Part 3: Big Banks Misbehaving: Robo-signing

October 1, 2012 | St. Louis Mo.

Emmons explores the reasons and ramifications of large banks involved with robo-signing, Libor rate rigging and botched hedging. He first focuses on the robo-signing issue, first succinctly explaining how foreclosures are supposed to work in judicial and non-judicial states and what went wrong with the collapse of the housing market and the ensuing explosion of problematic robo-signing practices by the major mortgage servicers.

Presentation (.pdf)


William Emmons: So first topic. Big banks misbehaving. I'm going to speak specifically to robo-signing, rate rigging and botched hedging. I'm going to use those terms. And you have handouts prepared by my colleague, Julia Maues. There are others, of course. If you were watching the news today, two came out today. American Express was charged by the New York State Attorney General with a deceptive marketing tactics accusation. Similarly, Discover and Capital One have been accused and in some cases settled, paid civil money penalties. There have also been money laundering allegations. For example, HSBC. There have been wrongful foreclosure settlements of military service members by Bank of America. There have been—the other thing that came out today, late in the day, was that JP Morgan Chase was accused of using fraudulent and deceptive practices in selling sub-prime mortgage securities. They, of course, join a host of other banks that have either settled or been accused of similar practices, including Goldman Sachs, Bank of America, Citi Group and others. So these very much are ongoing issues being investigated at lots of different levels.

So let's dive in and talk first about robo-signing. And how I will explain this is first you have to understand a little bit about foreclosures. How mortgage foreclosures are supposed to work. Then I'll talk a little bit about what some mortgage servicing firms actually did, how that came to light, and what's happening now.

So first there's a basic difference between different states. There is something called a judicial foreclosure and a non-judicial foreclosure. A non-judicial foreclosure, as its name suggests, does not require a court. Missouri is an example of a state where most foreclosures go without any court involvement through the process. And it can take several months. So that's relatively quick.

In judicial foreclosure states, and our best example locally is Illinois, where all foreclosures must go through a court. The lender must prove to a court that it owns the mortgage and that there's been a default on the agreement. In the judicial foreclosure states this process can take many months, and in fact, many years. There are some states, Florida is an example. New York and New Jersey are other examples, where the timeline now is stretching out to two and three and four years for a single foreclosure to go from start to finish.

Okay, so that's the basics on how our foreclosure process works. Here's a map that shows you where the judicial states are. They tend to be in the eastern part of the country. You can see Illinois is one. Also heavily in the northeast. And the coloring on that map behind there indicates the degree of mortgage distress or delinquency. So the green colors are very low levels of mortgage delinquency, and the yellows are intermediate. The orange and red is very high. In the red case, 30 percent or more of the mortgages are in some stage of delinquency. And I know it's hard to put it all together in a quick glance, but there is kind of a general correlation. The higher delinquency rates tend to be in the judicial states. So there seems to be something going on, some connection between the judicial foreclosure problem and the rate of mortgage delinquency. It's also true if I showed you a map of the unemployment rates, that there's a correlation there too. So those parts of the country that are suffering the most from high unemployment tend also to have the worst mortgage problems. And they tend, not always the case, but they tend to be judicial foreclosure states. So there's a lot of pressure coming from lots of different directions to try to make this process move faster.

In a judicial foreclosure, for example, in Illinois, typically it's a mortgage servicing company that takes the action on the behalf of the lender, or in fact lenders if that mortgage has been sold to a trust and then securitized. Here's where the issue arises. The servicer acting on behalf of the lender submits an affidavit, which is a signed, written statement asserting that the signatory, that individual, has personally reviewed the mortgage documents and believes them to be accurate. That's necessary to move this process through.

What went wrong – well, with the collapse of the housing market, surge in delinquencies and foreclosures, the mortgage servicing companies were inundated with defaults. So some servicers ordered employees to sign affidavits without investigating the documents. Hence, creating robo-signers. In other words, they were robotically signing these affidavits without actually having investigated the underlying documents. There's no dispute that this practice occurred. No dispute at all.

In late 2010, in September, GMAC Mortgage, which is part of Allied Financial, halted foreclosures in 23 judicial foreclosure states. Some of the evidence that persuaded GMAC to do this included one employee who signed multiple depositions that, in wrongful foreclosure suits, that for a period of at least 10 months he had signed about 500 foreclosure affidavits a day. And, of course, there's no possible way he was investigating, personally investigating all of the details of each of those cases. Now he was not the only one, but that's just a concrete example of a robo-signer.

So that's—in the judicial states foreclosures came to, virtually to a stop, because the other major mortgage servicing companies also halted their foreclosure procedures. It was only in February of this year when a joint state, federal mortgage servicing settlement was signed with five of the major mortgage servicers. They agreed to change many of their practices, including hiring more people, providing single points of contact for distressed borrowers and many others. They also agreed collectively to pay $20 billion, provide $20 billion of relief to eligible mortgage borrowers, and to pay an additional $5 billion to federal and state governments. Now that's the only mortgage servicers involved. There are others that are currently in negotiations with state and federal authorities.

So this, I won't go through this, but this is what's termed the settlement flowchart. This is on the HUD web site and you'll be able to track this down when you get the file at a future date. But that $25 billion paid, not equal amounts, but different, depending on how large their effected mortgages were. Those were the five mortgage, the parent companies of those mortgage servicing firms. And you can see how the money flows out through the various channels. So that's robo-signing.