The media and courts have slammed the mortgage lending industry for using false affidavits in thousands of foreclosure cases. Because of the "robo-signing" scandal, several large banks temporarily froze all pending foreclosures. For some homeowners, the robo-signing mess may create opportunities to challenge their foreclosures in court or negotiate with lenders to avoid foreclosure.
Read on to learn about the massive robo-signing problem and what it means for homeowners.
What Is Robo-Signing?
As part of the foreclosure process in the 25 or so states that require judicial foreclosure (the lender must go to court), the lender must demonstrate that the homeowner has defaulted on a mortgage and that the lender owns the mortgage. (To learn more about the foreclosure process in judicial foreclosure states, see Nolo's article How Foreclosure Works.)
Typically, in a judicial foreclosure state, the lender proves the requisite facts by submitting documents and a written statement signed under oath (called an affidavit) by a person (usually a bank employee) who has reviewed the documents and who is supposed to have some personal basis for believing the facts to be true. The idea is to prevent foreclosures on homes where the foreclosing bank cannot prove that it actually owns the mortgage (which is more common than you might think) or where the homeowner is not actually in default to the degree asserted in the foreclosure papers.
It came to light that several large banks routinely used affidavits signed by employees who did not personally review the documents and had no basis for believing that the homeowner was in default or that the bank owned the loan. Employees for financial giants like Bank of America, JP Morgan Chase, Wells Fargo, and GMAC have all testified that they signed many thousands of affidavits a month, spending about 30 seconds on each affidavit, and that they didn't have a clue regarding the veracity of the affidavit or the documents in question -- hence the name "robo-signers."
What Effect Does a False Affidavit Have on the Foreclosure Process?
Banks cannot legally foreclose on a house if the foreclosure paperwork is not in order. This means that if the affidavit a bank submits is false -- as any affidavit completed by a robo-signer would be -- the foreclosure should not go through. Of course, the reality is that banks have foreclosed on thousands of properties based on just such false affidavits. But now that the issue has come to light, business is not always as usual. Here's what's happening:
- In states where foreclosure must go through the court system, more and more judges are taking a closer look at the affidavits and paperwork and refusing to sign off on the foreclosure.
- In states where foreclosure does not go through court, some homeowners are bringing lawsuits to stop the foreclosure on the ground that false affidavits have been recorded as part of the non-judicial foreclosure process.
What Happens if the Lender Cannot Foreclose?
For all practical purposes, the only way to enforce the terms of a mortgage is to foreclose on the property. Through foreclosure, the lender gains ownership of the property and the right to force the ex-homeowner to move out. If the lender is prevented from foreclosing, it could sue the homeowner for breach of contract if the homeowner falls behind on mortgage payments. However, except in rare circumstances, a lawsuit for breach of contract against the homeowner is not a viable remedy because:
- lawsuits are expensive
- the lender can get only a money judgment (not possession of the property), and the likelihood of collecting this judgment from the homeowner is small, and
- the homeowner can avoid personal liability for such a judgment by filing for bankruptcy.
In addition, in California and a few other states, the lender is not permitted to sue for breach of contract on first mortgages (called "nonrecourse loans").
The bottom line: If the lender cannot foreclose on a property, it does not have a good method for getting mortgage payments, or their equivalent, from defaulting homeowners.
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