In yet another major setback for the foreclosure settlement, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against – JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), Citigroup Inc. (C - Analyst Report), Wells Fargo & Company (WFC - Analyst Report) and Ally Financial Inc. – for alleged violation of foreclosure practices. Further, Mortgage Electronic Registration System Inc. (MERS) and its parent company have also been named as defendants.

Allegations

The lawsuit alleges that these five major mortgage servicers used various deceiving foreclosure practices to fast track foreclosures without properly following the rules. Some of the procedures followed by these banks included use of ‘robo-signers,’ misleading homeowners in relation to loan modification processes, utilizing flawed documents and illegally foreclosing a property.

Additionally, MERS, which provides database for mortgage servicers, has been accused of sloppy record keeping, hiding the identities of the holders of mortgage debt from borrowers and evading fees. The lawsuit also charges these banks for utilizing the MERS database without paying registration fees to the government.

Motives

Ms. Coakley commented that the primary motive behind the lawsuit is to provide proper accountability for the roles played by the banks in unlawful and illegal foreclosures. Additionally, the lawsuit aims to give proper and enforceable relief to the homeowners whose property had been wrongly foreclosed by the misconducts of the mortgage servicers.

Responses from the Banks

The officials of all these five alleged companies stated that they would fight the lawsuit. They have also expressed that a joint resolution would have been a better way to deal with foreclosure mess and the present lawsuit jeopardizes chances for broader relief.

The Story Behind

It all started more than a year ago, when JPMorgan, Bank of America and Ally Finance Inc. temporarily suspended foreclosures across the country, following the detection of faulty foreclosure paperwork. Following this, the U.S. bank regulators, along with the state AGs, geared up to take actions against mortgage servicers.

The banks and regulators along with the AGs were in the middle of settlement deal designed to provide new guidelines for foreclosure practices across the nation. However, several obstacles appeared in the settlement agreement between the mortgage servicers and the AGs.

Ms. Coakley along with the AGs of New York and Delaware has been vocal in arguing that banks should not be exempted from future liability. Some other states including Minnesota, Nevada and Kentucky have been raising concerns regarding the extent of civil protection that should be given to the banks as a part of the settlement deal.

Though at present the talks have ceased, differences have cropped up between the banks and the AGs over the amount of money (nearly $25 billion) that should be placed in the reserve account for those home owners with wrongly foreclosed property.

Still a Long Way to Go

The banks have been hoping to put the foreclosure matter behind them with the agreement to settle the issue with the state AGs. However, with the Massachusetts lawsuit their plans to avoid the legal issues have been jeopardized. Apart from Massachusetts, the AGs of California, New York, Delaware and Nevada have pulled themselves out of the settlement talks and have started their own investigations.

Additionally, the banks already facing a large number of litigations related to mortgages could face further liabilities if other states also follow the suit and start their own inquiries.

However, whatever be the case, either through settlement talks or lawsuits, clearing the foreclosure clutter will go a long way to resolve the mess. However, we are optimistic that various counteractive measures, if implemented correctly, would prevent yet another foreclosure crisis. But most importantly, it would leave a lasting impact on lenders, forcing them to be extra cautious during housing transactions

With foreclosure sales steadily rising, four states are concerned that the use of the foreclosure sale prices in appraisals of neighboring homes is distorting the market.

Legislators in Illinois, Nevada, and Missouri have all proposed separate bills that would exclude or restrict foreclosure sales from being used as comparisons to determine the value of homes around them.

Maryland had proposed a similar bill, but withdrew the legislation on Tuesday.

Industry participants have expressed reservation at the idea of barring distressed sales from consideration when appraising properties, saying such actions would cause homes to be appraised for more than they are really worth.

According to the Appraisal Institute, “Elimination of foreclosures and short sales as comparables would result in an artificial market and would mislead lenders as to the true value of their mortgage collateral.”

Furthermore, the institute notes that under the Uniform Standards of Professional Appraisal Practice, all federally related transactions are required to consider all sales for appraisals, including short sales and other distressed sales. Most residential lending transactions fall into this category.

“In some markets, there are so many distressed sales that they are the market and must be considered. When there is a glut of distress sales in the marketplace, and those properties are truly comparable to the subject, it would be misleading not to use them as part, or in some cases all, of the basis for a value conclusion,” a representative of the institute said in an e-ma

• November 1 2010
• Patton Boggs

Sources with close ties to the Federal Housing Administration (FHA) are saying that the agency is likely to soon begin taking steps to address faulty foreclosures of FHA-insured mortgages as a result of the recent foreclosure furor. Significant action is expected against FHA-approved mortgagees and mortgage servicers who did not follow FHA’s prescribed loss mitigation requirements and foreclosure procedures. The Department of Housing and Urban Development (HUD) has already taken a more vigorous enforcement approach over the last several months and has apparently been galvanized into action on the foreclosure front by the wave of publicity about improper foreclosure procedures. If it intends to come down heavily on FHA-approved mortgagees/servicers, it has the means to do so.    

