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Nationwide Probe Launched to Look for Flaws in Foreclosure Process

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By Toluse Olorunnipa and Ina Paiva Cordle

RISMEDIA, October 15, 2010—(MCT)—In a new foreclosure crisis that has gone national, attorneys general in all 50 states plus the District of Columbia have launched a sweeping probe of the country’s lenders, even as new figures showed banks repossessed a record number of homes in September.

The joint investigation, led by Iowa Attorney General Tom Miller, seeks to find out whether mortgage servicers and banks have been using flawed documents in court proceedings that have dispossessed hundreds of thousands of distressed homeowners.

The announcement comes at a time when the foreclosure debacle—which encompasses millions of now-questionable documents, foreclosure-shy title insurers and law firms processing paperwork at a dizzying pace—has mushroomed in magnitude.

GMAC and JPMorgan Chase recently followed in the footsteps of Bank of America by expanding their foreclosure suspensions. Those freezes, previously restricted to 23 states, now blanket the entire country, encompassing hundreds of thousands of distressed homes. But two of the nation’s other top lenders, Wells Fargo and Citigroup, have not stopped their foreclosure processes.

Recently released figures reveal that in the months before the foreclosure system began to implode, lenders were ramping up their home repossession operations to unprecedented levels.

According to RealtyTrac, an Irvine, Calif.-based real estate research firm, lenders reclaimed 102,134 homes nationwide in September, the first month that bank repossessions have ever reached the 100,000 mark.

With jurisdiction over one out of every eight mortgage servicers, Florida stands at the forefront of a probe that could lead to criminal charges, more delayed foreclosures, new regulations and tons of litigation.

In Florida, which has one of the nation’s highest foreclosure rates and an overwhelmed court system, the investigation could further complicate the process of home repossessions and possibly help homeowners challenge banks.

“Florida is taking a leading role in this multistate initiative as a member of the Executive Committee of the multistate group,” Florida attorney general spokeswoman Ryan Wiggins said in a statement.

In South Florida, the rate at which homeowners are entering into foreclosure is slowing—but some 22,500 homes are currently caught somewhere in the pipeline, RealtyTrac found.

As the legal tension grows between major lenders, attorneys general and foreclosure law firms, South Florida’s distressed homeowners are left with the task of navigating the unpredictable environment.

One of those homeowners is Annie Edwards, a wheelchair-bound retiree whose degenerating house in Liberty City is being foreclosed upon by Deutsche Bank under questionable circumstances.

After owning the home free and clear, Edwards faces the threat of having it repossessed after a suspicious trail of documents left her stuck under a $100,000 mortgage on a property her lawyer says is worth nowhere near that.

Jonathan Heller, who is representing Edwards, said a family member forged her signature on a quit-claim deed in 2005, and a bank loaned her stepson more than $100,000 for the run-down home without her knowledge. Now Deutsche Bank is moving to foreclose on the property, which could leave Edwards, her two daughters and seven grandchildren homeless.

“The year before the loan was made for $100,000, the Dade County appraiser valued the house at $34,000,” said Heller, who is representing Edwards pro bono. “Lending $100,000 on that property just raises questions—it confirms the problems that plague the industry.”

A spokesman for Deutsche Bank declined to comment specifically on the case, but said it acts merely as a trustee, and is not responsible for foreclosure decisions by loan servicers. Heller has launched a counterclaim against Deutsche Bank for wrongful foreclosure and is taking depositions of bank executives. “As expected, the corporate rep knew nothing about the case, the loan docs, the forged deeds,” Heller said after a recent deposition.

As banks halt foreclosures nationwide and the new multi-state task force investigates a wide swath of lenders, the effect could be significant in belabored courts in hard-hit regions such as Florida. There are more than 150,000 foreclosure cases pending across South Florida’s judicial systems, and banks have frozen a large chunk of them to review critical legal documents.

Retired Miami-Dade Circuit Court Judge Jorge J. Perez has been closely watching the developments, and said the foreclosure “sub-crisis” couldn’t have come at a worse time for the courts.

“We were seeing a slight drop in the number of foreclosure filings, and we were seeing the backlog being whittled down,” he said. “All of a sudden we’re seeing this new, potentially critical matter. It’s like two steps forward and one step back.”

Perez, a partner at law firm of Gordon & Rees, said he foresees mountains of litigation resulting from this, as homeowners arm themselves with lawyers and go on the offensive against banks.

Meanwhile, the new hodgepodge of investigating agencies is in the beginning stages of an expansive probe of the banks’ lending and foreclosing practices.

More than 50 financial regulating agencies from all over the country are working with the group of attorneys general in the bank probe, including Florida’s Office of Financial Regulation (OFR).

OFR has oversight over mortgage loan servicing companies, and more than one-eighth of the national mortgage servicing market falls within Florida’s regulatory authority, said Flora Beal, spokeswoman for the Florida OFR.

“The office is looking into the foreclosure policies and practices of the mortgage servicing agencies under our jurisdiction, whose combined portfolios are an estimated 13 percent of the loan servicing market,” she said.

Florida regulators are in the first phase of their inquiry, sending letters to lenders requesting information on policies and confirming that they are adhering to laws. Providing a false statement to regulators is a criminal offense and is cause for suspension or revocation of their license, Beal said.

Perez believes that inquiry could uncover even more suspicious activity, worsening what is already a troubled foreclosure system. “It’s not the end of the world—it does have a solution,” he said. “But the solution is more complicated and will take longer to work its way out.”

(c) 2010, The Miami Herald.

Distributed by McClatchy-Tribune Information Services.

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