There seems to be a misunderstanding as to why the rampant and systemic foreclosure fraud is so dangerous to American system of property rights and contract law. Some of this is being done by people who are naked corporatists (i.e., the WSJ Editorial Board) excusing horrific conduct by the banks. Others are excusing endemic property right destruction out of genuine ignorance.

This morning, I want to explain exactly why this RE fraud is so dangerous, and explain the significance of the rights that are currently being trampled. I also want to demonstrate that the only way the nation could have the quantity and magnitude of errors we see is by willful, systemic fraud.

Perhaps this commentary will allow for a more intelligent debate of this issue, and focus on what can be done to fix the problems, rather than the blind parroting of talking points.


The process of purchasing a home in America culminates with an event called “the Closing.” It is an hour plus long contract signing that ensures the buyer is legitimately taking title, possession and legal ownership of a unique parcel of land and any structures upon it. The process gives any buyer specific rights to that property that cannot be abrogated under the laws of the United States.

At the closing, buyers sign and initial numerous documents. The goal is to accomplish the following:

1) Papers are signed that will be filed with the County Clerk (or appropriate officer) along with recording fees, for the official transfer of title from the prior owner to the new owner. The enabling purchase loan (i.e., mortgage note) is also filed with the Clerk.

2) The buyer receives title (ownership) of the land;

3) The mortgage lender establishes a new interest in that property contingent upon their mortgage note;

4) All other claims, liens, tax obligations and prior mortgages, home equity lines or second notes are satisfied and extinguished before title passes to the new owner.

5) Third party claims of any interest in that property superior to the buyer are eliminated;

6) Title Insurance is purchased and issued so the buyer has a recourse in case of defects in ownership occurs.

Every step of the process is designed to protect the property rights of all parties. The result is more than a mere transaction selling property from one party to another; rather, this has created a system where ownership interests are clearly defined; where title history can be reviewed going back decades and centuries. There is a certainty to the purchasers of this property against all future claims.

Everything about this process has been created to make sure the transfer goes off perfectly. In a nation of laws, contract and property rights, there is no room for errors. Indeed, even small technical flaws can be repaired via a process called “perfecting title.”

As we noted previously, esteemed economists such as Hernando de Soto have identified that the respect for title, proper documentation, contract law and private property rights are the underlying reason capitalism works in Western nations, but seems to flounder elsewhere.

We cannot have free market capitalism without this process. So what does it mean if banks have been systemically, fraudulently and illegally undermining this process?


The closing process described above took place with all parties participating voluntarily. The buyer wants the house, the seller wants the transaction, the financing bank wants to make the mortgage loan.

What happens during a proper foreclosure? The prior closing is essentially reversed, only its done involuntarily. The process requires another RE closing, only this time, the Note holder is exercising their right to repossess the house if the borrower has failed to uphold the terms of the mortgage note. It typically states that if a borrower fails to make the requisite payments, they become delinquent. After an extended period of delinquency, they go into default. That allows the note holder to exercise their rights to foreclose on the property, and take title and possession.

The same care and attention to detail that occurred during the initial closing must also occur in the foreclosure process. All of the steps noted in our initial closing must occur here also. But since it is an involuntary process for the (soon-to-be former) property owner, extra care must be taken to make sure that property rights are being maintained and respected. The entire process is, if anything, is even more rigorous.

The law does not tolerate any errors in this process. What does the foreclosure process legally require? It varies by state and mortgage note, but the following is a good outline:

1) Notice of Delinquency is sent to a borrower who has fallen behind his payment schedule;

2) Notice of Default is sent to a delinquent borrower who has missed the requisite number of mortgage payments;

3) Notice of Foreclosure is sent to the defaulted borrower, and the process begins;

4) Affadavit by the bank’s representative are signed attesting to: Ownership of the note, who the borrower is, the property in question, the date of last mortgage payment, amount of delinquency, tax escrow owed, other payments (such as homeowners insurance);

5) Notarized documents: A Notary Public affirms that the affidavit was actually signed by the signatory, and this allows it to be entered into the court as documentary evidence;

6A) Notice of Pendency (Lis Pendens) is filed with the County Clerk putting the world on notice as to the foreclosure action;

6B) Summons and Complaint are prepared by bank attorneys, who further verify the specific information attested to by the bank executives. The attorneys then file the Complaint, commencing the Foreclosure Action;.

7) Service of Process is filed, either hand delivered to the home owner, or nailed to the door of the home;

8) Referee is Appointed to review and process the case; calculate the amount owed, and report back to the Court; The Referees report is also notarized;

9) Judgment of Foreclosure is moved for by Note holder;

10) Court orders the property auctioned. The court specifies a notice of the auction, publicizing the property auction;

11) Bidders must Close on the auctioned house in 30-90 days; In the event of no sale, the bank takes possession (REO);

The fraud that has come to light are primarily occurring in steps 4, 5, 6 and 7. The verification of the specific data that is mandated legally is not taking place by bank executives. Reviewing a file can take anywhere from, 20 minutes to well over an hour. Yet some bank employees are testifying that they have signed off on as many as 150 per day (Wells Fargo) or 400 per day (Chase).

