The Mortgage Crisis: Bank Foreclosure Fraud And How It Can Affect You

By Richard E. Korb, attorney ©2011[1]

On April 1^st, 2011, the news organization 60 Minutes ran a story entitled “Mortgage Paperwork Mess: Next Housing Shock?” investigating the recent phenomenon of mortgage fraud by a number of big banks—including such well-known names as Wells Fargo, Citibank, Bank of America, U.S. Bank, HSBC and Deustche Bank. Though not yet directly implicated, these banks all relied on the services of a ‘mortgage processing’ company known as Docx (owned in turn by the company LPS) which has since been found to have committed forgery on an enormous scale. This situation is under investigation by the FBI and all fifty state attorneys, and is believed to be contributing to the current shaky state of the housing market.

What does all this mean for ordinary homeowners? Essentially, if you have been foreclosed upon or are in danger of a future foreclosure, it is possible that the bank is trying to take possession of your home illegally.

Here’s how it happened: during the housing boom in the earlier half of the decade, banks bought and sold mortgages at extremely high rates. By packaging a large number of individual mortgages together in bundles called ‘securities,’ they were able to maximize the efficiency, and thus the profits, of these sales. However, the sales progressed so quickly that the banks often found themselves short on time to complete the paperwork necessary to make these transactions legal. But instead of allowing this to slow the rate of their business, the banks chose to fudge, to cut corners, and sometimes to do without physical documentation altogether.

Now fast-forward to the present day, when these same banks are busy trying to recoup their losses from the housing crash through a large number of foreclosures. Unsurprisingly, they’ve been running into a few problems—not the least of which is that, due to their earlier sloppy and fast-paced business practices, it has become nearly impossible to determine who actually owns many of these houses. The legal documentation has been lost, or in some cases, never existed at all.

This is when companies like Docx enter the picture. For $10 an hour, Docx would hire people—generally teenagers, unskilled laborers, and the unemployed—to sign and notarize fake documents. This is called ‘robo-signing,’ and appears to have become a disturbingly wide-spread phenomenon. The banks then took these documents—consisting of forged signatures, non-existent company titles, phony social security numbers, and countless other falsehoods and inaccuracies—and used them to take possession of the houses upon which they wanted to foreclose.

With this misconduct finally coming to light, many homeowners are beginning to learn that they may have lost their houses illegally. As a result, more and more are choosing to bring suit against the bank in question; if their house was only lost in the past year or so, they might even be able to regain possession of it. And homeowners who have only recently learned that they are in danger of foreclosure, and can prove that this action is illegal, may be able to successfully defend themselves and earn a second chance to keep their house.

Generally, a small-scale investigation by an experienced attorney is all that it takes to determine whether or not a foreclosure is legal, and if not, to prove this in court.California is a non-judicial foreclosure state, which means that your foreclosure will not be automatically reviewed by a judge before it is allowed to go through; in other words, these discrepancies may not be caught if individual homeowners do not take action. It is up to the homeowner to confront these issues by filing a lawsuit against the bank seeking to foreclose on them.

Furthermore, even if forgery or misconduct cannot be clearly proven on the part of the bank, homeowners who raise the question may be able to gain themselves some extra time to live in their house without paying mortgage. If you are in this position, you should make sure to contact your bank at once; some banks are temporarily freezing foreclosures entirely, which could allow you to avoid the situation altogether. Even if this is not the case, any problems you find in the paperwork can be grounds for renegotiating the terms of your mortgage, possibly granting you a much better deal than the one which had earlier left you struggling. The scandal has made courts more likely to be highly critical of the paperwork in such cases, which in turn has led the banks to become extremely hesitant of facing any homeowner in court and risk having another forgery revealed. Thus, even if you personally cannot find any defects in the paperwork, simply confronting the bank with this possibility may give you all the leverage you need for a satisfactory mortgage modification.

On the other side of the equation, buyers in the foreclosure market may want to proceed more cautiously. Accidentally buying a house which was not the bank’s to sell could land you in an unpleasant mire of litigation and lengthy court battles. This can be prevented by hiring an attorney to investigate the legal situation of any house you are interested in purchasing—someone to confirm that all the paperwork is in order, the previous owners do not intend to sue, and the legality of the entire situation is beyond question.

Mortgage fraud is a complicated issue, and one on which no homeowner facing a foreclosure should remain ignorant. If you have any further questions, please contact Richard E. Korb, an experienced business and trial attorney, for a free consultation at (510) 524-0903.

[1]RICHARD E. KORB is a seasoned attorney with 30 years of business, real estate, civil litigation and transactional (contracts) experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, bankruptcy and general civil law and he has drafted and negotiated over 250 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters.  In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts. ©2011