HUD’s Mortgagee Review Board (MRB) will likely be the principal instrument of any assault on faulty foreclosures of FHA-insured loans. The MRB has been much more active under this Administration and now will probably wade into the foreclosure crisis. It can impose probation, suspension or termination (withdrawal) of FHA approval as sanctions on erring mortgagees and servicers. In addition, it has the authority, which it frequently uses, to collect civil money penalties from mortgagees/servicers for violations of HUD regulations and guidance. Presumably, HUD could take even more serious action outside the MRB’s scope if it discovers major misconduct, such as fraudulent filings.

Mortgagees who service FHA-approved mortgages should be concerned about the likelihood of FHA action. Loss mitigation and foreclosure procedures and case files of foreclosures should be carefully reviewed.  

Issues regarding the process of handling mortgage foreclosures have cap-tured widespread attention during the last several weeks. While this is largely a documentation issue that is likely to be rectified relatively promptly by most lenders and servicers, allegations that large numbers of foreclosures have been processed without an adequate review of the relevant facts and that documents used in the foreclosure process did not meet legal require-ments have raised broad concerns among the government and industry, in-vestor and consumer groups about the mortgage finance business. Thus, the continuing task is the reconstruction of the credibility of mortgage finance systems.    

On the ground, there are significant aftershocks from the documentation disclosures, in the form of market and regulatory reaction:

• Borrowers’ lawyers have brought a range of challenges in an effort to protect them from foreclosure, including allegations regarding allegedly improper foreclosure practices, claims relating to the use of the Mortgage Electronic Recording System (MERS) and challenges to the operation of the Home Af-fordable Modification Program (HAMP) in regard to loan modifications.  
• The Attorneys General of all 50 states have announced a coordinated investigation of the mortgage servicing industry.  
• The Office of the Comptroller of the Currency has reportedly initiated examinations of the foreclosure and loss-mitigation procedures at large national banks.  
• The Federal Housing Finance Agency has in-structed Fannie Mae and Freddie Mac to re-quire their servicers to review foreclosure-related actions to ensure that any affidavits that have been filed were correct and com-plied with applicable law.  
• Institutional investors, as well as the Federal Reserve Bank of New York, are seeking with increasing insistence to have the mortgage-backed securities they hold repurchased, based on questions regarding the servicing or credit quality of the underlying mortgage loans.  
• To the extent that issues related to foreclo-sure processing may impact the stock price or financial performance of bank holding companies, shareholders may explore the possibility of alleging securities violations or mounting derivative actions against direc-tors or officers.  

Firms that participate in all phases of the home mortgage process from origination to securitiza-tion, servicing and foreclosure are likely to be drawn into some aspect of the current controversy and investigations. Our experience suggests that, to prepare for such potential challenges to past and current business practices and to reestablish credibility in the marketplace and with regulators, these parties should consider the following:  

• An independent review of potential trouble areas to provide objective support for the essential integrity of the processes used in the past or to guide future efforts to identify potential remedial steps for operational and legal processes;
• Participation by the audit committee or a special committee of the board of directors in order to provide appropriate board oversight and reassur-ance;  
• Developing a strategy to address the concerns of regulators, particularly where companies may be subject to the jurisdiction of more than one state or federal financial regulatory agency, including how to deal with potential concurrent civil and criminal investigations, cease and desist orders, civil money penalties and various forms of restitu-tion;  
• The dynamics of responding to multiple Attorneys General investigations and multi-faceted litigation and settlement processes, including shareholder and derivative suits;  
• The impact on and potential liability of or to busi-ness partners, service providers, counterparties, investors and others in the mortgage finance chain.  

While the documentation deficiencies that have been alleged appear to be fixable, the aftermath of address-ing regulatory, investor and consumer concerns in order that the country can once again enjoy an efficient, effec-tive and reliable mortgage finance system will require more attention and thought. Success in that regard is likely to be the product of significant remedial and pro-active actions that rebuild confidence in institutions and processes.

The “Mortgagegate” Scandal: Congratulations America, You’re Now in the Title-Insurance Business

[Editor's Note: On Wednesday, in the latest development in the "Mortgagegate" scandal, Fidelity National Financial Inc., the largest U.S. title-insurance firm, reversed course and said it wouldn't require an indemnity agreement before insuring individual foreclosed properties. Money Morning's Shah Gilani, a retired hedge-fund manager, warns that there's a deep game being played, and provides investors with detailed insights, and advice on the steps to take.]

By Shah Gilani, Contributing Editor, Money Morning

U.S. taxpayers already own pieces of such problem-plagued companies as General Motors Corp., Chrysler LLC, American International Group Inc. (NYSE: AIG), Fannie Mae (OTC: FNMA) and Freddie Mac (OTC: FMCC). Now the increasingly problematic "Mortgagegate" saga could land American taxpayers in the trouble-ridden title-insurance business.

On Oct. 8, Bank of America Corp. (NYSE: BAC) indemnified Fidelity National Financial Inc. (NYSE: FNF) against any losses that Fidelity might sustain in litigation over title insurance it writes on foreclosed homes - the same homes, coincidentally, that Bank of America wants to sell to new buyers.

