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ForeclosureGate: The Definitive Guide To Foreclosure Moratoria And What It Means For You

National news has been dominated by myriad foreclosure freezes, rumors of moratoria and general uncertainty about what the possibility of indefinite holds on foreclosures around the country means for real estate investors, homeowners, the economy and the country as a whole. We decided that it was time to stop focusing on the minutia of this crisis – as, indeed, it is becoming – and take a look at the larger picture in order to explain exactly what happened, and when, to set off the current domino effect that is sweeping the mortgage industry and threatening to send the housing market back into a double dip.

In this series, we will not only explore the events and issues that you need to know in order to understand what is happening now and what brought it is about, but also bring you a variety of perspectives on the Foreclosure Freeze Crisis, now being called “ForeclosureGate” by some media outlets. What does the foreclosure freeze mean for you? Some investors claim that their business is booming. Others are shutting down.

Analysts are, for the most part, predicting doom and gloom, but others believe that this, like many other aspects of the housing crisis, is something that the housing market will just have to get through in order to heal. You will have to make your own decisions about how to react to a scandal that seems to be spreading in magnitude – appropriately or not – with every hour. Understanding the basic events behind the problem will help you determine how best to thrive in today’s real estate investing environment.

How It All Began

In mid-September, the rumors started to fly: GMAC/Ally was calling a halt to foreclosures. According to Daily Finance, Bloomberg and other media outlets, on September 20, 2010 “GMAC Mortgage told its agents and brokers to stop foreclosures on homes in 23 states, including Florida, Illinois, Indiana and Ohio”. Daily Finance later partially retracted the report, posting a press release from Ally Financial that denied that GMAC Mortgage was halting foreclosures. In part, that press release stated that “In fact, all new residential foreclosures are continuing in the ordinary course of business with no interruption in our usual practice.” However, it would soon become apparent that GMAC/Ally had a problem, and soon a lot of other lenders would, too.

That problem took the form of the now-notorious “robo-signer,” a mortgage-servicer employee – who turned out to be many, many employees in many, many different lending bodies – who signed affidavits, assignments of mortgages and other documents that established the bank’s ownership of a mortgage, thereby giving the lender the right to foreclose. GMAC’s original robo-signer was, by most accounts, Jeffrey Stephan, who “didn’t really look at each case” that he signed, assuming all the details were correct. This confession came to light during depositions given in December 2009 and June 2010. As the case received more and more publicity and with lawyers for borrowers in foreclosure arguing that the banks trying to repossess homes probably did not have the legal standing to do so, more and more lenders found that they had their own robo-signers nestled in cozy offices signing away. The next “big” hit was a Chase document signer named Beth Ann Cottrell, who claimed that she and eight others in her department “signed about 18,000 foreclosure-related documents a month, including affidavits of indebtedness”. Upon further questioning, Cottrell revealed that she had no personal knowledge of the documents that she was signing.

An affidavit of indebtedness and affidavits of foreclosure are the documents that establish whether or not the lender actually owns the debt and whether or not the debt is in a position to warrant foreclosure. By signing off on these documents without so much as a cursory review – much less the legally requisite thorough review and verification process – the robo-signers, who have been growing in number since other lenders started their own internal investigations, placed thousands, if not tens of thousands or even millions, of foreclosed homes in limbo. Because there is now an uncertainty about thousands and thousands of foreclosures that were signed off on by robo-signers and, indeed, everyone else involved in the process even if they are not currently labeled with this nomer, banks and homeowners cannot move forward with the foreclosure process because it is simply unclear who, if anyone, has the right to do so.

Judicial vs. Non-Judicial Foreclosure

As the ripples spread, more and more lenders began their own investigations on their foreclosure processes and many, like GMAC, initiated foreclosure moratoria. While GMAC/Ally was the first to announce a moratorium on foreclosures in the 23 judicial foreclosure states, other lenders quickly followed suit with JP Morgan Chase and Bank of America quickly climbing on board with self-imposed, temporary and indefinite moratoria in those 23 states to examine their own foreclosure practices. Interestingly, Wells Fargo has remained firm that it has a policy of continual review, critique and reinforcement in place that “daily…demonstrate(s) that our foreclosure affidavits are accurate”. Other lenders, however, have not behaved as confidently thus far, and many are finding themselves the target of state attorneys general and legislative action designed to force a moratorium in non-judicial foreclosure states or nationwide.

Judicial and non-judicial foreclosure processes have played a major role in this controversy. Judicial foreclosures are handled through the courts. As a result, they are more easily suspended because the process is uniform throughout the state, and this played a major role in lenders’ decisions to first suspend foreclosures in judicial-foreclosure states. It is simply easier to do. In judicial foreclosure states, lenders file a complaint for an unpaid debt and explain why the default should result in foreclosure. Ultimately, both parties have the option to be heard before the court and a judge will determine whether or not the debt is valid. If it is determined to be valid, the collateral property goes up for auction.

On the other hand, a non-judicial foreclosure process happens without court intervention and varies by state. The homeowner generally receives a default letter and, if the debt continues to be delinquent, a notice of sale prior to eviction from the property and a public auction. Non-judicial foreclosure states each have their own specific rules and regulations, and each of these 27 states are slightly different, making the process more complicated than in judicial-foreclosure states.

