Sorting Out The Banks' Foreclosure Mess

Foreclosure proceedings across the country are on hold as banks and loan servicing companies scramble to deal with a growing controversy over the foreclosure process. Lenders have admitted to paperwork problems, where "robo-signers" signed legal documents without personally verifying their accuracy. And now there are new questions about who really owns the loans.

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RENEE MONTAGNE, host:

As of this morning hundreds of thousands of Americans facing foreclosure are in a kind of limbo. That's because some of the nation's biggest banks have put evictions on hold while they sort out questions about the foreclosure process. One of the issues involves robo-signers, those are workers at loan servicing firms who sign stacks of legal documents without personally verifying the accuracy of those documents. But the problem goes beyond that. There are now questions about who owns the loans and who has standing to foreclose.

NPR's Tamara Keith joins us to sort some of this out. Good morning.

TAMARA KEITH: Good morning.

MONTAGNE: Let's start with those robo-signers. How big, how serious is that problem?

KEITH: Well, to hear the banks tell it, this is just a technical issue, a paperwork problem. They say the facts are all correct - someone checked everything, just not the people who were signing the documents. But 50 state attorneys general launched an investigation this week, and some are making it very clear they think this isn't just a situation where banks made mistakes, they think it's fraud. So analysts out there who follow the banking industry, they seem to be split on just how bad this could be for the banks. One said the delays that will be involved in fixing this could cost the banks 6 to $10 billion dollars. Others have different figures, and depending on who you ask, this could either be a blip or the start of some sort of causing Armageddon.

MONTAGNE: OK. Many of these firms have halted foreclosure actions while they sort out the paperwork. Will struggling homeowners actually get a break because of this?

KEITH: In the short term at least, some homeowners will get a reprieve while the paperwork is fixed. They'll be able to stay in their homes. But the loan servicing companies insist that the underlying circumstances that led to the foreclosures, those are not in question.

Here's an example: JP Morgan Chase says that on average, when a home is sold in a foreclosure sale, the borrower hasn't made a payment in 14 months. JP Morgan Chase's CEO Jamie Dimon, he put it pretty bluntly in an earnings call on Wednesday.

Mr. JAMIE DIMON (CEO, JP Morgan Chase): We've known there are issues in the mortgage business. And, you know - but for the most part by the time you get to the end of the process, you know, we're not evicting people who deserve to stay in the house.

KEITH: In many of these cases, these homeowners have actually given up and moved out before the foreclosure sale ever happened. People I've spoken with, even consumer advocates, say it's unlikely we're going to find a bunch of people who were current on their mortgages, who were getting foreclosed because a robo-signer didn't verify the documents.

MONTAGNE: So Tamara, the idea here that the banks will fix the documents, get good signatures, and then resubmit everything?

KEITH: And that's what the banks are saying, and they're working on it. But there are a couple of complications. One is that in many states these faulty documents were submitted to courts where there are judges who might not look too kindly on false affidavits. And also, some of those faulty documents were documents that said we know who owns this mortgage, we're working as their agent, therefore we have the right to foreclose. But legal experts we've been talking to say they may not actually be able to prove that, that there are some complications. In most cases these mortgages were packaged into securities and sold to investors. But in the process of packaging and selling and reselling, the ownership of the mortgages changed hands numerous times. And in some cases - and we have absolutely no idea how many cases - the paper trail is faulty. It fell apart. So who owns the loan and who has the right to foreclose could become very difficult to prove in some instances.

MONTAGNE: It certainly sounds like sorting this is going to drag on.

KEITH: Yes, it's going to take a long time and a ton of lawyers to figure this thing out. There are lawsuits all over the country. The thing is the banks say that these affidavit problems are a technicality, and they could be correct in that. But it's also throwing the whole system into disorder.

MONTAGNE: Tamara, thanks so much.

KEITH: Thank you.

MONTAGNE: NPR's Tamara Keith.

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