A new report that found systemic flaws in California's foreclosure process could be fodder for securities investors to make claims against banks and mortgage servicers, its author says.
Lou Pizante, a partner at Aequitas Compliance Solutions, a mortgage regulatory compliance firm, says his audit of 382 foreclosures in California found that the original lender did not properly assign the mortgage in 85% of the cases.
In one sense, the audit confirms what both consumer advocates and the mortgage industry have long known: foreclosures are riddled with procedural flaws, some of which may be hard to amend. But while the report has been seized on by borrower advocates, a closer read shows that many of the flaws are technical violations that did not result in harm to a borrower who was in default and unable to pay their mortgage.
"Some of these issues really are just technical issues relating to proper notice and notice requirements, and in most cases, it's likely the borrower still would not have made their mortgage payments and the foreclosure could not be avoided," Pizante said.
The report's thoroughness stands in contrast to the broad and sometimes vague claims laid out just a week ago in the national $26 billion settlement between the five largest mortgage servicers and state and federal regulators.
"You can't read this report as a tug-of-war between lenders and borrowers because these issues have far more relevance to investors in mortgage-backed securities," said Pizante, who sold his compliance firm Mavent to Ellie Mae in 2010.
The proposed national settlement does not resolve most of the issues identified in the report nor does it protect lenders and servicers from a host of potential liabilities that the report raises.
One of the report's findings: 59% of mortgage assignments were recorded after a notice of default, indicating that the entity filing the default notice did not own the loan at the time of foreclosure. In 27% of foreclosures, the mortgage assignment also was improperly signed by an employee of the servicer or the trustee.
The audit also found that 23% of foreclosure documents did not match the findings of a securitization audit regarding who was the true, current owner of the loan. Whether this has resulted in legal confusion is unknown.
Pizante, a lawyer who has worked at RBS Securities, Nomura Asset Capital and Goldman Sachs, said the report doesn't aim to criticize the mortgage industry, nor does it assert that homeowners are entitled to compensation. Rather, he says there is something wrong when foreclosure laws are not being complied with "at an alarming rate."
"We have a public land-records system that lacks integrity and now we have gaps in title on many loans," he said.
Phil Ting, the San Francisco Assessor-Recorder, said he commissioned the report after several homeowners came into his office confused about who owned title to their mortgage. He has long advocated changes to California's real estate laws, which were created more than 100 years ago, long before mortgages were securitized and the foreclosure process outsourced.
"We found numerous circumstances where there were consistent breaks in the chain of title," Ting said in an interview Thursday. "We now have firm data over a three year period showing how widespread it was for corporations to pretend to be other corporations and to assign title back to themselves."
Failure to comply with the transfer of mortgages can violate pooling and servicing agreements. Securities investors also could use the findings of the report to sue servicers and trustees for fraudulent foreclosure practices.
William Frey, chief executive of Greenwich Financial Services, said the widespread errors cited in the report could potentially harm investors. Investors would have to prove that, as Frey believes, the discrepancies were a substantive violation of their agreements.
"[I]f MBS investors don't pool together and sue, then all their assets will be looted."
Pizante takes no position on whether investors were harmed. But the types of violations he found could be used to argue that originators and servicers had failed to comply with the pooling and servicing agreement.
Ben Weber, a senior administrative analyst in the Assessor-Recorder's office, said there is no easy fix and that the entire foreclosure processes needs to be redesigned.
"The larger question is, how do we create a system that works for everyone?" Weber said.