The Foreclosure Document Mess: What It Means for Homeowners in DC, Maryland and Virginia

October 11, 2010
By Edward Gonzalez, Esq. on October 11, 2010 3:30 PM |

The take-away lesson from the recent disclosure of fraudulent lender documents and the subsequent suspension of foreclosures throughout the country is this: Yes, lender mortgage documents are defective and faulty, and it's been that way for some time.

The big news last month was the revelation that hundreds of thousands of phony affidavits had been signed by an employee of GMAC Mortgage (a unit of Ally Financial) and then submitted to courts throughout the country to support foreclosures. That admission in turn prompted the company to voluntarily suspend foreclosures in 23 states, as well as prompting demands by state attorneys general in Connecticut, Colorado and California to stop foreclosures in those states.

Recently joining the list of lenders suspending foreclosures are Bank of America, JP Morgan Chase and PNC.

In Maryland, Governor Martin O'Malley last week called on lenders to freeze foreclosures and evictions, re-examine procedures and then report back to the state what steps they are taking to address the problem. "In light of recent events, it seems reasonable to question whether the manner in which affidavits are prepared, reviewed and signed, and the sufficiency of the process employed to verify elements of default leading to foreclosure may be in violation of Maryland law," the governor wrote in a letter to lenders.

Foreclosure law in Maryland requires affidavits from mortgage lenders swearing to:

  1. The default and, if applicable, that a notice of intent to foreclose was sent to the homeowner
  2. Amount due and payable
  3. Ownership of the debt
  4. That the homeowner is not in the armed services, and
  5. That the homeowner has been evaluated for "loss mitigation" alternatives (such as loan modification, deed in lieu of foreclosure, etc.) as required by Maryland's new foreclosure mediation law.

At our bankruptcy and foreclosure defense law firm, we have used documentation errors by lenders to the advantage of homeowners. More than a few times in Virginia we have been able to remove second mortgages from property because - in a hurry to get as many loans done as possible - lenders failed to get the signatures of both husband and wife, when both were on the title of the home, on the contract putting the house up as collateral for the loan. That meant the loan was not guaranteed by the house and it was an unsecured loan that could be discharged in bankruptcy, or that its unsecured status could be used as leverage to obtain a settlement with the lender.

In another case, the lender sought permission from the bankruptcy court to proceed on a foreclosure of our client's house alleging a failure to keep up with mortgage payments after the filing. The homeowner contested the amount and the lender backed off and dismissed its motion after itself coming up documentation for two different arrearage amounts.

Will you get a free house? No. And for many, eventually they may have to give up the home particularly if they cannot pay and have a substantial arrearage anyway. But in the meantime the sloppy documentation can present some opportunity to delay the foreclosure, or obtain leverage to extract economic benefits from the lender.

Bank of American Stops US Foreclosures for Review, Associated Press, October 8, 2010

Government Had Been Warned For Months About Trouble in Mortgage Servicer Industry, Washington Post, October 10, 2010

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