Gretchen Morgenson’s front page NYT piece is your must reading for today.

She lets the facts speak for themselves; Calling these failures “problems” understate the case dramatically, but WTF: Its front page NYT. All of these errors “involve documents that must be submitted before foreclosures can proceed legally.”  (Sweet!) The flawed legal practices are so prevalent that numerous banks have voluntarily undertaken reviews of their legal procedures and document processing.

I have a longer piece out on this general subject tomorrow, but I had to point out the highlights of Gretchen’s piece:

• GMAC Mortgage, JPMorgan Chase and Bank of America are running internal investigating; Other Lenders and Loan Servicers are halting foreclosure proceedings;

• Documents attesting to crucial, specific information were routinely signed by employees who say they never verified the info;

• Lenders or loan servicers often start foreclosure process without being able to produce documentation showing they have the legal right to foreclosure, (standing).

• Banks present legal affidavits, signed by an employee of a legal services firm acting as an agent for the lender or loan servicer. This shows the banks have ownership of the note, and allow foreclosures to proceed

These legal attestations are often dubiously prepared, and are frequently invalid:

• GMAC said it was halting foreclosure proceedings in 23 states because of problems with its legal practices.

• GMAC employee testimony stated they signed 400 affidavits per day for GMAC without reading them or verifying that the information in them was correct.

• Herman John Kennerty, a Wells Fargo Mortgage loan administration manager, he typically signed 50 to 150 foreclosure documents a day (he did not independently verify the information to which he was attesting).

• False verifications of data included:

-amounts owed by borrowers
-legal notarization that predate document prep
-notarizations so far from where docs signed it was impossible for notaries to have witnessed the signings (as the law requires).
-Counterfeited/Forgery of official names

This has led to:

• Multiple banks all claiming right to foreclose same property, a result of a murky trail of documentation and ownership.

• In Florida, a sample of foreclosure cases (12th Judicial Circuit) showed 20% of summary judgment involved deficient documents, according to chief judge Lee E. Haworth.

• Harry Rapkin, a Florida judge overseeing foreclosure, dismissed 61 foreclosure cases do to bad are falsified docs.

• Attorneys general in at least six states, including Massachusetts, Iowa, Florida and Illinois, are investigating improper foreclosure practices.

• Secretary of state of Ohio referred “notary abuse by Chase Home Mortgage” to federal prosecutors for investigation.

As noted this morning, the real estate / financing industry has brought the same machine-like  technical prowess that they used to automate the process of underwriting mortgages to a similar automated foreclosure process. Is it any surprise that the results of this are similarly disastrous?


Flawed Paperwork Aggravates a Foreclosure Crisis
Gretchen Morgenson
NYT, October 3, 2010

Category: Credit, Foreclosures, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

54 Responses to “How ‘Flawed’ Was the Paperwork?”

  1. curbyourrisk says:

    Signed affidavits…admitting failure to do their job. If there are no handcuffs….and MAJOR fines for corprorations….it just goes to show what a sham this governmen is….(not republicans or democrats, but the whole lousy crew)

  2. inessence says:

    U.S. mortgage mess = a cluster fuck.

  3. barbb says:

    Not to put a fine point on it, but garbage in > garbage out (gigo) seems to fit here.
    Condolences to the people with their house at stake – eventually their nightmare will end.

  4. Lesly says:

    Is it any surprise that the results of this are similarly disastrous?

    No, but I’m sure Fannie/Freddie have something to do with it. Also, poor people are ultimately responsible. On the other hand if we removed all regulation we would love the banks.

  5. constantnormal says:

    @BR … a while back, you were soliciting ideas about where shorting opportunities might be found … surely this qualifies. I think it is a whole lot larger than the implosion of Lehman … the collateral damage is likely to be humongous.

    And people called the LAST financial crisis a “crisis”.

    The line from Crocodile Dundee springs to mind, “You call THAT a knife? THIS is a knife!”

