por Nick Timiraos
JJoselin Reyes and other supporters listened while citizens affected by the foreclosure crisis gave testimonials at the Wells Fargo demonstration yesterday. (PHOTO FROM RICHMOND CONFIDENTIAL)
Banks trying to foreclose on homeowners are hitting another roadblock, as some delinquent borrowers are successfully arguing that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.
These “show me the paper” cases have been winding through the courts for several years. But in recent months, some judges have been siding with borrowers and stopping foreclosures after concluding that banks’ paperwork problems are more serious than previously thought and raise broader ethical questions.
This year, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others have raised questions about whether banks properly demonstrated ownership.
During the fall, banks temporarily suspended foreclosures to address so-called robo-signing problems, where employees were approving legal documents without properly reviewing them. They said that in weeks they could fix what they considered to be simple clerical errors. But borrowers are uncovering new types of document problems, further delaying banks’ efforts to get foreclosures back on track.
In some cases, borrowers are showing courts that banks failed to properly assign ownership of mortgages after they were pooled into mortgage-backed securities. In other cases, borrowers say that lenders backdated or fabricated documents to fix those errors.
“Flawed mortgagebanking processes have potentially infected millions of foreclosures, and the damages against these operations could be significant and take years to materialize,” said Sheila Bair, chairman of the Federal Deposit Insurance Corp., in testimony to a Senate committee last month .
Last month, the Maine Supreme Court reversed the foreclosure of Dana and Robin Murphy of Auburn, Me., after concluding that the mortgage company, a unit of HSBC Holdings PLC, filed “inherently untrustworthy” documents. An HSBC spokesman declined to comment.
The case began in 2008 when HSBC filed to foreclose on the Murphys, who hadn’t made a mortgage payment in two years. A trial judge initially rejected HSBC’s foreclosure because the bank couldn’t show it owned the promissory note—in effect, the borrower’s IOU.
The court later granted the foreclosure after HSBC submitted new paperwork. However, the Murphys found discrepancies and alleged that the documents were backdated. The court voided the foreclosure and sent the case back to the lower court to determine potential penalties.
Attorneys for borrowers reject the view that they are using arcane legal rules to secure free houses for clients who aren’t paying their bills. Efforts to gloss over incomplete or falsified evidence “can’t be tolerated by a free society,” says Thomas Ice, an attorney in Royal Palm Beach, Fla., who has a similar case before the Florida Supreme Court. “This is a huge assault on our legal system” that risks “turning us into a banana republic.”
