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THE FORECLOSURE CRISIS
FLAWS IN THE PROCESS:
“SPECULATION AND WORSTCASE SCENARIOS”
In , additional issues have come to the fore, as problems with individual foreclo-
sures have revealed systemic flaws in how lenders documented and processed mort-
gages for securitization. Legal experts and consumer advocates told the Commission
that procedural and documentation problems with foreclosure have been laid out in
court cases and academic studies for years, but were ignored until the number of
foreclosures rose so dramatically.
All of the nation’s state attorneys general banded together in the fall of to
investigate foreclosure irregularities, identify possible solutions, and explore poten-
tial redress for borrowers who were harmed by improper foreclosures. For example,
lenders have relied on “robo-signers” who substituted speed for accuracy by signing,
and sometimes backdating, hundreds of affidavits claiming personal knowledge of
facts about mortgages that they did not actually know to be true. One such “robo-
signer,” Jeffrey Stephan of GMAC, said that he signed , affidavits in a month—
roughly per minute, in a -hour workweek—making it highly unlikely that he
verified payment histories in each individual case of foreclosure. In addition, a
number of court cases have been filed alleging invalid notarizations, forged signa-
tures, backdated mortgage paperwork, and failure to demonstrate having legal stand-
ing to foreclose—that is, being the entity with the right to repossess a home.
The problem of legal standing arose because the rapid growth of mortgage securi-
tization outpaced the ability of the legal and financial system to accurately record
who owns the mortgage. During the securitization process, loans were sold multiple
times. To speed up processing, the financial industry created Mortgage Electronic
Registration Systems, Inc. (MERS), an organization made up of , mortgage
lenders. It tracks changes in servicing rights and ownership interests in mortgage
loans. MERS is designated as the “mortgagee of record” on behalf of its members, a
status that is meant to give it the legal right to foreclose if the borrower fails to pay the
loan. MERS has registered million mortgages since launching in and had
million loans outstanding as of November .
The standing of MERS or its designees to foreclose has been called into question
by courts and academics, however. In a hearing before the House Judiciary Com-
mittee on the foreclosure crisis, New York State Supreme Court Justice F. Dana
Winslow testified that “standing has become such a pervasive issue that I frequently
use the term ‘presumptive mortgagee in foreclosure’” to describe MERS. Because of
“multiple unrecorded transfers of the legal ownership of the [m]ortgage,” it is unclear
whether MERS continued to be the mortgagee after subsequent sales of the loan, ac-
cording to Winslow. Moreover, courts have held that MERS does not own the un-
derlying note and therefore cannot transfer the note or the deed of trust, or foreclose
upon the property.
Winslow also highlighted other deficiencies in MERS’ standing, many involving
sloppy paperwork: the failure to produce the correct promissory notes in court during
