Banks’ Negligence, "Tip of the Iceberg":A legal inside view of banks are halting their foreclosures.

Last week, we saw three of the nation’s top banks (GMAC, JP Morgan Chase and Bank of America) stop foreclosures due to irregularities in paperwork signed by bank employees. Also a total of 7 of the nation’s largest banks have been ordered to review their foreclosure procedures: JP Morgan Chase; Bank of America; HSBC Holdings; Wells Fargo; U.S. Bancorp; and PNC Financial Services Group.


While JP Morgan Chase tried to downplay the problem by saying it only (ONLY) applied to some 56,000 foreclosures, those of us in the “know” believe that this is the “tip of the ice berg”. And on a daily basis, the list of banks who have either stopped foreclosures or are reviewing their foreclosure processes is growing longer.

While I was thrilled to see the regulatory order 7 of the largest banks to review their paperwork and procedures, as an attorney in California who represents distressed home owners in various stages of default on their mortgages, my first reaction was WHAT TOOK THEM SO LONG?????

I am constantly reviewing bank documentation. What I have found in almost every instance is that the documentation from the bank is non-compliant – or in other words, a mess.

For example, borrowers seeking loan modifications are constantly being made to send and resend the same paperwork over and over again –only to be told that because the bank doesn’t have the paperwork, the process has to be restarted. Even when the borrower proves the paperwork was received by the bank, it still doesn’t change the outcome.

Borrowers are denied modifications of their mortgages because no one at the bank bothers to look at their financial information. Borrowers are sent denial letters even though their lenders have financial records in their possession that clearly establishes the borrower’s qualifications for the modification. And, yes, the borrower is left to start the process from scratch!

In many instances, borrowers who qualify under HAMP are placed in more perilous foreclosure alternatives such as “special forbearance agreements” which contain language that if the borrower is one day late with a payment, the agreement is breached and the house will go into foreclosure.

I review Notices of Default and Notices of Trustee Sales daily, and I have yet to see one done correctly by any lender. In California, we have certain provisions of the Civil Code that in detail spell what actions a lender must perform to try to prevent foreclosure. And one would think that the lender should have to document compliance with all of the terms set forth in the California Civil Code.

Unfortunately, this is not the case. These lenders only have to include a short declaration stating that it complied as opposed to a list of what actions they actually took. The only detail to the statement is that it must be made by a person who actually has personal knowledge of compliance as opposed to a third party.

Mortgages are constantly sold and resold usually in large “pools” of loans – thus the term pooling agreement. So it isn’t unusual for a lender that has commenced foreclosure proceedings to sell the note to a third party, sometimes a large investor, sometimes a pension fund, and sometimes other lending institutions. When this happens, an assignment under the deed of trust is supposed to be executed and recorded in favor of the new note holder or servicing bank (bank collecting the money ….. servicing the loan on behalf of the note holder).

These procedures are fairly simple – and yet it is absolutely shocking how many homes are wrongfully foreclosed because of lack of compliance with even the simplest regulations.

This is not uncommon! What is unconscionable is that the federal government has allowed these banks to continue to “run wild” while only stepping in when the problem is so pervasive, so serious, that the cure may trigger yet another crises to the American economy that is even worse than what is now being experienced.

For the legal mind, this is an exciting time to be practicing law. But for American homeowners, it is one more burden they must bear in an already burdensome economy.