It is impossible to perform that many foreclosure reviews and data verifications in a single day. The only way this could happen is via a systemic banking fraud that orders its employees to violate the law. Hence, how we end up with the wrong house being foreclosed upon, the wrong person being sued for a mortgage note, a bank without an interest in a mortgage note suing for foreclosure, and cases where more than  one note holders are suing on the same property that is being foreclosed.

This is more than mere accident or error, it is willful recklessness. When that recklessness is part of a company’s processes and procedures, it amounts to systemic fraud. (THIS IS CRIMINAL AND SHOULD BE PROSECUTED).

The next step in our cavalcade of illegality is the Notary. Their signature and stamp allows these fraudulent documents to be entered into court as actual evidence (no live witness required). Hence, we have no only fraud, but contempt of court on top of it (BOTH OF WHICH REQUIRE PROSECUTION).

Law firms preparing the legal documents are not doing their job of further verifying the information. And, it seems certain states such as Florida have foreclosure mills who were set up from the outset as fraudulent enterprises. (EVEN MORE PROSECUTION NEEDED).

Lastly, some service processors are not bothering to do their job. This is the last step in the foreclosure proceedings that would put a person on notice of the errors (YET MORE FRAUD).

There are multiple failsafes and checkpoints along the way to insure that this system has zero errors. Indeed, one can argue that the entire system of property rights and contract law has been established over the past two centuries to ensure that this process is error free. There are multiple checks, fail-safes, rechecks, verifications, affirmations, reviews, and attestations that make sure the process does not fail.

It is a legal impossibility for someone without a mortgage to be foreclosed upon. It is a legal impossibility for the wrong house to be foreclosed upon, It is a legal impossibility for the wrong bank to sue for foreclosure.

And yet, all of those things have occurred. The only way these errors could have occurred is if several people involved in the process committed criminal fraud. This is not a case of “Well, something slipped through the cracks.” In order for the process to fail, many people along the chain must commit fraud.

That it is being done for expediency and to save a few dollars on the process is why the full criminal prosecution must occur.


The approach of most Western nations to property is an important legacy. In the United States, it has been enshrined in the Constitution. Even the rare exercise by the State to take private property during Eminent Domain requires an extensive and proper process. The Fifth Amendment to the US Constitution guarantees that no “private property be taken for public use, without just compensation.” The Supreme Court has detailed the process required for the State to seize any citizen’s private property without the owner’s consent.

There is simply no reason we should tolerate unlawful property seizure merely when it is done by banks. They are not the State, not the King, and not above the law.


Man without Mortgage Loses Home in Foreclosure (September 23rd, 2010)

Florida’s Ongoing Foreclosures Nightmare (September 29th, 2010)

How ‘Flawed’ Is Foreclosure Paperwork? (October 4th, 2010)

Foreclosure Fraud Reveals Structural & Legal Crisis (October 5th, 2010)

Are WSJ OpEd Writers Clueless or Liars? (October 11th, 2010)


This work is licensed under a Creative Commons Attribution 3.0 Unported License.

Category: Credit, Foreclosures, Legal, Real Estate, Really, really bad calls, Regulation, Taxes and Policy

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.

122 Responses to “Why Foreclosure Fraud Is So Dangerous to Property Rights”

  1. stopGOVTwaste says:

    Barry is spot on!


    BR: Oooh, that’s good — I’ll embed that scribd doc tomorrow early . . .

  2. andrewp111 says:

    There is no reason for the banks to worry about such minor speedbumps. Congress will give them a blanket fix in the Lame Duck or next year. All state laws will be preempted, and a new electronic Federal title system to be managed by the Fed or the Treasury will be implemented.

  3. tt says:

    amazing the apologists for the banks. they have a private printing press monopoly of a country’s money, they got trillions of bailouts and buy ins on junk, and now there are people apologizing for little mistakes in foreclosures.

    stockholm syndrome or on the bank’s payroll.

    i like the balls of the french people. the modern amerikans are baby seals begging to be clubbed. my fellow citizens scare me with their ignorance, arrogance, apathy and apologies form wars to bankers to torture…….

    usa has become a shit country along with israel. at one point in the not so long past both nations were fairly decent. both are shitholes of grifters now.

  4. ToNYC says:

    FRS sells you crack, takes it back, and you get whacked. The Euro banking cartel tried to bankrupt this young Republic since its late 18th Century founding and was successful under the top hat and tails, Princetonian Woodrow Wilson who let the FRS be born during the Christmas recess of December, 1913.