    How can the goobermint bail us out of this, and what are the likely repercussions from them being unable to deal with it? Is this a TBTB situation? (TBTB = Too Big To Bailout)

  6. contrabandista13 says:

    Herman John Kennerty, a Wells Fargo Mortgage loan administration manager is my brother-in-law, who also happens to be my daughters husband. They live in the double-wide next door…. Nice folks….

  7. rktbrkr says:

    If the first round of the foreclosure mess cause a 40% drop in prices in the sand states what will happen when/ if large numbers of foreclosure titles become uninsurable? 80-90% off on these properties?

    How dumb do these banks look holding off large numbers of shadow inventory homes? The values of all bank owned properties will be pulled down by this mess not just the cloudy titles because basically these banks have zero credibility. People will get some amazing bargains.

    I know the accounting standards were bent backwards to accommodate the banks but eventually these chickens will have to roost – and they’ll be very heavy – TARP II to the rescue

  8. hammerandtong2001 says:

    So how does a bank or investor or insurance company, which purchases, buys MBS, which has been sold to them via the securitization process “execute” against a foreclosed holding?

    Is the originating bank named as agent to “collect” and manage payments from the mortgage holding homeowner? And in default of payment — isn’t the MBS holder required to bring cause?

    I can readily see that since nearly all US mortgages are securitized that this can be a nightmare –


  9. SinRazon says:

    Obviously a cluster-headache for the banks. But I don´t see where “humongous” losses come in- we haven’t seen any fines or loss of ownership yet. Please explain that comment.

  10. jjay says:

    That’s great news.
    The banks and the NINJA borrowers play “Dueling Grifters” to settle the fate of the US housing market!
    On deck, 800 billion dollars of soon to be worthless Federally Insured Student Loans.
    Is this a great country, or what?

  11. alnval says:

    As you probably know, Calculated Risk has been on this at least since the Deutsche Bank case in October of 2007.

    Tanta laid it out pretty well suggesting to me that the basic issues relating to the negative impact of sloppy paperwork on foreclosure proceedings associated with securitized mortgages in the secondary market were well known at least three years ago or certainly at the time B of A was entertaining thoughts of buying Countrywide.

    For that reason the ‘oh my gawd’ reaction that seems to be part of the media take on this ‘suddenly’ coming to light is hard to stomach.

    I’m looking forward to your post tomorrow.

  12. epl145 says:

    Perhaps a little tit-4-tat.

    Should the bank file improper foreclosure, the debt is on them and the house is yours.

    I got your moral hazard swingin

  13. constantnormal says:


    “Please explain that comment.”

    Very well.

    Many times I have read that the bedrock of the American financial system was the large amount of home ownership, that mortgages formed the bedrock of our commercial banking system, from which all our corporations and commercial lending was leveraged. That may be wrong, but I think that no one can dispute that the amount held in mortgage debt is quite large. And if the ownership (or even existence) of those notes becomes unprovable, the value of it declines considerably.

    Now it seems likely that we have moved past the point of hiding the problems in the shadows, and they are about to be exposed to the full light of day.

    The financial accounting standards were bent beyond recognition when we did away with mark-to-market accounting, and allowed banks to account for bad loans as if they were good, until such time as they were undeniably proven to be bad. I thought that would have been when the loans arrived at their maturity dates, in which case the losses would have been smeared over several years, but I now see that another possibility exists — that the banks will be unable to prove ownership of the notes, or in some cases, whether the loan even exists in any sort of legal manner.

    In that case, it seems likely that the bad (and good, if they cannot prove that they own them) loans might evaporate suddenly, in the wake of an audit. That means that a huge chunk of the assets of the lenders might suddenly disappear, and these are very large lenders that we are talking about here, so the impact on the economy as a whole would be considerable. How big a chunk that might be, we have no clue, thanks largely to the fogginess of mark-to-make-believe accounting, where everything is assumed to be sound and will eventually be paid off in full.

    That’s where the “humongous losses” come in. I realize that we are not yet at that point, but when one looks up and sees a piano falling down from the 81st floor, one need not await its arrival to assess the likely consequences of it.