This arrangement amounts to U.S. taxpayers, who are the ultimate backers of the Federal Deposit Insurance Corp. (FDIC), backstopping a giant, publicly held title-insurance company, which is backstopping a huge commercial bank, so that the bank can sell properties that it might not have proper title to.

It sounds like a Wall Street version of the "Six Degrees of Kevin Bacon," but it's no game - it's a daisy-chain scheme that once again sets American households up as the biggest losers.

Click throught to the original article on this one. This guy got some interesting feedback

Although the mortgage market mess persists, one aspect of the fiasco appears to have worked itself out. Several major title insurance companies were demanding that mortgage servicers take on liability for title problems, but dropped that request on Thursday. This matters a lot, because it could mean that purchasers of foreclosed homes won't shy away from buying due to the fear of not getting title insurance.

Elizabeth Razzi of the Washington Post reports that three big title insurers, First American Financial, Old Republic International and Stewart Information Services, are no longer demanding indemnifications from banks and servicers on foreclosed properties. Those three firms make up more than half of the title insurance market.

Calculated Risk explains why this is so important:

This is means that the buyers of REO (lender Real Estate Owned) will be able to obtain title insurance, and that the new owner can sell the property. There was some concern that buyers would shy away from REOs.

So the demand problem is partially solved. Although some buyers might still worry about purchasing a foreclosed home, it won't be due to a lack of title insurance. Instead, they may fear title insurers' ability to back up a flood of claims if many titles are bad. Since that's likely less of a concern, however, this new development should prevent a plummet in foreclosed property sales.

But it doesn't fix the supply problem. Some banks and servicers are still investigating their documentation and procedures and halting some foreclosures temporarily. This will reduce the number of defaulted properties that hit the market, which will further delay the sector's recovery. Housing cannot move confidently forward until all properties from bad mortgages have been absorbed by the market.

Old Republic National Title, one of the country’s largest title insurance companies announced that it won’t insure homes that have been foreclosed on by J.P. Morgan Chase.

The New York Times obtained a company memo that said Old Republic would not write policies on foreclosed Chase properties until “objectionable issues have been resolved.” Earlier last week, the company said it would not write title policies for homes that had been foreclosed by GMAC mortgage, which is now owned by Ally Bank.

Late last week Bank of America said it would also freeze foreclosures in certain states while it reconfirmed that the foreclosure documents had been prepared and executed correctly. It’s likely that Old Republic will stop writing title policies on these foreclosures as well.

If other major title companies follow suit, and stop writing these policies, it could turn into the watershed event that actually sends the already crippled housing market into a tailspin.

Why? Let’s back up for a moment.

Title is the ownership in a property. A chain of title is a list of all owners in the property going back to when the land was first developed or, in the case of some East Coast properties, when the King of England first granted large tracts of land to homeowners.

The stop foreclosure message seems to have taken hold in light of the recent hoopla surrounding the “robo signing” mess created by mortgage lenders who have been caught red handed filing bogus and fraudulent affidavits in order to steamroll over distressed homeowners and take their homes through foreclosures that are in many cases illegal.

Major mortgage holders who have been very active in their bank foreclosure departments have now brought home foreclosures to a halt. J.P. Morgan Chase, GMAC and Bank of America, among others are leading the way in a massive foreclosure stoppage across America. Chase and GMAC have stopped foreclosures in 23 states. Bank of America in response to increasing pressure from congressional inquiry and court cases has now announced it is stopping home foreclosures in all 50 states.  It is only a matter of time that other lenders will follow suit.

By Annie Lowrey 10/12/10 4:32 PM

Earlier today, the White House reiterated that it opposes a blanket moratorium on foreclosures, preferring to work with servicers and lenders to sort out the mortgage paperwork fiasco while letting the 50 state attorneys general file charges, if they see fit. (There is no federal regulator of mortgage servicers; each state has its own.)

This afternoon, Florida Attorney General Bill McCollum — who is considering charges on behalf of Floridians, residents of the state most impacted by the foreclosure crisis — agreed that a full freeze might not help. He wrote and released letters to major servicers, expressing concern over the widespread fraud. Here is one letter, to the head of Litton Loan Servicing:

As Attorney General of the State of Florida, I am writing you to express my concern for Florida’s economic future and the credibility of Florida’s judicial foreclosure system as a result of the actions of your company — actions that have affected the integrity of title to real property for Florida’s homeowners as well as the foreclosure process in Florida.

I was distressed to learn from media reports that your company may have engaged in filing faulty affidavits in foreclosure cases in Florida courts with regard to ownership of promissory notes and affidavits that attested to personal knowledge of facts when, in fact, the affiant had no such personal knowledge. The net effect of these actions, among other things, has been to cast a shadow on the title to these properties which is of such proportions that at least one major title company is now refusing to write title insurance on foreclosed properties. Even more disturbing in that some of these foreclosed properties have already been sold and resold, and now their titles are in question, which may substantially slow the economic recovery for the citizens of Florida.

All of this has been compounded by the impact of the recently announced moratoria on foreclosures by several mortgage servicers and the plethora of private litigation that has privately commenced. In my view, the moratoria and the private litigation are counterproductive to obtaining the swift solution necessary to address this serious problem facing Florida’s already fragile economy.