To help sort it all out, we’ve drawn up a cast of characters. Let’s start with the basics:
Loan Originators/Mortgage Issuers –Banks make mortgage loans to homeowners, which homeowners must repay. The home serves as collateral in case the borrower defaults on the mortgage.
Mortgage Servicers – Mortgage servicers collect mortgage payments and foreclose on delinquent loans. These are usually the nation’s biggest banks, which all have mortgage servicing units.
As we’ve noted, these servicers have also been charged by the federal government with helping eligible homeowners avoid foreclosure through the government’s Making Home Affordable loan modification program.
The discovery of robo-signing (see our entry for robo-signers below) by employees at major servicers — including GMAC, Bank of America, JPMorgan Chase and Wells Fargo ($) — has initiated a joint investigation by the attorneys general of all 50 states. GMAC, Bank of America, JPMorgan Chase and Litton Loan Servicing, a mortgage servicer owned by Goldman Sachs, have all temporarily halted all or some foreclosures and are reviewing procedures. Wells Fargo, which the Financial Times has also flagged as using robo-signers, so far has not halted foreclosures.
Other contractors – Lender Processing Services, as we’ve noted, helps servicers manage data. When loans fall into default, servicers sometimes transfer the loan information to these processing firms, effectively outsourcing management of the foreclosure process to companies like LPS.
A subsidiary of Lender Processing Services is currently the subject of a federal probe into how it handled foreclosure affidavits. LPS has acknowledged it once had problems, but says they were quickly addressed.
“Foreclosure Mill” Law Firms – In states that require judges to vet a foreclosure, law firms execute affidavits certifying a number of facts key to the foreclosure case.
As financial blogger Barry Ritholz has explained, these signed affidavits attest to: “Ownership of the note, who the borrower is, the property in question, the date of last mortgage payment, amount of delinquency, tax escrow owed, other payments (such as homeowners insurance).” They must also be notarized, or signed in the presence of a notary public, which allows them to be used as evidence in court.
Some foreclosure law firms, however, often take shortcuts and have been known to foreclose first and finish the paperwork laterby backdating documents. According to the Washington Post, document processing companies often rewarded law firms withadditional bonuses if they met deadlines for finishing the legal paperwork. (LPS confirmed to the Post that it had paid these bonuses in the past, but said it no longer does so.)
In Florida, the state attorney general initiated an investigation into the practices of several foreclosure law firms believed to process paperwork in this fashion, but a judge halted that investigation. The Florida attorney general this week requested a rehearing.
Mother Jones tied the origins of these “foreclosure mill” law firms back to Fannie Mae and Freddie Mac, which bought up mortgage debts en masse and had thousands of foreclosures to process when loans started going bad:
In the 1990s, the market expanded into subprime territory to feed the securitization beast, and borrowers began defaulting at increasingly higher rates. Hiring lawyers on a case-by-case basis was burdensome, so Fannie and Freddie put together a stable of law firms, prime contractors prepared to litigate large bundles of foreclosures quickly and cheaply. They urged these handpicked firms to bring in-house all of the related services — inspections, eviction notices, sales of repossessed properties, and so forth — or at least to retain a suitable subcontractor to handle the tasks. Thus emerged the foreclosure supermarket.
Robo-signers – The term “robo-signers” has been defined on a New York Times blog as a “nickname for those who processed large numbers of foreclosure affidavits.” Robo-signers earned this nickname not only for the large volumes of paperwork processed, but also for processing these affidavits without fully verifying the information they were claiming to have knowledge of.
The problems with robo-signers have emerged in a series of depositions by employees of servicers, in which servicers admitting to signing thousands of documents — often without even basic knowledge about the documents they were signing. From the Times:
The depositions paint a surreal picture of foreclosure experts who didn't understand even the most elementary aspects of the mortgage or foreclosure process — even though they were entrusted as the records custodians of homeowners' loans. In one deposition taken in Houston, a foreclosure supervisor with Litton Loan couldn't define basic terms like promissory note, mortgagee, lien, receiver, jurisdiction, circuit court, plaintiff's assignor or defendant. She testified that she didn't know why a spouse might claim interest in a property, what the required conditions were for a bank to foreclose or who the holder of the mortgage note was. "I don't know the ins and outs of the loan, I just sign documents," she said at one point.
Often servicers outsource some work to foreclosure document companies such as LPS. And those companies have also been accused of using robo-signers.
The Washington Post, for instance, found that one employee at LPS had for years claimed to be an executive of Bank of America, Wells Fargo, U.S. Bank and other lenders. Her signature also varied, suggesting they were forged by several different employees.