  14. constantnormal says:

    I am looking at the mess that MERS made, and thinking that if the paperwork is all screwed up for mortgages in trouble, what are the odds that in the flurry of selling mortgages back and forth to each other over the past few decades, the paperwork is screwed up in pretty much the same manner for mortgages that are not in trouble, including those that might have been paid off over the past decade?

    Who owns a house if the mortgage cannot be located and the records trail is shattered beyond repair? Forget about whether the mortgage is in default or not, this extends to even loans that have been paid off, I would think.

    Oh, to be a real estate lawyer in these exciting times.

  15. rktbrkr says:

    We will have to bail out the TBTF again. (CITI will just pull out giant chunks of their $300B going away gift from Paulson, I think BAC shortsightedly returned their 200B guarantee.)

    While the banks bad paperwork (fraud really) is just starting to cause clusterfuck headaches on the foreclosure front their bad paperwork is causing putback problems with investors, just like the Nazis the banksters can’t win a two front war!

  16. ezduzit says:

    so if my mortgage was written in 2006 and it was done by a broker through indymac bank, how do i check out its legality? the property in new jersey, had decent equity, owned by me for over 27 years and even today it is not underwater, but close.

    it was done by a broker who has left the state and is no longer available to contact. indymac went belly up. deutsche bank got and held the mortgage somehow. they refuse to talk to anybody but refer calls to one west bank of california who seems to be the owner or manager of the loan. i never signed notarized papers. the loan was an alt a loan and not fannie mae or freddie mac. i am currently in the middle of a hamp restructuring process.

    not looking for a legal opinion, just a door to try and walk through. what a tangle mess! thanks,

  17. alnval says:

    I hope “ezduzit’s” comment goes viral!

  18. louis says:

    Crazy shit happens when you securitize the values of a nation. Kierkegaard you are so right on.

    I got a crazy idea- Re write all the loans from 03-07 and call it a day.

  19. curbyourrisk says:

    Barry… still stand by your call that we are at or near the bottom of housing???? I still say we have a minmum of another 30% to go…

  20. Robespierre says:

    So now that all these “problems” are being discovered, does that mean that the whole RMBS business is predicated on mortgage fraud? And if so how do you handle all the RMBS investors owning worthless paper? Any opinions?

  21. This issue is a bit overwrought. Courts may use the failure of the mortgage companies to properly document their ownership of notes and mortgages as an excuse to punish a mortgage company here and there and give someone a house that they didn’t pay for, but really, that can’t become national policy, else we’ll all be paying for our neighbor’s house. Oops. W/ Fannie and Freddie’s subsidies, we already are. Never mind.

  22. AHodge says:

    i guess that soon the banks will ask that flawed paperwork be accepted “to maintain confidence in the financing system”
    in spite of our corporate protections, false swearing here should be a criminal offense for individuals? so they already getting a pass from prosecutors here. Also corp and personal liability for fraudulent foreclosure damages?

    while we may think the bank foreclosers “really” entitled to own the house, they should have to show it to kick folks into the street.
    looks like it too late to short the title insurers which the banks now rely on.
    or maybe not?

  23. Mannwich says:

    Good to see the Fed’s doing a damn fine job “regulating” the banking industry…..AGAIN.

  24. bergsten says:

    I’ve said this every other time this topic came up, so I’ll say it again here:

    Screwed-up paperwork cuts both ways.

    If you have a mortgage (and perhaps even if you don’t) you should wander down to your County Recorder’s office and make absolutely sure that your paperwork is on order.

    It would be a really good joke on you if you pay off your loan, only to find out you were paying the wrong bank / person / financial-group, etc.

  25. Maseratij says:

    @alnval I think you are making the best point here. This situation is nothing new. The exact landscape was called out at the very beginning of the process. See the link provided by @alnval or check here

    It did not stop them then, so now all of a sudden it is a problem. Call me a cynic, or some kind of paranoia self destroya freak, but I just figure they have this figured (the banks that is) already. They are just setting things up so the losses on the mortgages go the taxpayer and any profit or financial fiat remains for themselves.

  26. [...] mortgages to a similar automated foreclosure process,” Big Picture blogger Barry Ritholtz notes. “Is it any surprise that the results of this are similarly [...]

