Robo-Signing Scandal Continues: Loan Notes and Securitizations on the Line
Loan servicers, such as the former GMAC Financial, which is where the problem started, have been signing foreclosure documents without reading them for years. The resulting paperwork problems have become a mess. The potential for the proceeding of foreclosure cases to halt could possibly bankrupt some banks and loan servicers because some delinquent borrowers could get settlements from these servicers and they may be able to stay in their homes indefinitely.
Judges have begun to totally distrust what servicers are putting into their foreclosure petitions. More and more judges plan to look at filings more closely. This has made several major banks second guess what they are filing in their foreclosure proceedings. Hence, they have halted these foreclosure proceedings until they are finished reviewing all of their paperwork. Several other major banks, one is Bank of America, are continuing business as usual because they are confident that there is no problem with their methods.
One of the biggest questions to come out of this robo-signing scandal is: Who has the right to foreclose on a home and who really owns the loan? This could potentially plunge banks and loan servicers into an ocean of paperwork.
This foreclosure scandal is dependent upon the note, which is the instrument that lets investors foreclose on delinquent borrowers. A note is the paper that denotes that a loan has been taken out to buy a house, similar to an IOU. The mortgage then uses that house, or property, as collateral to pay off the loan or debt. When these mortgages, or notes, are combined into securities sold to investors, a trust is issued comprising these notes. Then, the investors who buy the notes then become the owners and holders of the mortgage.
The main issue here is that many loan servicers have, technically, lost that piece of paper or it wasn’t transferred to the trust involved, which holds the mortgages, properly. Until recently, quite a few courts didn’t require investors and servicers to produce the actual note, just an affidavit of ownership. This robo-signing scandal has made courts rethink that process and have begun to require the actual note.
Conversely, an industry group, called the American Securitization Forum, has indicated that the standardized industry methods concerning the transfer of ownership of various mortgage loans to securitization trusts are appropriate and sufficient. The Forum has indicated that they are confident that their standardized transfer methods are based on a well-established body of law and that the process is sound.
Since securitizations became popular in the 1990s, loan servicers wanted to centralize and digitize the paperwork concerning the bundling and selling of mortgages. Servicers then created MERS, the Mortgage Electronic Registration System. The point of this system is to be a repository of the correlation between the owner of the note and the home that is the note’s collateral. This information is used to bring about foreclosures but judges are beginning to question MERS’ right to represent the note’s owners, which could make the judge throw out the case.
Even though more paperwork, time and filing fees are involved, the MERS’ situation can be rectified by the trustee bringing suit on behalf of the investors.
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