Foreclosure law firms have also been accused of using “robo-signer” practices and signing documents on behalf of lenders. From The Palm Beach Post:
Banks that have not pulled back on foreclosure sales and evictions, such as lender CitiMortgage, gave firms power of attorney to sign documents on their behalf. In turn, some firms created assembly-line signing systems to keep up with bank deadlines on foreclosure cases.
The operations manager for the Plantation-based David J. Stern law firm said in a deposition last year that she signed foreclosure papers for two hours a day on behalf of financial institutions without reading the documents.
And, when the manager wasn't available, employees would forge her signature, according to a sworn statement taken last month by state investigators of a former Stern paralegal. Stern's attorney has refuted the employee's allegation.
Fannie Mae and Freddie Mac – Fannie and Freddie are government-controlled mortgage giants that buy up qualifying mortgage loans and guarantee them to investors. They were essentially independent companies until they exploded spectacularly during the financial crisis, and were bailed out by the feds to the tune of $148 billion so far.
As the Wall Street Journal explained, Fannie and Freddie also help manage the foreclosure process by providing lists of approved vendors to handle “everything from issuing foreclosure filings to selling homes."
Some of those vendors have included alleged “foreclosure mills.” Fannie and Freddie recently suspended referrals to one vendor, the Law Offices of David J. Stern, a Florida “foreclosure mill” law firm caught up in a probe by the Florida attorney general, but the firm appears to still be on Fannie’s list of retained attorneys (PDF).
Like many of the players in the foreclosure system, Fannie Mae had an interest in speeding the process along. The Post reported that to get bad loans off its books, Fannie imposed fees and penalties on contractors for failing to move quickly:
Fannie declined to comment on these fees. But in a memo to loan servicers dated Aug. 31, Gwen Muse-Evans, Fannie Mae's chief risk officer, warned mortgage servicers that fees may be imposed based on "the length of the delay and any costs that are directly attributable to the delay."
MERS (Mortgage Electronic Registration Systems) –MERS is a confidential electronic registry that banks created in 1997 to more efficiently “track” mortgage paperwork. It saved banks time and money by cutting down the paper shuffle and helping banks avoid paying recording fees to government recorders, who traditionally kept track of mortgage sales. The increased convenience for the banks helped enable securitization of mortgages.
“It’s like a Microsoft Excel spreadsheet, only bigger. It doesn’t have images of documents, it doesn’t have signatures in it. It doesn’t have copies of original documents,” explained Christopher Peterson, a law professor at the University of Utah who has written several research papers on MERS.
“Members of the MERS system can put info on database if it feels like it,” Peterson said. “MERS uses the word ‘track,’ they say they track servicing rights or ownership rights, but that’s not really what they do. They’re more of a passive information receptacle.”
In addition to its function as a record-keeper, MERS has also been used as an agent to enforce foreclosures on behalf of servicers in order to further streamline the foreclosure process. Critics contend that impedes transparency and makes it harder for homeowners fighting foreclosure to know who they're dealing with.
The company continues to assert that it has the right to foreclose, and says that “courts have ruled in favor of MERS in many lawsuits.” (On its website, the company has a legal primer touting such cases.) However, that assertion is increasingly facing challenge.
The supreme courts of Arkansas, Kansas and Maine have all ruled that MERS doesn’t have the standing to foreclose on homeowners, according to The Washington Post. The company currently facesclass-action lawsuits in California, Arizona and Nevada.
MERS itself is a small firm (according to The New York Times, in 2009 it had 44 employees) but has a process by which employees of other companies — mortgage servicers or firms working for mortgage servicers — can sign off on behalf of MERS and transfer the mortgage back to the servicer trying to initiate foreclosure.
Investors – Pension funds, hedge funds, and mutual funds (even those complex investments known as CDOs) are possible investors in securities backed by mortgages.
They’re quite removed from the front-end players — the mortgage originators, the servicers, the law firms and the robo-signers therein — but confusion over the true ownership of the underlying mortgages in a security could cast doubts on investors’ true ownership of the security. Some investors may use the situation to try to recoup their losses on mortgage-backed securities by suing the banks that issued them. From The Washington Post:
Now, some of the pension systems, hedge funds and other investors that took big losses on the loans are seeking to use this flaw to force banks to compensate them or even invalidate the mortgage trades themselves.
… The Association of Mortgage Investors is pressuring trustees to investigate the transfer of loans in the securitization process. The trade organization has said big lenders should be liable for losses due to their negligence.