Oct 06, 2010

Foreclosures on Hold Due to Fraudulent Affidavits

A number of major mortgage lenders have apparently put a freeze on pending and future foreclosure cases. The reason? Bank employees testified that they signed affidavits attesting to the truth of various foreclosure documents, but in fact had no personal knowledge of the facts to which they attested. Employees of Bank of America, JP Morgan Chase, and GMAC have all testified that they signed many thousands of affidavits a month, spending about 30 seconds on each affidavit, and that they hadn't a clue regarding the veracity of the affidavit or documents in question.

Class Actions, Criminal Prosecutions, and Problems for Owners of Foreclosed Properties?

Since this testimony implicates all past foreclosures that depended on similarly flawed affidavits, there may be humongous class actions about to hit the mortgage lending industry. Criminal prosecutions may also multiply faster than rabbits, since the practice of having these affidavits signed by unknowledgeable people is something that provably comes right from the top.

And what about people who have purchased homes that with a fraudulent foreclosure affidavit? Although some may have ownership issues in the future, many may be able to keep their new homes because of a legal doctrine that gives clear title to people who are "bona fide purchasers for value." On the other hand, foreclosed homes that are still owned by banks may now be up for grabs (and transferred back to the original owners) since the banks would have difficulty in making the bona fide purchaser for value argument. Finally, as these defects in title come to light it may be difficult for a new owner to claim bona fide purchaser for value status without having the foreclosure process subjected to an audit for fraud and ownership issues.

Challenging Foreclosures Based on Fraudulent Affidavits

There are three different judicial venues where foreclosures can be challenged. In about half the states, the foreclosures go through court - called "judicial foreclosures." Challenging a foreclosure based on a fraudulent affidavit is a relatively simple matter of raising the issue at the foreclosure trial. It is primarily the foreclosures in these states that have been frozen by the major lenders, since all judicial foreclosures require testimony under oath.

In the other half of the states, foreclosures are completed without going to court - called "non-judicial foreclosures." In order to challenging a foreclosure in one of these states, the homeowner would have to file an action in court to enjoin the foreclosure on the basis of suspect documentation. In many of these "non-judicial foreclosure" states, the foreclosure can't legally take place without recordation of appropriate documents accompanied by an affidavit attesting to their truth, so the ground for challenging the foreclosure would be similar to that used in judicial foreclosure states.

The third venue for challenging a foreclosure occurs in Chapter 13 bankruptcy. In Chapter 13 bankruptcy your mortgage lender must file a claim, and you are entitled to oppose this claim. Simply put, in Chapter 13 you can basically have the mortgage thrown out due to the inability of the mortgage owner to provide the requisite sworn testimony. And if a lender seeks permission from the judge to proceed with foreclosure, you can defeat the motion on the ground of fraudulent documents (or failure to prove ownership).

As all of this unfolds, new details will undoubtedly emerge calling into legal questions hundreds of thousands if not millions of mortgages. The negative effects this will have on the housing industry in particular, and the economy in general, are incalculable, but there is now little question that many homeowners will be able to escape their mortgage obligations for many more months than previously, if not forever.

To learn more about fraudulent affidavits, and your options, see Nolo's article False Affidavits in Foreclosures: What the Robo-Signing Mess Means for Homeowners

Learn more about foreclosure and other options for struggling homeowners in Nolo's Foreclosure topic.