Perhaps the biggest revelation in the past week—for me—has been the realization that despite the past three years, the mortgage industry has yet to figure out that doing things right the first time is a whole heck of a lot easier than the alternative. For an industry that accounts for roughly 40 percent of U.S. banking assets, you’d think a historic collapse in the market might have alerted a few people to the need to do things differently. I railed last week about the meaning of the so-called ‘robo-signer’ controversy, which at the time involved only Ally Financial; I also suggested it would extend to other lenders and servicers, which it since has. I’ve learned from years covering mortgages as a journalist and columnist that, in general, courts do care about procedural rules—but the ultimate test of any procedure is whether a failure to adhere to it harms another party (in this case, the borrower). The ‘produce the note’ brouhaha from 2008 and the ‘robo-signer’ flap, for example, fail such a test. The borrower isn’t inherently harmed by the use of a certified copy of a mortgage note versus the original, any more than the same borrower would be harmed by the use of a correct affidavit, whether properly reviewed or not. Courts are, however, clamping down on procedural sloppiness. In the case of the GMAC/Ally robo-signer, for example, it turns out that the lender had first been warned about its affidavit signing practices back in 2006. The judge clearly had reached a limit with how many times the court was going to ask GMAC to start following proper procedure—but in no way did the court suggest that GMAC somehow then lacked the legal standing to pursue a foreclosure action. Regardless, the robo-stir led none other than the New York Times’ own Gretchen Morgenson to publish a damning story about that and other alleged notary and signature shenanigans on the part of banks. From her column:
Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary. Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires. On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries.
That last sentence does deserve pause, because it refers to allegations that foreclosing lenders quite literally forged loan assignments. As in someone willingly signed someone else’s name on a dotted line, and managed to then have that document notarized and filed with the court. We'll call this one the 'surrogate signer' controversy, since every good set of mistakes deserves its own name. In the print edition’s front page this past Sunday, the Times also ran some examples of ‘surrogate signers.’ For states that require judicial action to foreclose, all 23 of them, a properly assigned note is a prerequisite for any judicial foreclosure—without it, the foreclosure sale itself may be found invalid by a court. “We’ve been asked by all of our clients to go back into all of our files and review loan assignments, affidavits, everything,” said an attorney, on condition of anonymity. “We’re doing this for more than just the banks everyone already knows about.” Just how widespread is the ‘surrogate signer’ problem? Time will tell. Like nearly every story when it comes to foreclosures, however, there is much more here than meets the eye. And should it become needed, I'll take the time to explain this in great detail to HousingWire's readers. While the procedural gaffes seem to keep getting more and more serious and shocking, it’s still debatable whether or not even this newest mess is the sort of thing that actually harms borrowers—meaning that while the bank might have willfully misrepresented a signature on a loan assignment, does that act really harm the borrower who is in default to begin with? Someone, after all, is ultimately in the position to foreclose when payments on a secured loan aren’t made. Translation: get ready for an avalanche of litigation to answer this and a host of other related questions, all of it expensive. And all of it eminently avoidable, too, had someone actually done things right the first time. Paul Jackson is the publisher of and HousingWire Magazine. Follow him on Twitter: @pjackson