What the big banks have feared has finally happened. Yesterday, the Massachusetts Attorney General (AG), Martha Coakley filed suit against the big five —Wells Fargo & Co., JPMorgan Chase & Co., Citigroup Inc., Bank of America Cor., and GMAC, a subsidiary of Ally Financial Inc — in Suffolk Superior Court. The AG also named the Mortgage Electronic Registration System Inc and its owner MERSCORP as parties to the lawsuit.
The litigation represents the first direct response by a state, on the behalf of its residents, to the robo-signing scandal, which became news in late 2010, which disclosed that bank employees and third parties were unlawfully signing foreclosure paperwork, without performing the proper review.
The AG charges the banks with four counts in its complaint. Following is a summary of the charges filed in court:
The Banks Used False Documents to Expedite Foreclosures - Coakley accuses lenders of knowingly using false documentation to foreclosed on borrowers or the mass robo- signing of foreclosure documents. Evidence uncovered in the robo-signing scandal revealed lenders repeatedly committed egregious affidavit and notary violations by instructing employees to sign affidavits and sworn statements.
However, the signers did not have the personal knowledge of the information attested to in the documents. Besides the illegal activities taking place with foreclosures, it also occurred with assignments, transfers and loan modifications secured by real property.
Massachusetts law requires the lender, or any party to a real estate foreclosure, to demonstrate it filed an affidavit that complies with the regulations of the Commonwealth of Massachusetts.
- Ibanez Violations – Banks pursued illegal foreclosures although they were not the legitimate holder of the mortgages. By participating in these foreclosures, the lenders violated a ruling recently upheld in a case rule on by the state’s Supreme Court (Commonwealth v Ibanez), which states: “only the present holder of a mortgage is authorized to foreclose on the mortgaged property.”
Because lenders failed to get the proper and valid “assignment of mortgages” before proceeding with many foreclosures, it negatively affected “hundreds or thousands” of property owners in Massachusetts. Furthermore, the lenders’ “falsely claimed” to hold title to mortgages in various paperwork although they never held the requisite assignment of mortgages.
- MERS Undercuts the State’s Public Records System - In this complaint, the AG charges the banks use of the private electronic registry system, in effect, allowed them to “avoid” the state’s system for land registration and recording of documents, including the payment of charges and fees, as related to the selling of mortgages .
- The AG claims that MERS “lack transparency as to the entities that have the legal authority to enforce mortgages, and unfairly concealed form borrowers the true identity of the holder of the debt.” Banks also “failed to register assignments of mortgages and transfers of the beneficial interest in mortgages. This violation occurred repeatedly when mortgages were sold in the bond market.
- Banks Misrepresented Loan Modification Program to Borrowers – Mortgage lenders “deceived and misrepresented” their loan modification procedures-- in terms of the program requirements and the resources available for homeowner relief. Simultaneously, the lenders stated publicly they were aggressively involved in modifying loans and trying to keep people in their homes.
The banks enlisted borrowers in the modification program, but a large percentage of homeowners never made it out of the “trial process,” which represents the first step after receiving approval to participate in the loan modification program.
What Is the Mortgage Electronic Registration Systems?
The Mortgage Electronic Registration Systems or MERS refers to an electronic system created by the banks in the mid 1990s. The primary purpose of MERS focused on simplifying the mortgage process by eliminating much of the traditional paperwork associated with the mortgage system. This includes transferring ownership of mortgages especially in the mortgage re-securitization process.
The system was suppose to work to the advantage of all players involved in the business of the residential mortgage, including mortgage originators, loan servicers, lenders, document custodians, real estate closing agents, title companies, insurers, investors, county recorders and borrowers. However, borrowers who faced foreclosures actually became “victims” of the system.
Damages Ask for in the Complaint
The Massachusetts AG asks the court to levy civil penalties, offer restitution to borrowers harmed by the banks and provide compensation to the Commonwealth for registration fees. The AG also wants relief for borrowers already foreclosed upon—illegally. The AG also wants the banks to follow the laws of the state in any future foreclosure actions.
Despite having entered in talks with a group of attorney generals and from various federal agencies, including The Office of the Comptroller of the Currency and Department of Justice, the banks still have not reached a final settlement after a year of negotiations.
Massachusetts, California, Delaware and New York have backed off from the wholesale settlement to pursue a better resolution for their residents. The lenders hoped to reach a settlement with all 50 states, in their attempt to put the robo-signing fiasco behind them and move forward.
After the scandal was uncovered last year, many lenders placed a moratorium on foreclosures and commenced a review of the questionable procedures. In early fall 2011, statistics released by RealtyTrac showed lenders have resumed moving delinquent homeowners through the foreclosure pipeline.