages.”

One of the other things I learned was that judges tended to use very precise wording in their rulings. If the judge in the Florida case was feeling overwhelmed, she didn’t mention it. What she did say what that somebody had fraudulently created a document.

That’s not a technicality. And it doesn’t matter if you’ve been making your mortgage payment or not. Banks are not allowed to foreclose on a home using fraudulent documents. Period.

One of the aspects of the rule of law is that it applies the same to everybody: a bank isn’t allowed to submit fraudulent documents to a court any more than a pauper is. That’s not a technicality. That’s the rule of law.

In the most recent brouhaha, a number of big banks, Ally, PNC Financial, J.P. Morgan Chase and Co and Bank of America, have acknowledged that their officials didn’t actually read key foreclosure documents before submitting them in court. Some documents appeared to have been forged; others appeared to contain false information.

A number of state attorney generals across the country have threatened legal action against the banks. Faced with a firestorm, some banks have voluntarily halted foreclosures in 23 states: the ones where judges oversee foreclosures. Only Bank of America has halted foreclosures in all 50 states.

One of the first banks to acknowledge that its own paperwork hadn’t been properly reviewed was Ally Bank, formerly known as GMAC. The latest controversy wasn’t the first time GMAC’s legal work on foreclosures came under scrutiny.

In 2006, Bloomberg News reported, another Florida judge sanctioned the company, finding that it submitted false affidavits to the court in a foreclosure case. The judge ordered GMAC to submit an explanation, certify that its policies had changed and pay the opposing party’s legal costs of more than $8,000.

As a result, GMAC’s legal department issued a statement that told employees “not to sign verifications on court pleading documents unless you have independently reviewed and checked the facts.”

The new policy, the Journal reported, was distributed in June 2006; it also stated in italics and boldface that GMAC employees should sign documents only in the presence of a notary. GMAC told the court  that the policies were “being corrected.”

Three and a half years later, a GMAC employee said in a deposition that his team of 13 people signed about 10,000 documents a month without reading them.

Deborah Rhode, a Stanford Law professor, told Bloomberg, “It’s not ‘technical’ when people attest under oath to knowledge they don’t have, and it doesn’t matter that in fact there isn’t actual error or discrepancy,” Rhode said. “Any court would take this very seriously.”

Letting Go Of Principals

After more than a year of ineffective attempts to stem the foreclosure crisis, the Obama administration this week may be edging toward acknowledging reality.

This sick housing market isn’t going to heal itself, and won’t get better with the band-aids they’ve applied so far. The stakes are high not just for the homeowners: without some stability in housing, the rest of the economy can’t heal either.

The administration announced today that it would begin to encourage banks to write down the principal when modifying borrower’s underwater mortgages. Bank of America also said this week it would tiptoe into principal reduction.

Time, and follow-through will tell whether the administration intends the principal write-downs as another band-aid or something more substantial. Time will also tell whether the administration will fight for write-downs or wilt in the face of the inevitable backlash. It’s also important to note that all of the administration’s foreclosure initiatives rely on the voluntary cooperation of lenders, with modest incentives paid by the government.

There is every reason for healthy skepticism of the administration and the banks’ ability to tackle the problem. As John Taylor, president of the National Reinvestment Coalition testified before a congressional panel this week: “We rush to give banks tax breaks, but we dawdle to help homeowners who through no fault of their own lost their jobs because of the economic crisis or bought defective loans that caused the economic crisis.”