56,000 Foreclosures in Limbo as JPMorgan Chase Reviews Documents

The following article is brought to you by David Dayen at FireDogLake.

As I mentioned yesterday, JPMorgan Chase, one of the nation’s largest banks, has suspended all its foreclosures in states that require judicial approval, while it reviews the foreclosure documents. We have some more information on that today.

This affects a total of 56,000 foreclosures, and the reason is exactly the same as Ally Financial/GMAC’s freeze: one individual would sign off on all the relevant documents with court-required affadavits:

Chase spokesman Tom Kelly said the company has requested that the courts not enter judgments in pending matters until the company has had time to re-examine the filings “to verify that the affidavits and other documents meet the standard of personal knowledge or review where that is required.”

“While Chase does not expect find any factual problems and that customers have been harmed, but if we do find any cases we will take appropriate action,” Kelly said.
In May, a Chase employee named Beth Ann Cottrell said in a sworn deposition that she and her team signed off on up to 18,000 foreclosure affidavits and other documents a month without reviewing them thoroughly.

The AP buries the lede with new information about why large lenders have stopped dead: the rating agencies threatened action.

Fitch Ratings said that Wednesday it was asking mortgage companies about their internal processes for executing foreclosure affidavits. If it finds the processes lacking, Fitch will consider downgrading the company’s rating.

The agency also said if the issue is widespread, the resulting delays and extra costs to foreclose could increase losses related to residential mortgage-backed securities.

Just yesterday, the IMF called for greater supervision of rating agencies, because faulty ratings could cause global financial instability. I read this action by Fitch as a kind of response, a new aggressiveness that shows a willingness to take their role seriously.

In addition to the raters, the title insurance industry really wants a full investigation here. If more instances of fraudulent foreclosures kick people out of their homes without the lender having ownership of the title, the resultant sale of the home could come back to haunt the new homeowner, if the old homeowner makes a claim on it. Title insurance payouts would skyrocket, and the industry has a keen instinct for self-protection. So there are industry concerns on both sides of this. Not to mention, it’s completely illegal.

In Florida, ground zero for this fraud, Ally Financial has stopped using one of the foreclosure mills, law firms that stop at nothing, including forgeries of both mortgage documents and court orders, to speed foreclosures through the system. Ally has only cut ties with Florida Default Law Group, not the other three foreclosure mills, who collectively file as many as 80% of all foreclosures in Florida. So the pressure is still on Ally.

Lawmakers continue to take notice. Sen. Al Franken called on Treasury and the Justice Department for a full investigation of foreclosure fraud.

This will grind the foreclosure process to a halt in many states, and that will have a direct effect on the housing market. In the second quarter of 2010 one out of every four home sales was a foreclosure. With the bargains off the market, sales could slow appreciably.

I’m sure the banks will play this off as just one part of the business not knowing what the other part is doing, but I’ve theorized that foreclosure fraud acts as a cover-up for the original sin of mortgage fraud.

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