  27. Maseratij says:

    @ Barry Thanks for making the NYT assigned reading. Good article, and very scary

    The part where they say they are going to fine the lenders is interesting. Are these the same lenders the taxpayers gave all that bailout money to?

  28. NormanB says:

    The default processing group is probably the same set of morons that wrote the mortgages with jacked-up mortgagee financials in the first place. Just shows how sloppy, unprofessional and most of all illegal these bozos are. They’ll probably all get bonuses, anyway.

  29. Jim67545 says:

    One root cause of this is allowing originators to sell off the servicing. It also separated result of originating garbage from the pain and suffering of trying to collect it. The various tasks became fragmented and, in the attempt to squeeze out a few basis points in profit, specialization became prevalent.
    Had one situation where the applicant for a refi had financed with a lender who was acquired. The acquirer could simply not find the file – at all. I’d bet that this is rampant in the portfolios of banks being closed by the FDIC. They did not get into trouble because they were doing everything right.
    I doubt that the legal rights of the lender will be voided. Delayed, yes. Perhaps indefinitely.
    Had a friend who had a tenant making rent payment directly to the bank to be applied to his loan. But they stopped paying and the bank (a big one) sent foreclosure notices to the tenant, not the owner. The home was sold and my friend learned about it when he tried to get a credit card. Both he and I (a former employee of that bank) tried to explain what happened to the lender. They denied they could make such a mistake. A lawyer later he got a nice settlement greater than the value of the rental. The solution is to whack their pee pee legally. Once burnt, twice shy.
    Incidentally, irregularities like this by legal functionaries are what errors and omissions insurance is for. Wonder who is issuing that insurance?

  30. Jim67545 says:

    Forgot to include: This is another nail in the coffin of mortgage securitization and sale to the world’s investment community.

  31. farmera1 says:

    Remember when:

    -The US was a nation of laws (when you owned a piece of real estate, you really owned it for example)

    -Corporate financial statements were real and transparent and the envy of the world

    -The US stock market was real and not subject to computer programs belches

    -Enron’s corruption was the biggest thing around

    -US manufacturing was the envy of the world

    -Congress actually approved going to war (the Constitution was actually followed)

    -The US had the finest legal system in the world (at least for male white folks)

    -Retirement was a real option for the average person

    Talk about the good old days. If you remember all of these you are oh, some 69 1/2 years old.

  32. Lots of you are touching some of the themes I hit, but only around the edges.

    Hint: think really big picture, and go read Hernando deSoto’s Mystery of Capitalism

  33. ACS says:

    It is the culture that sets the stage for the legal system. Sadly our culture is becoming so corrupt that the legal system is well on the way to degeneracy. At that point it’s banana republic time as the legal system becomes, like the government, a tool of the rich and powerful.

  34. philipat says:

    Please tell me I’m wrong. Bonus payments tied to the number of documents “authorised”???

  35. mote says:

    Confiscation of property without due process.

  36. willid3 says:

    having worked in a finance company before i can see how it happened. they are more fixated on what makes money (the sale) not in the process to protect it. so they cut corners save moneys. which will cost them bug bucks in the states that have judicial foreclosure and may eliminate the non-judicial option in the other states. plus it might get them in real trouble if they sold the notes to F&F. that will get the feds involved post haste

  37. Jack says:

    This paperwork stuff has been around for months, if not years. This is not “news”, it’s banks shitting a brick because more judges are seeing the reality of the situation and, and, and, guess what? Election Day for the judges.

    Power to the People. Maybe.

  38. alnval says:


    That’s one hell of a teaser. I’m getting up early tomorrow.

    I can barely find Hernando deSoto “economist” in Wiki let alone know enough about his thinking to hazard an intelligent guess. Regardless, I’ll expose my ignorance.

    To begin with could he argue that we’ve almost blown it? We had a good deal going and couldn’t leave well-enough-alone? And, that if we’re not careful we might end up destroying the legal/property system that made us great? Would he also argue that this system that has existed successfully in our economy must be allowed to acknowledge the reality of the investments made by each individual homeowner in the property they thought they were purchasing even though the paperwork might be flawed?

