Where the Fraud Is

Barry Ritholtz posts a clear summary of the foreclosure process, to help understand the massive unfolding foreclosure fraud scandal. Here is, document by document, the typical paper-trail for when a homeowner defaults and a bank repossesses her house (the process varies a bit state by state).

1. Notice of Delinquency is sent to a borrower who has fallen behind his payment schedule;
2. Notice of Default is sent to a delinquent borrower who has missed the requisite number of mortgage payments;
3. Notice of Foreclosure is sent to the defaulted borrower, and the process begins;
4. Affidavit by the bank’s representative are signed attesting to: Ownership of the note, who the borrower is, the property in question, the date of last mortgage payment, amount of delinquency, tax escrow owed, other payments (such as homeowners insurance);
5. Notarized documents: A Notary Public affirms that the affidavit was actually signed by the signatory, and this allows it to be entered into the court as documentary evidence;
6. Notice of Pendency (Lis Pendens) is filed with the County Clerk putting the world on notice as to the foreclosure action;
7. Summons and Complaint are prepared by bank attorneys, who further verify the specific information attested to by the bank executives. The attorneys then file the Complaint, commencing the Foreclosure Action;
8. Service of Process is filed, either hand delivered to the home owner, or nailed to the door of the home;
9. Referee is Appointed to review and process the case; calculate the amount owed, and report back to the Court; The Referees report is also notarized;
10. Judgment of Foreclosure is moved for by Note holder;
11. Court orders the property auctioned. The court specifies a notice of the auction, publicizing the property auction;
12. Bidders must Close on the auctioned house in 30-90 days; In the event of no sale, the bank takes possession (REO).

Fraud has happened — though nobody knows the extent yet — in steps four through seven. Banks did not have the proper legal documentation to move forward with the final foreclosure — meaning the foreclosure itself might be illegal. We know that’s a major problem for banks, which will, at the very least, have to spend some serious time answering various state courts about violating consumer-protection and banking laws. And Mike Konczal — in a great series of post called “foreclosure fraud for dummies — shows that there are serious repercussions for homeowners undergoing foreclosure as well:

[T]he process of trying to get people behind on their payments current instead of driving them into bankruptcy has broken down. But for now it’s clear that mortgage servicers don’t have great incentives to get distressed homeowner’s records correct.

There’s well-documented evidence that extra fees are tacked on to mortgages that have fallen behind, fees that aren’t following the terms of the note. This is usually only found out in bankruptcy where there is a lawyer (and multiple parties), not in foreclosure cases. But if homeowners wants to challenge whether what the servicers claim is the correct final due amount, the terms of the note are necessary for the court.

This will matter a great deal for many homeowners. Small, marginal differences in the total owed could allow for a short sale. It could determine if the homeowner has any equity in their home. And this can only be determined by producing the note.

The hope is that homeowners might be empowered to seek better terms and fewer fees from banks and servicers, now that everyone from local courts to the federal government is calling for major investigations of what has gone on.