Foreclosure settlement a failure of law, a triumph for bank attorneys
Barry Ritholtz
Washington Post February 25 2012


After many months of wrangling, a foreclosure settlement has been reached between 49 state attorneys general and a consortium of banks.

It is an epic failure of law and a triumph for bank attorneys.

It will accomplish little of value, as I’ll explain. First, let’s recall what the “robosigning” foreclosure scandal was all about.

Foreclosure is an extremely serious issue in American jurisprudence. As a nation of laws with strong respect for property rights, we have always treated this process appropriately. After all, having a sheriff forcibly evict a family that typically made a down payment, moved into a home, lived there for some years, made payments, etc., is disruptive — for the family, the lender and the neighborhood.

Foreclosure laws vary from state to state. However, all are specific and precise as to the legal steps that must be followed, from the homeowner’s initial delinquency onward. There are benefits to giving the homeowner a chance to “cure their default.” It is in everyone’s interest for the homeowner to catch up if possible.

We never want to see an innocent party “accidentally” evicted from a home. The legal system has evolved so this has become a “legal impossibility.” Imagine returning home from work or vacation to find the front door padlocked, the belongings strewn all over the block, a big orange sticker screaming “FORECLOSED” on the garage door, with an auction sign in the front lawn. Now imagine that this occurred even though you are not in default or even delinquent on payments. Thanks to the robosigning banks, this legal impossibility has happened repeatedly, even to homeowners who paid cash for their houses and had no mortgages. Imagine that — foreclosed with no mortgage.

Before any foreclosure can proceed, a lender must run through a checklist of specifics for the court to move forward. This review can take 45 to 120 minutes per file and addresses, for instance:

• When was the original loan made, and for how much?

• Who is the borrower? Who is the original lender?

• What is the address of the property?

• Which bank holds the mortgage note? Was the note transferred? When?

• When was the last payment made?

• How much is owed on the loan?

• Was the borrower notified of the delinquency? Default?

• Has the borrower been served notice? When, where and how?

Banks review these details to make sure there was not an administrative error. (Oops! We applied payments to wrong account!)

The banker who reviewed these files fills out and signs an affidavit, which is then notarized. It is the written equivalent of sworn testimony in court. Judges take affidavits extremely seriously. False affidavits bypass the entire fact-finding and legal process, and the result can be a miscarriage of justice. Anyone who lies on one commits perjury, a felony punishable by jail time.

At least, they used to get jail time.

Before the settlement, we learned that nearly every aspect of the robosigned documents was false. None of the details were ever reviewed. The signatures attesting to the review of the documents were fabricated — made by someone other than the person whose name was on the document. Neither person — the supposed signatory to the document nor the hired forger — ever validated the facts of each case. All of the safeguards put in place to make sure foreclosures were done correctly and legally were bypassed. Even the notary stamps were bogus — they were not real, and not signed by a notary to validate that the signer and the signature matched.

How did this happen? Instead of a careful review, people were hired to rubber-stamp hundreds of foreclosure documents an hour. Former burger flippers were paid $8 to $10 an hour to violate the law, file false affidavits and commit perjury. Some of the information was correct, but much of it was wrong — and none of it was verified for court purposes.

And now we have this grand settlement.

What will the impact be?

Economically, it will have no effect. The dollar amount is small relative to the U.S. economy. Indeed, the total impact of the settlement is less than one ten-thousandth of annual gross domestic product.

Then there’s the “math.” The number touted is $26 billion, but that’s wildly misleading. At most, it’s $6 billion, paid out by a consortium of banks. The other $20 billion is for capital write-downs for delinquent homeowners that were going to happen anyway. These were homes that the banks anticipated taking a $50 billion-to-$100 billion hit on. Only now, they get a tax benefit for it.

As far as the U.S. housing market goes, the impact will be minimal. About one out of five mortgages are underwater — meaning the house is worth less than is owed on it. Today, more than 11 million mortgages are underwater.

The settlement won’t affect the majority of these homes. Depending on which analysis you believe, the borrowers who receive a principle write-down will get $2,000 to $20,000 off their mortgage. This will not appreciably change the situation for most borrowers. They owe many tens of thousands more than the house is worth; some are hundreds of thousands of dollars behind in payments. Most will be as likely to default after this write-down as before. The impact on the overall underwater-mortgage issue is almost nonexistent.

The bigger issue is the economics of criminality. Most people who get caught committing crimes are punished. Commit a felony — if you run a bank — and your shareholders pay a monetary fine. Violating the law has merely become the banker’s cost of doing business.

Thus, the robosigning agreement has allowed the mass production of perjury. It has gone unrecognized and unpunished. It has made perjury a business expense, like travel or office furniture. The same reckless approach to giving loans to unqualified people was institutionalized, leading to another reckless approach to foreclosing homes.

We still don’t know who ordered these crimes, who is responsible for this, whether they still are in their jobs — or whether they are in a position of authority to do the same thing again.

Last, politically, the settlement reveals the corrupting influence of bank bailouts. Government is supposed to enforce laws equally and fairly. Instead, it is protecting its investments in rogue banks. They are committed to their original error and are loath to admit it. This is the reason that after a surgical accident, a new surgeon does the repair. He is objective and has nothing to hide. Conflicted governments, though, are focused on their reputation and reelection.