    I can’t think of a bigger and more catastrophic picture than one where there is no longer any trust that the country’s legal system will protect and defend the property rights of the individual. Without some fix that reassures us that we can figure out how we are to resolve who pays for the trillions existing in outstanding mortgage debt and how the individual property owner fits into that puzzle we’re in deep doo-doo.

  39. willid3 says:

    i wonder, with so many financial companies being so big in shipping back office work (such as paper trails of notes or mortgages among many others) to LCC (low cost countries, I.E. Brazil, India and China among others) how well they did their part.

  40. philipat says:

    Incidentally, I live in a country without the rule of law so if you need input as to how it looks, I can help.

    The State preys on its citizens like a legalised mafia Organisation, invlolving bribes for every service, and many without any service. The most corrupt institutions are the Courts, the Police and the Parliament (Like a Congress). Justice is a commodity which, essentially with State support, gets bought and sold, which favours the strong and wealthy. Companies are reluctant to invest and will not sign Contracts which involve local legal recourse, in favour of arbitration proceedings in a jurisdiction with legal transparency. Private citizens have very few rights and are abused by the “Ruling Elites”.

    Repeat, the above describes only the third world country I am living in.

  41. Kirkspencer says:

    Several points come to mind.

    If the paperwork is bad in 23 states where the courts must review, it is likely to be bad in the other 27 states.

    If the notes and deeds necessary for standing for foreclosure are missing, they’re missing to provide clear title on closure of the debt. (Mentioned above by others).

    If the notes and deeds on housing loans are bad, it is likely (since the same mechanisms were used) that commercial notes and deeds are equally bad.

    Look, the big deal to me about the messed up title stuff is that it interferes with the essential underpinning of capitalism. That underpinning is clear ownership, be it real property or intellectual property or ‘sweat of the brow’, is indisputable and absolute. Cloudy ownership leads to disputes and confusions over exchanges based on that property.

    This has been an attack on the underpinnings of our society. It wasn’t intended as such, but it is nonetheless. Or so it seems to me.

  42. Almitra says:

    I sense that the big fish are arranging that we will get whatever sense of satisfaction we need to keep us from our pitchforks by throwing us the little fish associated with this part of the story.

  43. hammerandtong2001 says:

    constant normal @2:32pm


    This can, and probably will, metasticize into something more ominous than paperwork shuffling technicalities.

    Aforementioned bucketing of resposibilities regarding underwriting and securitization process allowed for “mortgage originators” to shirk their actual obligations: to their capital providing partners (like shareholders, eg) and to their customers (residential mortgage buyers – homeowners).

    Is foreclosure a fraud? What is the percentage of outstanding mortgages which can be id’d to their holder via MBS and is that holder able to bring action in foreclosure?

    There are mounting cases showing that NOBODY knows who actually owns the mortgage.

    Shouldn’t it be the obvious requirement under MBS/securitization for MBS holders to post publicly to consumers which and what mortgages they hold — and to whom home owners are responsible?

    I have a mortgage. Who currently holds it? I have no idea. Tragically, the holder themselves likely have no idea as well. But — DON”T I HAVE A RIGHT TO KNOW THIS?

    I would think so — after all, I’m paying them a few $1000 every first of the month.


  44. ezrasfund says:

    It is the title insurance companies that are pointing the way here. If the company that is trying to foreclose cannot prove that they own the mortgage, who can? The title insurance companies now say we will not insure that the buyer is getting a clear title. It’s not only that the banks don’t have clear title to properties where mortgages were chopped up and repackaged. No one has clear title. And this problem of clear titles reaches beyond just homes in foreclosure and beyond residential real estate.

  45. RR111 says:

    From BR’s hints, I can see where he is going with his post tomorrow. Most likely, he is going to expand on the idea that capital is not physical; rather, it is network/relationship/information based. Once that network of trust falls apart, in the bigger scheme of things, our capital foundation crumbles. If I am right, it is pretty evident where things go from there regarding title issues, etc.

