Robo-Signers Under Scrutiny – Foreclosures Temporarily Halted

Posted on October 6th, 2010

In the newest twist on the ever-growing foreclosure crisis, up to 23 states are
either in the process of – or considering – suspending foreclosure evictions and
sales due to “procedural errors” associated with Robo-signers.

Defining a Robo-Signer

Large mortgage lenders with tens of thousands of defaulted loans to deal with
have been turning to “Robo-signers” to help with the backlog. Basically it works
like this…every home that is in a state of foreclosure is supposed to have a
professional review the documents for accuracy including whether or not the bank
actually owned the property, foreclosure affidavits and other documents. Not
only was each property portfolio to be reviewed and signed off on in the
presence of a notary public, but without proper documentation, lenders do not
have legal standing to foreclose.

A Big Problem

The problem is a big one. According to GMAC (a subsidiary of Ally Financial
which is now 56% owned by the U.S. Treasury), just one of their Robo-signers has
processed in excess of 10,000 foreclosures a month – or an estimated 120,000 per
year. GMAC has currently stopped foreclosures in judicial states where
procedural errors may prove to have significant repercussions. Attorneys
representing homeowners and former homeowners are already contemplating mass
action litigation due to the potential widespread abuse of the system which may
have led to thousands or even tens of thousands being evicted and foreclosed
upon erroneously. GMAC is not the only lender to engage in Robo-Signers;
JPMorgan Chase is also under scrutiny as a former Robo-Signer reports having
signed off on up to 18,000 foreclosures in one month.
According to recent testimony from ex-employees, it wasn’t unusual to sign-off
on up 750 foreclosure related documents each week. With a standard work week
that would represent roughly 30 seconds per document with some of the most
notorious robo signers putting in far less time per document. Concerns over the
quality of review and evaluation are expected to further contribute to the
questionable practices and documentation errors plaguing the industry. What’s
the likely outcome for real estate investors? Long, slow processing times.

Unanticipated Fall-Out

Just when you thought it couldn’t get any worse comes the news that robo signers
may have inadvertently cost many homebuyers to lose their tax credits just days
before the deadline due to the suspension in foreclosure sales. Ally Financial
(aka GMAC) has eventually stopped foreclosures in roughly half the states due to
robo-signing irregularities. Meanwhile, the extension for tax credits expired as
of Sept 30th, costing buyers  between $6,500 and $8,000 in tax credits.

On the Horizon

As news of the robo-signers continues to escalate, politicians and legal
professionals alike are calling for further investigations. California Attorney
General Edmund Brown is demanding that JPMorgan prove they are able to comply
with state law or cease foreclosures. Senator Al Franken is asking regulators to
investigate Ally/GMAC foreclosures both present and past. Massachusetts Attorney
General Coakley has called on BoA and other lenders to halt all foreclosures
until investigations are performed. Rep Alan Grayson seems to be using it as
part of his platform rally and the banks…well, the banks just keep telling
everyone it will be okay since it is unlikely to have significant impact on
business. Hmmm…..where have we heard that before?

Potential Fall-Out

The ramifications of this ongoing turn is expected to have profound impact.

Investors – Expect a dramatic slowing of properties as legal eagles and
politicians alike closely scrutinize records of all current transactions.

Lenders – potential for litigation increases but perhaps of even more concern is
the threat of having to reveal all pending and/or “off the books” properties in
the shadow inventory. Keep a close eye on the financials of these banks as the
story unfolds.

Title Insurance Woes – Old Republic, a national insurance underwriter, has
already directed agents to stop writing policies on GMAC foreclosed
properties…a position which will immediately halt the sales of impacted
properties. Other title insurance providers are expected to follow. A precursory
examination of Florida titles has already indicated up to 75% contain material
irregularities, prompting officials to proclaim the problem will have far
reaching implications for at least the next decade.

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