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The robo-signing scandal is an opportunity for homeowners to challenge foreclosures in court, negotiate with lenders, and buy time.
The media and courts have slammed the mortgage lending industry for using false affidavits in thousands of foreclosure cases. Because of the "robo-signing" scandal, several large banks temporarily froze all pending foreclosures. For some homeowners, the robo-signing mess may create opportunities to challenge their foreclosures in court or negotiate with lenders to avoid foreclosure. Read on to learn about the massive robo-signing problem and what it means for homeowners.
What Is Robo-Signing?
As part of the foreclosure process in the 25 or so states that require judicial foreclosure (the lender must go to court), the lender must demonstrate that the homeowner has defaulted on a mortgage and that the lender owns the mortgage. (To learn more about the foreclosure process in judicial foreclosure states, see Nolo's article How Foreclosure Works.) Typically, in a judicial foreclosure state, the lender proves the requisite facts by submitting documents and a written statement signed under oath (called an affidavit) by a person (usually a bank employee) who has reviewed the documents and who is supposed to have some personal basis for believing the facts to be true. The idea is to prevent foreclosures on homes where the foreclosing bank cannot prove that it actually owns the mortgage (which is more common than you might think) or where the homeowner is not actually in default to the degree asserted in the foreclosure papers. It came to light that several large banks routinely used affidavits signed by employees who did not personally review the documents and had no basis for believing that the homeowner was in default or that the bank owned the loan. Employees for financial giants like Bank of America, JP Morgan Chase, Wells Fargo, and GMAC have all testified that they signed many thousands of affidavits a month, spending about 30 seconds on each affidavit, and that they didn't have a clue regarding the veracity of the affidavit or the documents in question -hence the name "robo-signers."
In states where foreclosure must go through the court system, more and more judges are taking a closer look at the affidavits and paperwork and refusing to sign off on the foreclosure. In states where foreclosure does not go through court, some homeowners are bringing lawsuits to stop the foreclosure on the ground that false affidavits have been recorded as part of the non-judicial foreclosure process.
lawsuits are expensive the lender can get only a money judgment (not possession of the property), and the likelihood of collecting this judgment from the homeowner is small, and the homeowner can avoid personal liability for such a judgment by filing for bankruptcy.
In addition, in California and a few other states, the lender is not permitted to sue for breach of contract on first mortgages (called "nonrecourse loans"). The bottom line: If the lender cannot foreclose on a property, it does not have a good method for getting mortgage payments, or their equivalent, from defaulting homeowners. The proliferation of false affidavits, and the subsequent media attention, means that an ever-greater number of homeowners will be able to challenge foreclosures in court. In addition, the robo-signing fiasco provides more leverage for homeowners to negotiate with banks, and it may allow some homeowners to stay in their homes longer due to freezes or delays in processing paperwork.
mortgage under the debtor's Chapter 13 repayment plan. As with all other creditor claims, a homeowner in Chapter 13 may oppose the claim based on the lender's inability to provide the correct documents establishing the debt and sworn testimony to their truth. (To learn more about what happens to your home in Chapter 13 bankruptcy, see Nolo's article Your Home in Chapter 13 Bankruptcy.)
Opportunities to Negotiate
Because of the mounting evidence of robo-signing and sloppy bank paperwork, courts may be more inclined to believe that foreclosure paperwork in any given case is faulty. As a result, if a homeowner is able to cast uncertainty regarding the required foreclosure paperwork, banks may be more willing to go further than they have in negotiating some type of mortgage modification -- such as reducing principal, interest rates, or payments -- rather than risk having to prove the accuracy of their documents in court. Of course, if you can point out a defect in the paperwork, your leverage will increase. But even if you can't find a defect, you may still get the lender to negotiate by raising the possibility of faulty paperwork. The lender may discover that its paperwork is less than stellar or that it would rather negotiate with you than prove the opposite in court.
More Bad News for Mortgage Lenders: Class Actions and Criminal Prosecutions
The robo-signing scandal may bring more bad news to the mortgage lending industry in the form of class action lawsuits and even criminal prosecutions. Attorneys general in all 50 states have launched investigations to see what laws, if any, have been broken. In addition, people whose home foreclosures were based on false affidavits may be able to get their homes back if those homes are still in the possession of the foreclosing bank.
Getting Help
Challenging a foreclosure in court in a judicial foreclosure state, bringing a lawsuit to stop a foreclosure in a non-judicial foreclosure state, or even alleging documentation problems in an effort to negotiate with a lender can be tricky. You may want to talk with an attorney about your case -- especially an attorney who has experience in foreclosure law. You can use Nolo's Lawyer Directory to locate and talk to a foreclosure attorney in your area. To learn about the ins and outs of foreclosure, including how bankruptcy can help, how to challenge a foreclosure in court, and options for negotiating with your lender, get The Foreclosure Survival Guide, by Stephen Elias (Nolo).