A recent study of San Francisco home foreclosures found widespread irregularities in almost all the home seizures scrutinized. The report, commissioned by San Francisco Assessor-Recorder Phil Ting, was prepared by Aequitas Compliance Solutions Inc. of Newport Beach.
Company partner Lou Pizante conducted the study. He explained its findings …
Us: What did your report show?
Lou: We reviewed about 16% of all foreclosure sales that occurred in San Francisco from 2009 through 2011. The audit shows that 99% of the sampled foreclosures contain at least one irregularity and 84% appear to contain one or more clear violations of law.
Us: What were the key problems identified in your report?
Lou: We looked at six general subject areas, including assignments (which relate to chain of title), notices of default and trustee sale and suspicious activity (like robo-signing). The report, which you can download from the Aequitas website, explains these things in laymen terms. Within each subject area, we looked at a variety of issues.
Two-thirds of the loans had four or more exceptions and more three-quarters of the loans had violations across three or more of the six subject areas. In other words, this was not a case of most of the loans having one irregularity. Most of the loans had many irregularities across different stages of the foreclosure process.
We also compared the MERS database to public records. MERS was created by the mortgage industry as, essentially, an alternative to the public land records system. It is an electronic registry for tracking ownership interests and servicing of mortgage loans. We found that in 58% of the cases the beneficial owner of loan as entered on the trustee’s deed upon sale conflicted with the owner of the loan according to the MERS database.
Us: Weren’t most of these homeowners likely to lose their homes to foreclosure anyway? Why does this matter?
From the San Francisco study/Click to enlarge
Lou: That’s a very good point. Many of these homeowners simply overextended themselves and the resulting foreclosure sales were inevitable. So, what’s there to really care about?
What’s at issue here is compliance with California’s laws relating to non-judicial foreclosure. These are statutory requirements that, in many respects, are rather technical. Why, then, should inadvertent violations provide windfall remedies to reckless borrowers?
First, its important to understand foreclosure in California. Lenders in California rely almost exclusively on the non-judicial foreclosure process, also called statutory foreclosure. This is an expedited process where homes are sold without court approval. Therefore, there is frequently little, if any oversight. Because of this, courts have generally required strict compliance with statutory requirements affording borrower’s due process.
Now, there is plenty of public evidence showing that not all distressed borrowers are reckless deadbeats. We know that some borrowers did not receive fair and accurate disclosures, as required by federal law, explaining the payment and other material terms of their mortgage. Furthermore, the report reveals that a lot of lender’s foreclosing on homeowners don’t appear to own the underlying loans. The fact that homeowners borrowed something, on some terms, from someone should not be enough to rob them of their due process right.
To say most of these borrowers are deadbeats and can be denied their due process rights seems pretty lousy to me. It’s like saying that there might be a falsely accused guy on death row, but—hey—he probably killed someone.
But look, the purpose of this report is not to indict the mortgage industry or bailout borrowers. What’s at stake here is more than merely fairness and homeowner’s due process. Foreclosures impact not only homeowners but also entire communities, housing markets and mortgage-backed securities holders like pension plans. The integrity of California’s record title system is also at stake because the validity of title for subsequent purchasers is dependent on those that precede it.
So addressing this problem is critical to the recovery of the housing market and national economy, and that’s something that everyone has an interest in no matter their political leanings.
Us: Are these problems confined to San Francisco, or do you think the same problems are occurred throughout California?
Lou: The study focused exclusively on San Francisco. However, we are now working with other counties in California requesting similar studies.
My understanding is that lender and servicers practices are essentially the same in San Francisco as elsewhere in the state. And, of course, the same laws apply. So, we’d except to see similar irregularities in other counties, including those hit harder by foreclosures.
Us: How widespread do you think the foreclosure irregularities are in Orange County?
Lou: I cannot speculate as to whether the problems are the same or different. The foreclosing parties are generally the same cast of players and the laws the same, so you’d expect a strong correlation.
Us: What led to such a high rate of irregularities and illegalities in foreclosures?
Lou: It goes back to the origination boom, which was fueled by low interest rates and lubricated by an insatiable securitization market. Lenders’ operational infrastructure couldn’t keep pace with record fundings, and so you had lots of missing and incomplete documentation.
These loans were sold and resold and ultimately packaged into securities. Along the way, the necessary paperwork documenting these loan sales fell through the cracks and, once the market turned, a lot of the sellers of these loans disappeared.
Servicing is a business of razor-thin margins, and these folks had a tough time dealing with record volumes of new and exotic products that didn’t play nice with their systems.
When the party got broken up, the servicers were left to clean up a big mess. Ultimately, all this stuff above made it infeasible to carry out large-scale foreclosures.
That’s why you hear all this stuff about forged or back-dated documents and robo-signing. There are gaps in title that need to be filled. This is also why this is such a big mess to fix. You might have bought a loan but you never got a receipt and now the seller is dead and buried. Its difficult to imagine how the industry can cost-effectively solve these problems ex post facto.
Us: What’s the key lesson? Are the foreclosure laws antiquated?
Lou: Yeah, that’s it. If there is one lesson to take away from this report it is that, with so many homes being foreclosed and with so little oversight, California’s foreclosure process appears utterly broken.
Remember, these laws are more than 100 years old. The non-judicial foreclosure process was created long before things such as the secondary market and mortgage brokers existed. Back then, you rode your horse to meet with the banker, who you knew on a first name basis… sort of like It’s a Wonderful Life.
Surely the mortgage industry has much work to do in order to correct the weaknesses and deficiencies in its foreclosure practices. But to prevent this from happening again, change needs to come from the legislature. The mortgage industry has since seen remarkable innovation over the past few decades. Considering the extent and consequence of the issues, perhaps it is time for the legislature to be similarly innovative.
Us: How do you think the laws should be changed to catch up with the complex world of mortgage securitization?
Lou: As is often the case, it’s much easier to identify the problem than the solution. I have a lot of thought on this but, quite frankly, they require much explaining and go into some pretty arcane and mundane stuff.
Basically, ensuring clear chains of title and the integrity of California’s record title system are essential to the recovery and stabilization of the state’s housing market. So we need laws and systems in place that achieve these objectives without increasing overall costs to mortgage lenders and society generally.
Smart people will disagree on the best approach. But we should all agree that the status quo is unacceptable.
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