The Foreclosure Freeze – What It Means and Why It Matters

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I live in South Florida, described by some as ground zero in our nation’s foreclosure crisis. That’s afforded me a ringside seat to the foreclosure fiasco – and an opportunity to explore the issues as a consumer advocate, a journalist and, unfortunately, a homeowner.

As a homeowner, I’ve watched the value of my house drop by half since 2007 – literally hundreds of thousands of dollars of my equity has evaporated. That’s a sad story, and one I share with many others. Yet that story isn’t as sad as the story you’re about to see and read. It’s yet another lurid chapter in the book of greed – this time at the expense not just of the American homeowner, but of the American legal system.

You’ve seen the recent headlines: Major banks have halted foreclosures, some in every state, and Attorneys General from every state are now investigating the way some big lenders have been filing foreclosures. Well, long before the headlines – more than a month ago – I started hearing rumors of rampant, systemic errors occurring in the foreclosure process.

So I started interviewing foreclosure defense attorneys and their clients. What I found was shocking: A legal assembly line that discards legal protections for the sake of expediency, while lining the pockets of lenders and the foreclosure law firms they hire.

This is going to be a multi-part series. In this installment, I’m going to explain the freeze on foreclosures that’s recently been hitting the headlines. Start by watching the news story below, then meet me on the other side for more.

Until I started talking to foreclosure defense lawyers, I couldn’t wrap my mind around the problem I just described in that story. Over and over, the lawyers I interviewed kept repeating that bank employees and the law firms they employed weren’t reading the foreclosure filings before submitting them to a judge. And over and over, I kept saying, “So what? Of course they’re not reading all this stuff – they deal with hundreds of these things every day. What’s the big deal?”

Well, if you watched the story above, you’re now starting to get a glimpse of what the big deal is.

When you’re suing someone in a court of law – which is exactly what you’re doing when you take people’s homes in the 23 states, including Florida, that require judicial foreclosure – the person who’s signing and submitting these papers to the judge is essentially testifying under oath as to their accuracy. They’re swearing that all the facts being presented to the court are accurate. They’re swearing that the people being sued are the right people, that the lender bringing the suit has a legal right to seize the property, and that the money being demanded from the defendant is the correct amount.

Swearing to anything in court – whether in person or on paper, without personal knowledge of what you’re swearing to – is defrauding the legal system. Take another look at the analogy drawn by attorney Dustin Zacks in the story above:

“You’ve got a witness to a crime who can’t appear in person. They’re crippled and in the hospital. So he or she signs an affidavit that says I saw Mr. Smith commit that crime. I have personal knowledge of this. I examined the security video at my house, and I saw Mr. Smith commit that crime. And then, when you ask that witness about it, she says, “I just signed that document, I didn’t actually look at anything.”

That’s the criminal equivalent of the civil offense that bank employees are now admitting to, and it’s what’s behind the recent headlines about banks stopping foreclosures while they “investigate their foreclosure process.” And, by the way, you’re not seeing these headlines because lenders have suddenly become concerned about protecting people’s civil rights. This has come to light because foreclosure defense lawyers are taking legal action against lenders.

Now maybe you’re still saying, “So what? At the end of the day, it’s still an open-and-shut case. The defendant didn’t pay their mortgage, the plaintiff still has the right to their house, and the sooner it happens, the better.” That is, in fact, exactly what some lenders are suggesting: that while the paperwork may have been improper, the foreclosures weren’t.

Here’s a quote from JP Morgan CEO Jamie Diamond in this recent article in Fortune: “We’ve known there are issues for a while,” he said of the foreclosure process. But, he stressed, “We’re not evicting people who deserve to stay in their house.”

While that may be an acceptable excuse for Wall Street, it doesn’t work here on Main Street. Because cutting corners matters in other ways:

  • It matters to homeowners like me who are patiently waiting for my biggest asset, my house, to appreciate again. That’s something it can’t do until the foreclosure flood subsides. And now, thanks to improperly filed foreclosures done for the sake of expediency by some of the same players who contributed to this mess in the first place, that housing recovery could now be pushed back by years.
  • It matters to those who have lost their homes to foreclosure, because they could have used leverage gained from improperly filed foreclosures to work out a deal with a lender that could keep them in their homes – and thus prevent their foreclosure from impacting my home’s value.
  • It matters to society at large, because due process should never be subjugated to the bottom line of any business, especially with the unwitting complicity of our judicial system.

And keep in mind that robo-signing isn’t the end of this story. In a way, it’s the beginning.

The three defense lawyers I talked to didn’t work together — they didn’t even know each other. But they all made eerily similar claims, ones they weren’t afraid to make on-camera. Example? The quote from attorney Jeffrey Golant from the story above:

“Foreclosure firms are allowed to file foreclosures by the thousands and to cut corners and to fake documents and most of the time get judgments that they’re not entitled to in amounts that they’re not entitled to.”

As you’ll see in my next installment, what Mr. Golant is referring goes way beyond signing documents that haven’t been read. He’s accusing foreclosure law firms of creating and submitting “fake” documents to the court.

For example, if a lender’s lawyer doesn’t have the proper affidavit proving that XYZ bank owns a particular loan, someone at the law firm simply creates paperwork that says it does. He and other lawyers I’ve talked to also allege that the judgments these lenders are winning may be for amounts inflated by unauthorized fees that go beyond what a homeowner actually owes. That’s particularly relevant in states like Florida, because here the lender has the right to collect a deficiency judgment — in other words, they can pursue the homeowner for the difference between what’s owed and what they receive when a foreclosed house is sold.

As to whether these allegations are true, the jury’s still out. This is part of what Attorney General offices nationwide are investigating. But now that I’ve gone to foreclosure court and talked to numerous attorneys, it’s easy to imagine these accusations might be true. After all, in places like Florida, foreclosures are lawsuits that often last for less than a minute.

They’ve been going through the courts by the thousands for years now – lenders and their lawyers learned long ago that the papers they submit aren’t normally going to be scrutinized by a judge. It’s not a stretch to imagine that they might cut corners to save a buck. Why should they worry? They weren’t. But you can bet they are now.

In my next story, you’ll meet a guy who was foreclosed on when they’d never missed a payment – and one of the wealthiest lawyers in town.

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