As you can see, it would be a fairly simple matter to halt foreclosure proceedings in judicial-foreclosure states because it would simply require that the cases in court and headed to court be suspended. However, in other states with non-judicial foreclosure, notifications of varying types and different legal filings would have to be shut down on a highly specialized level. Nevertheless, at the time of publication, Bank of America had suspended foreclosures in all 50 states for an indefinite period of time and GMAC/Ally had expanded their review process to all 50 states using “independent” legal and investigative firms. As the lenders impose their own moratoria, politicians at all levels of government are scurrying to follow suit in order to protect their constituents from potential foreclosure fraud and to help build a loyal following in time for the November elections.

State Attorneys General and Legislators in Action

From the beginning of this foreclosure freeze, state attorneys general have played a major role in the process. A number of state attorneys general moved early in the investigations to gain legal injunctions that would result in statewide moratoria on specific lenders’ foreclosures and on foreclosures in general. In some cases, the move was simply to make sure that all foreclosures in a state were investigated before they moved forward, such as in the case of Indiana, which is a judicial-foreclosure state and already had suspensions in place for GMAC/Ally, JP Morgan Chase and Bank of America. Indiana AG Greg Zoeller moved to join in a coordinated probe spearheaded by Iowa AG Tom Miller to investigate “sloppy, rushed or even fraudulent paperwork used to foreclose on mortgages and evict borrowers from their homes”. Texas AG Greg Abbott, on the other hand, sent letters to 30 individual lenders asking for “a halt on all foreclosures, all sales of properties previously foreclosed upon and all evictions of persons residing in previously foreclosed-upon properties”. The AG’s office is opting to request the review process and moratorium while it attempts to gain a legally-enforceable moratorium on home foreclosure in the state. AG Abbott took this route because the lenders’ nationwide moratoria only extended to states in which foreclosure is a judicial process.

Elsewhere in the country, other legislators and politicians were getting in on the action. For example, in California, congresswoman Maxine Waters (D) and a number of other legislators worked to convince the federal government to suspend foreclosures at least in their state, if not nationwide. Thus far, the federal government has not entered the foreclosure moratorium fray, preferring to allow “attorneys general from each state to investigate banks’ mortgage foreclosure filings and make individual judgments on whether to pursue further action”. Considering that thus far, even GMAC is reporting that it has not detected a single unwarranted foreclosure, this could be the best option for the federal government and the economy, since a nationwide foreclosure freeze could easily send the delicate housing market spinning back down into a double dip and jeopardize regional economic recovery as a whole. “There are a series of unintended consequences to a broader moratorium,” White house spokesman Robert Gibbs told reporters. Thus far, the federal government appears to be determined to avoid these consequences – or at least avoid being the culprit for these consequences – if at all possible.

What It All Means for Foreclosures: Mixed Media Messages

From the start of “ForeclosureGate,” the media has played an essential and defining role in the entire foreclosure moratorium process. For example, GMAC/Ally announced a 50-state review of its foreclosure process. However, this “review” swiftly metamorphosed into a suspension according to many media outlets – likely because Bank of America recently suspended foreclosures in all 50 states pending review. GMAC/Ally, however, firmly stated less than 15 minutes ago (as of press time) that it would be reviewing, not halting, foreclosures in the additional states. As yet, the lender says it has not found any evidence of “inappropriate” foreclosures, though it has delayed foreclosures in some instances.

While the media and the public struggle to determine just exactly what is going on, many players in this drama are saying little more than they absolutely have to about the process. Lenders are feeling public pressure from just about everyone to do something, but that “something” ranges from continuing with business as usual in order to keep the economy moving and the housing market from tanking again to stopping everything completely in order to avoid accidentally evicting an undeserving homeowner. The result? Chaos, and stories like Amanda Ducksworth’s. Ducksworth was supposed to move into a new home in Ocala, Florida, this week and gave up her rental home with that in mind, but instead is living in a single bedroom in her boss’ house with her son while the home’s earlier foreclosure is investigated. She has no idea when the process will be completed, or if she will still have a house under contract at the end of the process. In fact, she does not even know if she has a house under contract now since the home has been pulled from the market.

While many politicians are praising this type of market-changing move, the protection they are trying to afford existing homeowners in foreclosure may be driving home buyers right out of the marketplace. Tim Ryan, president of the Securities Industry and Financial Markets Association, released a statement late last week calling the potential for a complete foreclosure halt “catastrophic” for the U.S. economy and home sales. However, thanks to the murky waters surrounding foreclosure processes, many buyers now are already questioning the validity of entering the housing market at such a juncture, which could lower home prices further as buyers beat a quick retreat. Furthermore, some title companies are refusing to insure mortgages from lenders that have imposed moratoria, reviews or both. This further complicates and slows home sales.

Ultimately, this is a huge problem. Indisputably, robo-signing should never have happened. But now that it is here, acknowledged and clearly a fact of real estate life, we, as real estate investors, have to determine how to work within the new confines of the housing market’s reality. While some experts point out that only about 20 percent of the nation’s homes are in foreclosure and, therefore, even if the drastic measure of taking all foreclosure out of the equation were enacted we would still have 80 percent of the property in the country to work with, it is important to bear in mind that in some areas of the country, nearly half of all real estate transactions involve a foreclosure in some form or fashion (California is at 43%). A foreclosure moratorium will not just impact homes that are in foreclosure right now, but also real estate owned (REO) properties currently in possession of banks, REOs that were sold during the time period in question, pre-foreclosure and distressed properties and homeowners that are the target for many real estate investors currently, and short sales.

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