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Can We Undo Botched Mortgage Foreclosures?

Nov 21, 2010

Posted by

Peter Miller

Peter G. Miller, OurBroker, is the author of six real estate books, including "The Common-Sense Mortgage." His web site,, is one of the largest consumer real estate sites online. A speak Read more


Lenders may be on the hook for billions in claims from borrowers who were improperly foreclosed. Several stories in the past few days raise the idea that huge numbers of foreclosures may have been incorrectly processed.  This is not a minor glitch or “technicality,” it potentially involves vast armies of people who lost their homes because the legal system failed to protect their rights.

It’s also nothing new.  We’ve been reporting about problems with the foreclosure system for years.  We gave a 2006 speech before the nation’s real estate regulators at the height of the real estate boom explaining why huge numbers of foreclosures were inevitable.)

On September 20th Bloomberg News reported that “Ally Financial Inc.’s GMAC Mortgage unit told brokers and agents to halt foreclosures on homeowners in 23 states including Florida, Connecticut and New York.”

In turn, Ally denied the story, saying that “recent reports have stated that GMAC Mortgage instituted a moratorium on all residential foreclosures in 23 states.  This is not true.  In fact, all new residential foreclosures are continuing in the ordinary course of business with no interruption in our usual practice.

“The speculation likely emanates,” said Ally, “from a direction previously given by GMAC Mortgage to certain of its outsource vendors to allow time to address a potential issue that was raised in a number of existing foreclosures challenging the internal procedure we used for executing one or more judicially required forms.  This direction was to suspend evictions and REO closings where the related foreclosure could have been impacted by the same internal procedure.  We are also reviewing certain previously completed foreclosures where the same procedure may have been used.”

The Washington Post then chimed in with two important stories:

First, on September 22nd, the Post reported that “some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork — an admission that may open the door for homeowners across the country to challenge foreclosure proceedings.”

The problem is that lenders are supposed to have an official review all paperwork to assure it’s correct and accurate before seeking a foreclosure.  In the case of Ally, reported the Post, the “head of Ally’s foreclosure document processing team, 41-year-old Jeffrey Stephan was required to review cases to make sure the proceedings were legally justified and the information was accurate.  He was also required to sign the documents in the presence of a notary.

“In a sworn deposition, he testified that he did neither.”

“The reason,” says the Post, “may be the sheer volume of the documents he had to hand-sign: 10,000 a month.  (See: Ally Financial legal issue with foreclosures may affect other mortgage companies)

The next day, the 23rd, the Post gets to the heart of a central foreclosure issue:

“The nation’s overburdened foreclosure system is riddled with faked documents, forged signatures and lenders who take shortcuts reviewing borrower’s files, according to court documents and interviews with attorneys, housing advocates and company officials.”

The Post then explains that “during the housing boom, millions of homeowners got easy access to mortgages while providing virtually no proof of their income or background.  Now, as millions of Americans are being pushed out of the homes they can no longer afford, the foreclosure process is producing far more paperwork than anyone can read and making it vulnerable to fraud.”  (See: Amid mountain of paperwork, shortcuts and forgeries mar foreclosure process)

The Post headline is simply wrong.  Shortcuts and forgeries don’t just “mar” the foreclosure process, they damage the legal system, cripple the courts and undermine public trust.  Everyone deserves not only their day in court but also the expectation of fairness when they arrive, and that includes families facing foreclosure.

Not “Just” A Paperwork Problem

The fact that borrowers obtained financing with no doc or low doc loan applications has nothing to do with a foreclosure proceeding.  Lenders created the mortgage programs which allowed such applications and literally wrote the loan documents — they’re composed by lots of lawyers “in the lender’s usual form,” an expression which means the lender writes the loan rules and requirements.

When lenders foreclose they have an obligation to meet all requirements.  If lenders do not correctly process their own claims that’s not the fault of the borrower.

A foreclosure is not a minor matter.  Courts have an obligation to assure that the loss of a home — literally tossing someone on the street with everything they own — is justified. If that means a slow process, so be it.  If that means all requirements to foreclose must be met, then that’s what should happen.


The looming problem for lenders — and for courts — has been the wholesale denial of borrower rights.  This is not merely a problem with “paperwork” or a “technicality.”  The court system has been unjustly used to throw people out of their homes.  How much of a bigger issue could there be?

One inevitable by-product of the mortgage lawsuits which are sure to come will be instances where foreclosures are determined to have been unjustified.  One has to ask: How do we compensate borrowers who have lost their homes and been humiliated?  How much money represents “just” compensation?  Is there enough lender money to pay such claims?