It's been all over the news -- courts are halting foreclosures and banks are freezing their foreclosure processes due to allegations of "robo-signing." This mess creates negotiation opportunities for homeowners in foreclosure.
What is "Robo-signing"?
To get a foreclosure through court, the lender has to submit proof of ownership and default on the mortgage. This proof typically consists of copies of various documents and a written statement under oath (affidavit) that the documents are true and accurate. To make such a statement, the individual signing the affidavit must not only review the documents but also have some personal basis for believing them to be true. Not just anyone can sign.
It turns out that the major mortgage lenders have assigned the "statement under oath" task to clerks who not only don't review the documents but who have no personal knowledge of the facts set out in them. The media has called them "robo-signers." (Recently bloomberg.com ran an informative article about O. Max Gardner III, the lawyer who let the cat out of the bag.)
In other words, it looks like lots of court-ordered foreclosures have been based on false affidavits, and it's that fact that has led the major lenders to put a hold on foreclosures in states where foreclosures go through the courts.
Even in states where foreclosures happen out of court, affidavits of ownership and default in payments must typically be officially recorded before foreclosure proceedings can begin, and to the extent that these affidavits suffer from the same defect as those headed towards court, the foreclosures based on them are similarly faulty. The only real difference is that the homeowner must affirmatively sue the lender (in an action for injunctive relief) in order to have the judge rule on whether the paperwork is deficient.
What Happens if the Lender Can't Foreclose?
For all practical purposes, the only way to enforce the terms of a mortgage is to foreclose on the property. It's true that in many states the lender can sue the homeowner for breach of contract if he or she falls behind on the payments, but the expense and uncertainty of that remedy pretty much dictates foreclosure as the lender's remedy of choice. In foreclosure the lender gains ownership of the property and the right to force the (now ex) homeowner to move out. If the homeowner decides to stop paying on the mortgage and the lender is unable to use the foreclosure remedy, the only remedy left is a lawsuit for money.
In California and a few other states, the first mortgage is what's known as a non-recourse loan, meaning the lender can't sue for breach of contract. And in those states where the lender could sue, the likelihood of collecting is small. Further, bankruptcy would wipe out the homeowners personal liability and the lender would have no remedy at all -- again, assuming that for one reason or another they can't foreclose.
The bottom line: If the lender can't foreclose because of fraudulent affidavits, the lender may be up a creek.
Fraudulent Affidavits Means More Opportunities to Negotiate
The fact is, foreclosure paperwork in any given case may be faulty, and judges may be more inclined to reach this conclusion than previously -- based on the mounting evidence of robo-signing and banks' sloppy paperwork. To the extent that a homeowner facing foreclosure can create an aura of uncertainty around the required paperwork, he or she will have a great opportunity to negotiate a mortgage modification that includes a substantial reduction of principle to (or near) the value of the property.
If the lender refuses to come to some settlement with you and you can later convince a judge that proof of ownership is lacking, or that robo-signing occurred, the lender may be permanently deprived of the foreclosure remedy, which will mean the mortgage is effectively unenforceable. Given this threat, more and more lenders may be inclined to knock down the principal and reduce your payments to an affordable remedy. As the old saw goes, half a loaf is better than none.
Your ability to use potential problems with the mortgage and foreclosure processing in your negotiations will obviously be strengthened if you can point to the deficiencies, but it may be enough to simply allege the possibility of bad paperwork and let the lender decide whether they are able to prove the opposite. Also, it would probably be advantageous if you had an attorney negotiating for you, but to do that you'd have to raise some money for the attorney fees, which is often done by rerouting some or all of your mortgage payment to the attorney -- which can be a really good deal in the long run.
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.