  5. tt says:

    what percentage of mba’s and wall street traders and analysts even understand what the fed is and what the money in usa is?

    i would bet less than 5%, from my experience asking these arrogant assholes. they are dupes. jamie dimon and blankfein…….get it. the average jerk running a hedge fund or desk has not a clue.

    like a monopoly game with a bunch of retarded adults where only a few sharpies have free access to more money and the other players don’t even know, even after decades of playing.

    that is how dumbed down the average wall st player is.

  6. andrewp111 says:

    After all the banks go bust from bad mortgage debt, the Fed will buy all the forclosed properties in the entire US from the FDIC through a massive round of QE3. The Fed will own most of the real estate in the USA, and will become the world’s largest landlord. Once this happens, we might as well have a new Federal land title system managed by the Federal Reserve.

  7. andrewp111 says:

    You might as well let the cat sign it and the dog witness it. That will put you on par with Bank of America.

    beaufou Says:

    October 12th, 2010 at 7:55 pm
    I just finished typing and printing the title for my house, just waiting for it to dry to notarize it.
    Maybe my wife can sign and my kids witness the whole operation.

  8. RadioFlyer says:

    Love this blog, it’ fantastic, and I have tremendous respect for both Barry Ritholtz and the majority of the folks who post on this blog. That said, we all make mistakes.

    Barry Ritholtz got his facts wrong on Kudlow (10/11/10 at approximately 7:23pm) during his attack on Diana Olick….I think he owes her an apology.

    In defending his argument that there is absolutely, positively no room whatsoever for any error in the foreclosure process, he repeatedly stated that other than the past few years, mistakes (such as improper foreclosures, throwing belongings out on the lawn) simply have NEVER HAPPENED in this country.

    Watch it here:

    The portion I am referring to happens about 8 minutes in, until the end of the video, and he is responding to Diana Olick’s contention that (I am parahrasing) these “horror stories” are rare and happen occasionally as a fact of life – no system is perfect. Some of Barry’s quotes, “No, no, you never see those stories. That has never happened before. That’s historically an impossibility. That is a legal impossibility.”

    or, “No, no, but this has never happened before. You have banks sending people to change the locks on houses that aren’t in foreclosure.”

    or, “It should never happen, this should be 100%, never, ever, ever happen.”

    or, “It should be zero, for most of American history, it’s been zero.”

    or, “It was zero for a long time, it’s only these past few years”

    In a few minutes of Googling, I came across an example of each. My guess is that there are more examples, should one choose to look (and likely plenty more that either weren’t reported in the days before the 24 hour news cycle, or were reported and are on microfiche somewhere, but not on the internet – yet). Are they exactly analogous to the current environment, probably not – one could make the argument that these examples are more “innocent” events than what’s happening today. But whether that’s the case or not, they did happen.

    Home mistakenly foreclosed, bank made it right:
    ["Homeowner is told foreclosure an error"‎
    Pay-Per-View - Boston Globe - Jul 22, 1999
    A Dartmouth man who lost the home in which he has lived for a quarter-century when he failed to pay his final mortgage payment of $324.57 got it back...
    Citizens Bank said a mistake had been made in foreclosing the home of Edward J. Brown, bought the house back, and transferred the deed to Brown yesterday afternoon,...]

    Wrong home (in Miami, ironic, huh?) emptied of belongings, bank made it right:
    [“Miami, FL, Family Mistakenly Evicted”
    Toronto Blade – Oct 7, 1987
    A tearful woman watched as eviction workers given the wrong address threw her family’s belongings,including antiques collected over 18 years, out doors and windows and onto the lawn.
    To continue reading:,662581&dq=foreclosure+wrong+house&hl=en ]

  9. Andy T says:


    You’re crossing the line now. You’re “messing with the meme” there….

    If you keep this up, you’ll be moderated.

  10. wisedup says:

    ah, he did not cross the line but he did jump the shark.

    love ya, RF, just keep swinging away , but do it next a wind farm so we get some benefit.

    Here we have prime TV spot focusing on a problem of unprecedented scale and Olick wants to ignore the rampant criminal acts and suggest that “very few have actually been hurt” – Barry is right, all of us have been hurt and hurt badly. Even if not one person had the locks changed, even if not one person was wrongly evicted. The instances are merely convenient handles for the evening news. The big news is how carelessly the banks have handled such a key financial asset. Stocks, bonds, contracts, even the money supply, all depend on respect for the law. Now that’s a useful meme for the tea-party guys. Respect for the law – you can never have too much of that can you?

