Recently 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 have temporarily frozen 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.
Recently, it has come to light that several large banks have routinely used affidavits signed by employees who have not personally reviewed the documents and have no basis for believing that the homeowner is in default or that the bank owns 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.
- Some banks are freezing foreclosures -- but just until they sort out the robo-signing mess. For example, Wells Fargo has just announced it is lifting its freeze, refiling thousands of affidavits, and proceeding with foreclosures where appropriate.
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.
New Options for Homeowners Facing Foreclosure?
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The proliferation of false affidavits, and the subsequent media attention, means that an ever-greater number of homeowners will be able to challenge foreclosures in court. In addition, the robo-signing fiasco provides more leverage for homeowners to negotiate with banks, and it may allow some homeowners to stay in their homes longer due to freezes or delays in processing paperwork.
Challenging a Foreclosure Based on a Faulty Affidavit
Because the robo-signing mess has called into question the integrity of lender paperwork, courts will be more likely to scrutinize bank foreclosure affidavits and documentation and be more willing to entertain homeowner claims that documentation is faulty or false. If you want to challenge the foreclosure of your home based on a faulty affidavit, the process depends on whether you live in a state where foreclosures go through court or not. A third option is to challenge the foreclosure in a Chapter 13 bankruptcy.
Judicial foreclosure states. In about half the states, the foreclosures go through court -- called "judicial foreclosures." In these states, to challenge a foreclosure based on a fraudulent affidavit you simply raise the issue in court at the first opportunity -- in a summary judgment proceeding or at the actual trial, if the more expeditious summary judgment procedure fails.
Non-judicial foreclosure states. In states where foreclosures are completed without going to court (called "non-judicial foreclosures"), the process is not as easy -- the homeowner must file a lawsuit in court to stop the foreclosure. In a number of these non-judicial foreclosure states, a bank cannot foreclose without recording the appropriate documents accompanied by an affidavit attesting to their truth, so the ground for challenging the foreclosure would be similar to that used in judicial foreclosure states.
To find out if there is an affidavit requirement for foreclosure in your state, check your state's statute regarding the foreclosure process. (Look for a requirement that the lender must submit a statement under oath or an affidavit as part of the paperwork.) To learn how to research your state law, see Nolo's Legal Research Center. Also, see Nolo's Best Foreclosure Websites for a list of helpful foreclosure websites. A number of these sites summarize state foreclosure statutes.
Chapter 13 bankruptcy. Homeowners may also challenge foreclosures in Chapter 13 bankruptcy. In Chapter 13 bankruptcy, creditors (including mortgage lenders) must file a claim in order to secure payments on their mortgage under the debtor's Chapter 13 repayment plan. As with all other creditor claims, a homeowner in Chapter 13 may oppose the claim based on the lender's inability to provide the correct documents establishing the debt and sworn testimony to their truth. (To learn more about what happens to your home in Chapter 13 bankruptcy, see Nolo's article Your Home in Chapter 13 Bankruptcy.)
Delays in Processing Foreclosures
As mentioned above, the robo-signing mess has forced some banks to temporarily freeze all foreclosures. And even if the foreclosing bank hasn't stopped foreclosures, or has resumed foreclosures, the process may be delayed. Banks are scrambling to gather the correct documentation, and going forward it will take longer to get a foreclosure affidavit signed if banks can no longer use robo-signers and, instead, must require bank officers to actually spend time reviewing the property file, loan papers, and other documents before signing the affidavit. And, despite what some banks have said, this is not a mere technicality. There are many instances of demonstrably false or legally faulty paperwork being submitted, and it may be that the banks will simply not be able to demonstrate the veracity of the necessary documents.
Opportunities to Negotiate
Because of the mounting evidence of robo-signing and sloppy bank paperwork, courts may be more inclined to believe that foreclosure paperwork in any given case is faulty. As a result, if a homeowner is able to cast uncertainty regarding the required foreclosure paperwork, banks may be more willing to go further than they have in negotiating some type of mortgage modification -- such as reducing principal, interest rates, or payments -- rather than risk having to prove the accuracy of their documents in court.
Of course, if you can point out a defect in the paperwork, your leverage will increase. But even if you can't find a defect, you may still get the lender to negotiate by raising the possibility of faulty paperwork. The lender may discover that its paperwork is less than stellar or that it would rather negotiate with you than prove the opposite in court.
More Bad News for Mortgage Lenders: Class Actions and Criminal Prosecutions
The robo-signing scandal may bring more bad news to the mortgage lending industry in the form of class action lawsuits and even criminal prosecutions. Attorneys general in all 50 states have launched investigations to see what laws, if any, have been broken. In addition, people whose home foreclosures were based on false affidavits may be able to get their homes back if those homes are still in the possession of the foreclosing bank.