    Bottom line: Information = Capital

  46. LarryT says:

    I’m a Florida lawyer who has been involved in these cases for some time. Lawyers have been talking about these issues for a while now and finally someone is listening. On my blog,, we have been discussing these very same issues for almost a year. With the recent actions by Bank of America, JP Morgan and GMAC, we now intend to ask the Courts to re-open old foreclosure cases and seek compensation for those homeowners who lost their homes based on these faulty documents. In our view, the filing of those documents are a fraud on the Court. If successful, we will be able to set aside old foreclosure cases no matter how long it has been since the home was taken by the Bank. We issued a Press Release today announcing that our office will be handling these cases without charging our clients a legal fee unless we prevail because we feel strongly about our position on these issues. You can read the release here:

  47. bman says:

    “• False verifications of data included:

    -amounts owed by borrowers

    …That about say’s it all

  48. dsawy says:

    If I might be so bold as to guess where Barry is going:

    What defines the US capital and asset system is our well legislated and litigated body of property rights law. We have types of property that the second and third world have never dreamed of, much less turned into assets or converted to capital in a sale.

    But let’s put that aside for right now. The bedrock of the US capital system, and the reason why we’re able to attract outside capital to invest in the US is the body of laws, case law, courts (civil, criminal and chancery) that define our property rights and provide a means for redress and compensation when or if your property rights are infringed upon. We have a court where the US government is no better or worse than any other property owner – the US Court of Claims. In how many other nations is a property owner on an equal footing in court with the government on a dispute of a taking or compensation for same?

    In other countries, the very definition of property is much more ephemeral and subjective. In many countries, property is all about who you know, who you’ve paid off and who your ancestors were. US investors in other countries often learn this the hard way.

    There’s no fundamental reason why people in Africa are dirt poor. They have a rich body of exploitable resources, they have capital available to them that would invest and has invested in the past in their nations. Take the current situation in Zimbabwe for example: they used to be an exporter of ag goods to other nations in Africa. Then the property law was cut down, property seized and redistributed to various politically connected thugs, and now they have to import food. Farmland that took decades to build and cultivate is now laying fallow, because the new “owners” don’t know what to do with said property. It’s just dirt to them. That’s an example of what happens when property law is extinguished by fiat.

    Back to the US and this mortgage paperwork clusterfuckery: Who is going to buy US RMBS when suddenly it appears that the rights of the lenders (ie, the buyers of these supposedly asset-backed securities) determine that the method of recovery in the event of default is compromised or possibly non-existent? People who are willing to buy compromised unsecured debt, that’s who, because the debt will become as good as unsecured.

    And any buyer of this newly-unsecured paper is going to demand far higher yields.

    Then let’s take the case of investors and real estate speculators who might have been buying up foreclosed properties. Would anyone here buy a property if you knew a) that the title might not be quiet, b) that in the event of a fraud committed upon a court in a judicial foreclosure, the foreclosure might be vacated, c) the combination of (a) and (b) makes a title insurance company put in a carve-out to limit their liability (and increase yours) or they simply won’t write a policy at all, meaning that you’re taking on the full risk here?

    I wouldn’t.

    In short, the banks are playing with destroying the US system of turning assets into capital (and vice-versa) here. They must be stopped.

    Now think about this: Ally is owned in majority by Uncle Sugar. The Fed has taken on $1.2T of RMBS. How much is Ally (Uncle Sugar) compromising the Fed’s balance sheet with this pattern of deliberate fraud?

  49. rktbrkr says:

    Already something like 1/4 of all home purchases are all cash, thats where we’re heading. Anybody who has purchased a foreclosure in Florida or other sand state must be shitting bricks. The title ins cos will reneg on their policies or go BK.

    Like they say real estate is local thw US could end up with a two tier pricing system, one tier for states with sensible court systems and another for states like Florida with “Dollar Store” courts.A foreclosure in the title chain is forever.

  50. rktbrkr says:

    I think you’re going to be a very busy man.

    This is the best thing for US lawyers since Bhopal!

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