  11. FrancoisT says:

    “Here we have prime TV spot focusing on a problem of unprecedented scale and Olick wants to ignore the rampant criminal acts and suggest that “very few have actually been hurt”

    It’s a miracle that my computer screen is still intact. As I was watching that exchange, I couldn’t take that shit anymore. Lucky me, a vestigial copy of the Yellow Pages was in my office and I used it to repeatedly smash it with great force on my desk about 20 times.

    Felt muuuch better after that! ;-)

    Seriously though, the playback of this exchange made me realize why this country is in such a pickle: There is a level of slothfulness, moral depravity and self-centeredness in the media that borders on the delusional psychotic. Olick just couldn’t or wouldn’t see the real problem and kept harping on the talking point that under no goddamned circumstances could John Q. Public get any reprieve, any relief that could impinge on the God-given right of the banksters to extract all the profits they wanna.

    Well…I say to the Financial industry to fuck off! You provoked that mess, you pay…bitchez!

  12. [...] need to go to jail Posted: October 13, 2010 by chadwig in Uncategorized 0 Barry Ritholtz provides the details: It is impossible to perform that many foreclosure reviews and data verifications in a single day. [...]

  13. davide says:

    It gets worse and worse. From an AP story yesterday:

    “In an effort to rush through thousands of home foreclosures since 2007, financial institutions and their mortgage servicing departments hired hair stylists, Walmart floor workers and people who had worked on assembly lines and installed them in “foreclosure expert” jobs with no formal training, a Florida lawyer says.”

    Here’s the URL:

  14. realgm says:

    I agree with Barry that there should be absolutely no mistakes in these stuffs.

    The guy who signed the paper should have the knowledge and the ability to understand what’s going on and be responsible for the signature he put on the paper.

    However, the banks are taking short cut, getting unqualified people to rush through a crazy amount of works. The people who signed the paper and the people who allowed unqualified people to do the works should both take responsibilities for screwing this up so badly.

    However, I think it’s always the little guys (the guys who just signed the paper without knowing what he’s doing) would be screwed. The guys who hired them to do the works and might have even misled them into all the frauds would probably get away with it.

  15. Thanks Barry. Well said.

    It seems the most immediate effect of this fraud is to cloud the titles. If a potential buyer cannot be certain to clear title on a property because of the chance of fraud in the foreclosure process, they would be wise to steer clear of that property. This would have the effect of further depressing the real estate market. While a flipper might have no problem buying a foreclosed property that might have been foreclosed fraudulently, eventually they have to sell it to someone who wants to live in it. And that person (and their bank) needs to have assurance the title is clear before proceeding. So it is a huge clusterfudge that will keep going for decades.

  16. subscriptionblocker says:

    Thanks. This is one of your best posts. Would like to see it wikied.

    Now, please tell us if you believe that the law will ultimately prevail (even if that law remains inconvenient)?

  17. [...] readers start arguing that these problems are small and therefore inconsequential, consider Barry Rithotz’s remarks: There are multiple failsafes and checkpoints along the way to insure that this system has zero [...]

  18. [...] And this may be the best article I’ve read yet – Why Foreclosure Fraud Is So Dangerous to Property Rights [...]

  19. [...] issues.  What issues?  Well, let’s take a look at how the foreclosure process works.  This post from Barry Ritholtz at the Big Picture describes steps that are commonly found in a judicial [...]

  20. [...] want to again stress that this is downright illegal and incredibly damaging to the rule of law. The improper affidavits were the tip of the iceberg, but even if they weren’t, the chain of [...]

  21. [...] An excellent explanation of the entire purchase-to-foreclosure process can be found at  .  I guarantee it’s worth taking the time to [...]

  22. jaymz42 says:

    agree that banks are not above the law and need to adhere to legal foreclosure processes. however, do not agree that people should be in homes they simply cannot afford. coming from grandparents who survived the depression, my grandfather worked several job to keep his home and put food on the table. let the buyer beware. it’s risky to own a home with no back up plan in case of a crisis or emergency such as job loss or loss of a spouse who had income. i’m pretty sure there was no criminal intent going on here, just alot of unfortunate people caught up in the financial crisis (job loss). but, don’t worry there will likely be a government bailout paid for by upper and middle class tax dollars. that seems to be the trend lately. why don’t we just sell our souls to China while we’re at it?


    BR: The deadbeat mortgage borrowers is a red herring — its not related to the criminality and fraud. They are leaving the houses, whether its delayed a week or a month, they are eventually gone.

    And where you ( a lay person) may be uncertain, I (an attorney) am fairly certain there WAS criminal intent. When an employee is ordered to sign 500 affidavits a day, attesting they reviewed all relevant documents, details, data points (about 30-60 minutes per file) — then send it to the notary, who will pretends you were present when they stamp it, even if you are in a different part of the state — then the whole thing is entered into evidence — THAT IS PERJURY.

    You cannot swear to court evidence that is false. Criminal law isn’t difficult to understand, people.