Discovery of a sea of corrupt paperwork threatens to make the U.S. foreclosure epidemic--already bad--significantly worse, delaying resolution by months or years.
It's not as if foreclosures weren't a big enough mess already: In August, according to real estate data firm RealtyTrac, lenders foreclosed on 95,364 U.S. properties--the highest monthly total since May 2005, when the company first began its tracking. In 19 states the number of homes seized by lenders at least doubled: in seven states it more than tripled. The number of loans 60 days or more past due now stands at 5.2 million.
"I don't see how we come out of this," says Professor Christopher Mayer, vice dean of the Columbia Business School. Working through the problem could take two years or longer.
"It's a terrible human cost," says RealtyTrac vice president Rick Sharga, "terrible for the families and for their communities."
Foreclosures, he notes, not only depress prices of surrounding homes; they erode the municipal tax base, reducing the dollars available for local services. Safety suffers, too. "Having a vacant home in your neighborhood is a hazard," he says.
How much worse (or better) might things get? That depends, says Sharga, on variables such as job creation and the health of the overall economy. "This year there have been 1.2 million bank repossessions. If things go badly, that could turn out to be 1.4 [million] next year. Anything above that would have to be the result of some new problem."
Enter the corrupt document scandal.
In recent days major lenders--including JPMorgan Chase, Ally Financial's GMAC Mortgage unit and Bank of America--have conceded that paperwork supporting an unknown number of foreclosures contain errors ranging from wrong dates to forged or inconsistent signatures. In many cases mortgage company employees signed foreclosure documents without first verifying the information in them.
Whether sloppiness or deceit is the greater culprit remains to be determined. In response, the banks have suspended tens of thousands of pending foreclosures. Bank of America, for example, has suspended all its foreclosures in 23 states.
Congress Enters the Fray
Angry calls for action came almost immediately from Congress. Sen. Jeff Merkley, D-Oregon, in a letter to Treasury Secretary Geithner and HUD Secretary Shaun Donovan, said foreclosure practices at the country's largest mortgage providers should be investigated. Merkely is also calling for foreclosures to be halted at lenders shown to be at fault and restitution made to families wrongfully dispossessed of homes. Rep. Elijah Cummings, D-Maryland, called for a 60-day moratorium on foreclosures in his state.
Sharga remains un-alarmist about the document mess, at least for now: "To put it in perspective," he says, "It's affecting loans only in the 23 states that do judicial foreclosures. It excludes some of the worst states."
If the problem turns out to have been mainly one of procedure--failure to dot the i's and cross the t's--then, he predicts, its disruptive effect will be limited. "It will delay the process for 60 to 90 days, while we review the documents. After that, you'll see an acceleration of foreclosures. From the standpoint of the overall problem, it's likely to be a temporary blip."
What, though, if the documents turn out to be the product of widespread, systematic fraud? "That's not a good scenario," he says. Resolution would take longer, and the length of the housing downturn would correspondingly be extended. "You're already seeing class action suits. What if somebody was foreclosed on, they lost their house, and a new buyer has moved in? Is there a precedent for overturning a foreclosure? A whole range of complicated and unimaginably bad things could happen."
Rep. Dennis Cardoza, D-California, who has drafted legislation to stabilize foreclosures, calls the paperwork scandal "a cloud over the whole mortgage and banking industry. It could delay things two to 10 years. I don't know how it will all shake out, but it's going to require ongoing attention from Treasury and from Congress."
Professor Mayer, who helped Cardoza draft his bill, agrees. "If some court says the legal basis for these mortgages isn't there, this is hugely significant. In any event, it throws a huge amount of uncertainty into the mix."
Even where corrupt documents were the result of honest error, he points out, homeowners have suffered. "People who played by the rules still found themselves thrown out of their homes. Trial lawyers are licking their lips."
Lawyers Circling the File Cabinets
A licking sound can be heard coming from the offices of Linda Tirelli, a plaintiffs' lawyer in White Plains, New York. She represents clients facing foreclosure, including Silvia Nuer of the Bronx, who is suing Chase for having relied on inaccurate documents. What's Tirelli's take on the future?
"I see it as this: The public are the Little Dutch Boy, with their finger in the dam. The flood gates haven't even opened yet." The scandal, she says, has energized homeowners. "The public is so much more empowered over this. You have a legal argument, now, to go in there and fight Goliath. We're choking them on their own documents."
Just digging up the paperwork, she predicts, will be a Herculean task: "The banks tell me it can take four to six months to locate a document. They'll need to go back and get the documents. They need to say they have the real ones or admit they don't."
During that process, she thinks, there needs to be a national moratorium on any more foreclosures. Banks that can't produce valid paperwork will find themselves in a tough spot, unable to foreclose.
"They're going to have to give some amazing deals--real reductions. They're going to have to sit down and work with customers. That's what they should have been doing all along."