No mortgage, but foreclosed on anyway

Jason Grodensky paid cash for a South Florida home last December. With no mortgage and full ownership, he had no fear of foreclosure.

And yet, Bank of America foreclosed on the house seven months later, according to the South Florida Sun Sentinel. The court-ordered foreclosure took place July 15.

Grodensky tried for months to get answers from the lawyers and lenders involved. He got nowhere until he contacted the newspaper which started poking around. Now, Bank of America says it will straighten out the mess at its own cost, the Sun Sentinel reports.

A bank owned sign hangs outside a home for sale Saturday in Las Vegas. Bloomberg News photo by Jacob Kepler

Banks that are suspending foreclosures call mistakes in paperwork mere technical errors. This implies that the foreclosures, or most of them, were otherwise on solid legal ground and that any mistakes were the unintended result of trying to handle too many cases in too little time.

No harm. No foul, right?

Not true. A great deal of harm has been inflicted, and not just on the rare homeowner wrongly judged to be delinquent.

What’s happened over the past few years is that the very system of keeping track of who owns what property in the U.S. has been undermined by banks too busy to bother with doing it correctly.

This bad record-keeping became an enormous problem for banks when the housing market collapsed and borrowers defaulted. Missing the proper paperwork, foreclosure mills turned out documents misidentifying mortgage holders and containing multiple errors and omissions.

Breakdowns

Signing hundreds of documents a day, bank personnel never checked for accuracy but said they did, sometimes forging other people’s signatures. Notary publics lied about witnessing those signatures and judges with civil dockets bulging with foreclosure cases didn’t inspect the papers before granting the foreclosures in a matter of seconds.

Why worry? Typically, the borrower was a no-show, anyway.

(And that’s in the states that offer some judicial protection to the borrower before their homes are taken away. In the rest of the country, no court even pretends to scrutinize documents before foreclosures.)

If judges had taken a closer look, they probably would have seen what Judge Arthur M. Schack in Brooklyn found when he actually read the foreclosure papers filed with his court.

In one case, for example, Deutsche Bank National Trust Co. filed to foreclose even though it had no legal right to do so, having already sold the mortgage to Goldman Sachs, the judge pointed out in an order.

Besides, one of the people signing the documents did so as vice president at two different firms. If he had somehow managed to change jobs on that day, Schack said, it would have been a conflict of interest for him to sign in both capacities.

In 46 out of 104 foreclosure motions Schack decided over a two-year span ending last year, the documents were so full of error that he refused to approve the foreclosures, the New York Times reported.

As to how many foreclosures he rejects that return later in good form and get approved, “I don’t keep score,” Schack said last week in a telephone interview.

“Some do come back and do clean up the paper work,” he said. “Others are out there suspended in limbo land.”

Skipping step

It’s come to this because banks took a giant record-keeping shortcut to feed the insatiable hunger for securities backed by mortgages. They were too busy to do what had been done throughout U.S. history: record in a public deed room at the county courthouse each time a piece of property changed hands and each time a lien was filed.

How archaic that whole county courthouse thing seems, when you can digitize the information and never leave your chair.

That’s what banks did in 1997. They created the Mortgage Electronic Registration System, which computerized, centralized and privatized deed records on some 60 million mortgages. The industry saved an estimated $1 billion in fees over the next decade.

“They simply dispensed with the recording system and have transferred what appears to look like trillions of dollars of real property without recording them,” says U.S. Rep. Alan Grayson, a Florida Democrat who’s been digging into the issue.

He points out that this deprived local governments of tax revenue from the transfers.

It also deprives the public of accurate, accessible records of property ownership.

While deed records were handed off to the electronic registration system, the borrower’s note promising to pay was sent on a circuitous route from loan originator to other mortgage firms and banks until it was pooled with other mortgages into trusts underwritten by banks and sold to investors.

For Jason Grodensky, the problem was that foreclosure proceedings that began before he bought the house in a short sale continued after he got ownership.

His case is probably rare. But the mortgage industry’s cavalier attitude toward rules and record-keeping is too common, too systemic, too long-running and too damaging to be sure of that. And in any case, it can’t be called mere technical error.

Ann Woolner is a Bloomberg News columnist.