Introducing the ‘Robo-Signing’ scandal.
Not to be confused with the flash crash or algorithmic trading, this robotic reproach concerns America’s foreclosure crisis.
It seems some mortgage servicers, in their haste to keep up with a growing mountain of foreclosures, may have cut corners — for instance, by signing off foreclosure documents without actually reading them, or doing so without the presence of a notary.
Bank of America, JP Morgan Chase and GMAC Mortgage have all suspended foreclosure cases in 23 states after noting their employees may have mishandled foreclosure documents.
In the meantime, the Office of the Comptroller of the Currency (OCC) has directed seven of the US’s biggest lenders — BAC, JPM, WFC, Citi, HSBC, PNC and USB — to review their foreclosure processes. Some politicians have seized the opportunity to call for a blanket moratorium on foreclosures. See, for instance, the Connecticut Attorney General’s request for a 60-day halt.
This is definitely not what an industry already facing billions worth of mortgage buybacks — themselves caused by breaches or misrepresentations in the original loan documentation — needs at the moment. Moody’s put Bank of America’s servicer ratings on review for a downgrade on Monday because of possible foreclosure delays, which could feed into bank-owned shadow inventory.
Likewise, a break in foreclosures might help temporarily stabilise house prices, but it won’t necessarily be positive for other segments of the mortgage market — for instance, Residential Mortgage Backed Securities (RMBS).
Canadian rating agency DBRS had this to say about it on Monday:
The recent findings could have far reaching implications throughout the industry with hundreds of thousands of homeowners contesting foreclosures that are in process or have been completed; ultimately causing servicers to face losses due to expensive litigation and class action lawsuits. The biggest uncertainty remains on how the courts will view the “legality” of foreclosures that have already taken place and what actions, if any, will be taken to remedy the situation.
DBRS believes that servicers will be able to quickly correct and refile any deficient affidavits in addition to implementing the appropriate controls to ensure there is not another breakdown in process. However, RMBS that contain these loans will likely experience higher loss severities due to longer liquidation timelines, negative rating actions and the potential for loans to be repurchased out of the transaction due to breaches of representation and warranties if it is proven that they were not serviced in accordance with applicable guidelines. DBRS will continue to monitor the impact of this situation on its rated transactions and take any rating actions as necessary.
Related links:
JPMorgan to freeze home repossessions - FT
Flawed paperwork aggravates a foreclosure crisis - NYT
GMAC’s ‘Robo-Signers’ draw concerns about faulty process - ProPublica
Erica Johnson-Seck deposition - Scribd