By Zachary A. Goldfarb, Dina ElBoghdady and Ariana Eunjung Cha
Washington Post Staff Writers
Thursday, October 14, 2010; 12:31 AM
Federal regulators sought Wednesday to prevent the growing furor over improper foreclosures from escalating, pressing mortgage lenders to replace flawed and fraudulent court documents while insisting that foreclosures continue apace.
The approach adopted by the Federal Housing Finance Agency (FHFA) is Washington's clearest response so far to a crisis that threatens to roil the national real estate market and overwhelm courts around the country.
Some consumer advocates and lawmakers said the policy wassoft on banks, and industry insiders said the approach may have little effect, because many lenders are already taking such steps. In addition, the handling of individual court cases is the province not of federal officials but of judges at the state level.
Judges handling foreclosure cases in the Maryland suburbs said Wednesday that they have begun to take concrete steps to cope with alarming problems now apparent in legal documents.
In Prince George's County, which has the Washington area's highest foreclosure rate, the circuit court has ordered a special review of cases in which lawyers have acknowledged they did not sign the documents as they had earlier claimed. The circuit court is scheduled later this fall to slowly begin reviewing some of the 14,500 foreclosure cases pending in the county. A judge in Montgomery County said the court is putting about 400 foreclosure sales on hold while waiting for lawyers to explain why they had not actually signed the legal paperwork in those cases as they had initially said.
As a result, some foreclosures in these counties may be dismissed and home buyers who are poised to purchase these properties may lose the chance.
The actions taken at the federal and state level come amid a public debate over whether a moratorium on foreclosure cases - now enacted in some states and by some lenders - should be extended nationwide.
Earlier Wednesday, J.P. Morgan Chase announced that it plans to expand its review of home loans from 23 states to roughly 115,000 in 41 states, saying it had "identified issues" in foreclosure documents. And attorneys general in all 50 states announced that they are joining to probe mortgage loan servicers.
The FHFA's policy statement, which officials said was developed in consultation with other federal agencies, underscores the Obama administration's opposition to a national freeze on the grounds that it could damage the economy.
"Delays in foreclosures add cost and other burdens for communities, investors and taxpayers," the agency said.
The FHFA was established during the financial crisis primarily to regulate Fannie Mae and Freddie Mac, the troubled mortgage finance companies seized by the federal government. While the agency does not oversee banks or most other financial firms directly, the regulator can still exert pressure by way of its authority over Fannie and Freddie, which now own or guarantee well over half the nation's home loans. If banks and other lenders do not follow the policy prescriptions, the FHFA could threaten to impose financial penalties and other sanctions.
The policy statement tells lenders to make sure that documents used as part of the foreclosure were properly reviewed and signed. If they weren't, lenders must work with local lawyers on a fix. This could include filing new paperwork.
"The country's housing finance system remains fragile and I intend to maintain our focus on addressing this issue in a manner that is fair to delinquent households, but also fair to servicers, mortgage investors, neighborhoods and most of all, is in the best interest of taxpayers and housing markets," the FHFA's acting director, Edward DeMarco, said in a statement.
The policy statement drew fire from some lawmakers and consumer groups.
Sen. Al Franken (D-Minn.) said the plan "seems to only require that servicers conduct an internal review - the very same servicers that brought us this mess."
John Taylor, head of the National Community Reinvestment Coalition, said he was disappointed with the Obama administration's continued reliance on the banking industry to do he right thing. "I think the magnitude of the crisis is such that we want to do something other than rely on a voluntary system of compliance," said Taylor, whose group represents 600 consumer advocacy groups nationwide.
Concerns about the foreclosure process have spiked amid reports that lenders in many cases used fraudulent paperwork or "robosigners," who vouched for tens of thousands of documents without reviewing them, to evict struggling borrowers. State and federal officials have increasingly questioned whether the rush to foreclose violated legal guarantees meant to protect borrowers.
Maryland Gov. Martin O'Malley (D) and the state's lawmakers in Congress sent a letter to the chief judge of Maryland's Court of Appeals on Saturday asking him to halt foreclosures in the state for at least 60 days.
The letter argued that many homeowners lack the resources to mount meaningful challenges and that the courts are too overwhelmed with foreclosure filings to discover the "fraud" on their own.
"Because we can no longer have confidence in the process by which the documentation justifying a foreclosure is produced, the fundamental fairness of the entire foreclosure process is now in serious doubt," the letter said.
Circuit judges in Prince George's and Montgomery counties said they are revisiting foreclosure cases in which "corrective affidavits" have been filed. In those filings, foreclosure lawyers acknowledge that they did not sign the original affidavits or documents - which claim to have been signed before a notary public under oath - but have since reviewed the paperwork and affirmed the information is correct.
Judge Thomas P. Smith, who heads a new foreclosure committee in the Prince George's court, said that last week he ordered the court's auditor and foreclosure unit clerks to bring him any cases with this kind of supplemental affidavit if there was a motion pending to repossess the house or if the foreclosure had not yet been ratified by the court.
"I'm looking at the first 50 cases on December 9th and the next 50 on December 15th until we finish," Smith said. He added that he does not know how many cases he will receive. In all the cases at issue, he said, the court is ordering that the foreclosure papers be refiled with a legible signature within 30 days. If the deadline isn't met, the cases could be dismissed, he said.
Smith said the problems surfaced in his court in August, when a lawyer representing a homeowner noticed a corrective affidavit in court records related to his client's case and brought it to the judge's attention. The court then started researching the issue.
In Montgomery County, foreclosure lawyers have filed corrective affidavits in roughly 400 foreclosure cases, some of which have already been ratified, said John W. Debelius III, the circuit court's administrative judge.
"The position we're taking is that these corrective affidavits are putting us on notice that there is some deficiency," Debelius said. "As of right now, those sales are not being ratified. Whether they will be is an open question."
The burden will be on the lawyers to justify why the sale should be ratified, or they may choose to dismiss the case and start the process all over again, Debelius said.
Separately, six notaries have been removed from office since August, said Rick Morris, director of charities and legal services at the Maryland secretary of state's office. All worked for law firms that handled foreclosures, Morris said. These notaries did not witness the person sign the document or did not keep a registry as a record as required by state law.
"The six notaries involved in this were afforded the opportunity for a hearing in the office of secretary of state," Morris said. "Based on failure or refusal to have a hearing, we removed them from office."
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