Foreclose first, ask questions later

There was a time, not long ago, when having a home of your own signaled stability. It was a stake in a community, a place for individuals to come into their own or for families to grow. It was a solemn obligation to a financial institution, a statement of the bank’s faith in you, an investment for old age.

So much for that. These days, millions of houses across the country sit empty or shelter owners who can’t or won’t make mortgage payments. The vacancies give lie to the notion of home ownership as a road to stability.

A house in foreclosure in March in Webster Groves. Ally Financial Inc.’s GMAC Mortgage unit halted evictions in 23 states this month due to problems with foreclosure processing. File photo

As dismal as the housing market is, at least we could cling to the idea that the nation was slowly climbing out of the mortgage mess. However painful foreclosure and heartbreaking evictions, the country was working its way toward still-distant normalcy.

This month hope for a stabilized housing market took a hit, as Ally Financial Inc.’s GMAC Mortgage unit halted evictions in 23 states. Attorneys general in at least two more states also are demanding moratoria.

The culprit is sloppy, possibly fraudulent, paperwork by at least one manager at the division. And it looks like he was doing what lots of other foreclosure processors were doing, too.

We’ve seen this culprit before. Sloppy research and sometimes fraudulent paperwork by lenders, loan packagers, credit raters and insurers of mortgage-backed securities kicked off the mortgage disaster in the first place.

The only difference is that this time it’s occurring at the rear end of the business, foreclosures.

Did anybody working at mortgage lenders learn anything over the past two years? And shouldn’t banks be careful about taking away someone’s home?

GMAC middle manager Jeffrey Stephan said in a deposition that he signed 10,000 foreclosure packages a month. To accomplish that, he had to give up something. What he omitted was checking to see whether the named owner was really in default and whether the listed mortgage holder in fact still held the mortgage.

In other words, he had no time to check the facts contained in the papers whose accuracy he was guaranteeing. Nor did he bother to always have a notary present when he signed, as required.

Likewise, a JPMorgan Chase & Co. executive said in a deposition last May that she hadn’t personally verified information on the thousands of affidavits and other documents she signed so that her bank could foreclose on houses.

Beth Ann Cottrell, an operation supervisor at the company’s Chase Home Finance unit, testified that she and seven other managers signed a total of about 18,000 documents a month, according to a transcript.

“My review is more or less signing the document unless it’s questionable,” she said.

Lawyers for homeowners say it was her job to do the questioning, and to do it before signing. Why else was she reviewing the documents — for typos?

Between the two of them, JPMorgan and Ally service a huge chunk of the country’s home mortgages, $1.35 trillion for JPMorgan and more than $349 billion for Ally, according to newsletter Inside Mortgage Finance.

These firms were clearly overwhelmed by the volume of foreclosures, but there’s a reason people like Stephan and Cottrell were called on to sign the documents, and it isn’t to serve as rubber stamps.

Ally calls Stephan’s time-saving methods a mere “technical” error and says it’s working to correct the “potential” issue. It may have to redo some foreclosures.

Surely Ally was aware of how quickly those stacks of foreclosure packages were moving. What did it think was happening?

If for no other reason, it should have been more careful because in 2006 GMAC was sanctioned by a judge in Duval County, Florida, for precisely the same conduct.

It’s too early for Ally to call the problem only technical, a common practice with no serious consequences. No one can know that since no one was checking the accuracy of the documents.

To say that few, if any, homeowners were wrongfully evicted is mere speculation. So is the idea that almost all owners of mortgages were accurately identified at foreclosure.

Some consequences are already clear. Thanks to this little “potential” issue, even borrowers who have clearly defaulted get new grounds to try to fend off foreclosure.

Lawyers for a homeowner in Palm Beach County, Fla., have asked a judge to cancel foreclosure proceedings for her because of Cottrell’s admission.

Then there are people as yet untouched by foreclosure who occupy homes long after they stopped making mortgage payments. They could get more time living mortgage-free as servicers try to figure out who’s really in default and to which mortgage holder.

Slowing down the process will keep more people sheltered longer, and will reduce the dumping of homes into an already flooded housing market. That’s fine by me.

But it also delays the day when the market will hit bottom and recovery begins.

And technical or not, in some states the mortgage-servicing firm can get into serious legal trouble for cutting corners.

“The use of unverified affidavits to obtain judicial relief could constitute a fraud upon the court,” North Carolina Assistant Attorney General Philip Lehman wrote Ally General Counsel William B. Solomon Jr. this week.

No, home ownership isn’t what it used to be. And as long as those in the mortgage business keep up their slovenly habits, it won’t be.

Ann Woolner is a Bloomberg News columnist.