Foreclosure Mess: More Shoes to Drop?

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This is the final part – at least for now – in a series on our nation’s current foreclosure debacle. In the first installment, I explained what’s behind the recent headlines regarding foreclosures that are being frozen nationwide – the fact that the mass robo-signing of legal documents deprived homeowners of their rights, and now gives them leverage with lenders. In the second part, I introduced you to Hugo San Martin – a homeowner who was foreclosed on even though he’d made his payments on time. In this story, we’ll explore other potential problems that could strengthen and lengthen what’s starting to be called “foreclosure-gate”.

I’ve been doing a lot of reading lately on foreclosure issues, and a lot of it takes the tack that while it was an unfortunate procedural error that foreclosure files were signed, witnessed and notarized by people unfamiliar with their contents, these problems should be easily sorted out. And that in a matter of weeks the foreclosure factories can once again start churning out the paperwork. (In fact, Bank of American has already thawed their foreclosure freeze.)

Here’s a quote from a recent editorial in the Wall Street Journal:

The affidavit was supposed to be signed by the nameless, faceless employee in the back office who reviewed the file, not the other nameless, faceless employee who sits in the front.

The result is the same, but politicians understand the pain that results when the anonymous paper pusher who kicks you out of your home is not the anonymous paper pusher who is supposed to kick you out of your home. Welcome to Washington’s financial crisis of the week.

In other words, this isn’t a legal problem, it’s just liberal political squealing. The editorial goes on to say, “We’re not aware of a single case so far of a substantive error.”

Well, maybe the author of this editorial meet Kenneth Trent, the foreclosure defense lawyer in the following news story. Check it out, then meet me on the other side for more.

As you saw from the video, robo-signing might be just the tip of a rather large iceberg. Because while some might argue that people submitting documents to a court that they haven’t read is immaterial (albeit not exactly legal), arguing that it’s OK to take someone’s house without properly notifying them first is something else entirely. In addition, systemically signing someone else’s name on legal documents is another major potential fly in the ointment – and since this story broke, that’s been born out: see Tired Robo-signers Let Coworkers Sign Their Names.

And when you ask Kenneth Trent, the lawyer from the video above, even these problems pale when compared to another looming issue: whether banks can actually prove that they’re the owners of these loans in the first place.

Last July Trent filed a suit contending that David Stern’s law firm violated the RICO (Racketeer Influenced and Corrupt Organizations) Act by foreclosing on thousands of homeowners on behalf of lenders who couldn’t prove they hold the original mortgages – which means they didn’t have legal standing to bring the suit.

When I talked to Stern’s lawyer, Jeffrey Tew, about this a few weeks ago, he said Trent’s suit had no merit. In fact, he called it “silly.” As you saw in my last story, Tew has also told the media that the other issues raised by Trent were also invalid and that the Stern firm has done nothing wrong.

What does it all mean?

This story is still unfolding, so it’s impossible to know at this point where it will ultimately lead. But from the time I’ve put into this story, here are some of my initial conclusions:

  • This could become a bigger issue than the banks and Stern’s representative would have you believe, particularly in states with judicial foreclosure.
  • Even as I write this, you can bet that the ranks of foreclosure defense lawyers are swelling – and those lawyers are going to find plenty of willing clients. Translation? Our overburdened courts may soon experience a lot more contested foreclosures.
  • If I were a homeowner facing foreclosure, particularly if it was filed by one of the banks that’s admitted wrongdoing or by David Stern’s firm, I’d probably at least talk to a lawyer – especially if my goal was to negotiate a deal that might let me to keep my house. Although I wouldn’t expect miracles. It’s unlikely, for example, that your legal leverage would enable you to cut your mortgage in half.
  • If I were a homeowner facing foreclosure, what I wouldn’t expect is to permanently enjoin a lender from foreclosing. Ultimately, this will be sorted out and people who haven’t paid their mortgages will lose their homes.
  • If I were an investor thinking about buying a foreclosure at auction, I’d wait to see how things work out. While it’s highly unlikely that you’d lose a home purchased at a legitimate auction, there’s no rush. Let the smoke clear. And don’t even think of buying any foreclosure, whether at auction or through a real estate agent, that doesn’t have title insurance.

I’ll keep following this story – you do the same by checking back!