The robosigning agreement will serve as an exemplar to future generations of what not to do when confronted with failing banks.


Originally published Washington Post February 25 2012

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter @Ritholtz

Category: Bailouts, Legal, Regulation

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.

14 Responses to “Foreclosure settlement a failure of law, a triumph for bank attorneys”

  1. huhwhat says:

    When the government no longer protects the rights of the people, that government must be stopped.

  2. carleric says:

    This is what happens when an entire administration together with the entire United States congress have been bought and paid for in orde to protect a “supposed” critical part of our economy. Just ask Benny if it was necessary to protect the banksters. F**k ‘em all.

  3. theexpertisin says:

    Makes one pine for frontier justice.

  4. Finster says:

    Thank you BR for summing it up so precisely. I completely agree that the decay of the rule of law is the greatest danger in this. All of this pertains to legitimacy of a system and legitimacy is the lifeblood of nations.

    Legitimacy is what differentiates just government by the people for the people from tyranny and feudalism.

  5. Sechel says:

    Seems Phil Agelides agrees with you..

    LAST week, Attorney General Eric H. Holder Jr. proclaimed in a speech that when it comes to fighting financial fraud, the Obama administration’s “record of success has been nothing less than historic.” Such self-congratulation is not only premature, but it also reveals a troubling lack of understanding about what is required to win the war against financial wrongdoing.

  6. obsvr-1 says:

    I am continuously amazed how the lawyers have skirted this whole financial mess; actually worse, how much they have benefited.

    Look at the frickin’ legal bill the US Govt (read: taxpayer) is paying for the Freddie/Fannie fiasco. Over $500M !! and growing. Why didn’t some private sector D&O insurance company have to pay this instead of the gov’t — at least then you would have had push back on double (fraudulent) billing and a hope for resolution instead of perpetual hourly billing machine.

    Just an aside: All of this Gov’t bailout, payouts being touted as the “Taxpayers” paying the bill is just another round of BS, it just gets added to the gov’t tab (National Debt) that we all know, or should know by now will never be paid. If every taxpayer had to write a check (special assessment to pay for this BS) then you would certainly see more outrage and blow back from the taxpayers.

  7. murrayv says:

    “Government is supposed to enforce laws equally and fairly. Instead, it is protecting its investments in rogue banks. They are committed to their original error and are loath to admit it. ”

    I don’t think the AGs had anything to do with the original error. Seems to me there is something deeper going on here. Either that or we have an amazing number of state AGs that are incompetent wimps.

  8. obsvr-1 says:

    LAST week, Attorney General Eric H. Holder Jr. proclaimed in a speech that when it comes to fighting financial fraud, the Obama administration’s “record of success has been nothing less than historic.”

    yeah, nothing less than an historic ‘Obama-Nation’

  9. Jim67545 says:

    I’ve already commented that while there is LOTS of evidence of improper documentation/signing, I’ve seen very little evidence of wrongful foreclosure/eviction (where the person was not delinquent or perhaps even had no mortgage.) I’ve already noted that legal firms play a role here, especially in verifying the address, legal description, liens which is why so few wrongful foreclosures/evictions have occurred.

    I have also commented that the persons harmed in all of this are the persons who eventually buy these properties which were foreclosed upon with improper documents and whose sound legal title is jeopardized. Too, they are missing from among those being compensated or whose damages are being remediated.

    Instead what we get is a government shake down of lenders who have lots to be feeling guilty about and who agreed to the settlement as the lesser of evils compared to specific discovery and legal action. This generalized shake down is a very bad precedent and a poor substitute for the (actually) guilty paying for their crimes. One can imagine one of the lesser perpetrators saying in a Board meeting, “We have made few errors but it’s easier and represents less risk to just pay the penalty.”

    And why the shake down? To throw a few dollars at deliquent homeowners to try to solve the housing market’s ills. Pitiful. I object to this Robin Hood approach to “justice.”

  10. andrewp111 says:

    Maybe the 49 State AGs went for this because they realized what a mess it would be to properly and legally clear the titles to all these properties, and feared what that Sword of Damocles would do to their property tax bases if it ever fell. They simply can’t allow another crash in house prices to take place, nor can they allow a situation to happen where the only way to properly clear tens of millions of titles will be Eminent Domain seizure. So, there is no way they can allow “robosigning” to be fully litigated.

  11. bdw says:


    Why haven’t we heard more about title companies payouts or policy costs increasing? The article below suggests that there was a “pause” after the robosigning but then policies were issued again after. What “addressed the title company’s concerns” that allowed disregarding robosigning so quickly?

  12. howardoark says:

    “Why haven’t we heard more about title companies payouts or policy costs increasing? ”

    Title Insurance protects the mortgage holder. If you have a $100,000 mortgage on a $700,000 house and it turns out you didn’t actually have title to it, the policy will pay the bank $100,000 and you will be out on the sidewalk with your possessions wondering if you can get the family into a homeless shelter before it starts snowing.

    You can get homeowners title insurance, but few people do (I don’t have it). You’re counting on the Title Company not wanting to pay out that $100,000 policy (that you paid for) to make sure you have a clean title to your “biggest investment ever”.

  13. bman says:

    This article maligns burger flippers, leave the burger flippers out of it they might spit on your bun if you blame them for the Robosign mess but they’d never file false legal documents they’re smarter than that.