Chicago Foreclosure Lawyer Blog

December 25, 2011 has come and gone, and the foreclosure fraud settlement has yet to materialize. Iowa Attorney General Tom Miller had stated that he wanted it wrapped up by Christmas, but it is clear that hasn't happened.

Several states including New York and California remain out of the negotiations, which means that banks are less willing to make deals when so much liability remains off the table. The major lenders are pushing for broad waivers of liability. Time is reporting that a deal may materialize in January and has published some details.

Here's the overview: the banks will commit $25 billion to three categories. They will make $5 billion in cash payments primarily to the states. $3 billion will be earmarked for refinances. The remaining $17 billion will be used for principal writedowns for underwater homeowners.

In reality, the banks will only be committing $5 billion out-of-pocket. The writedown funds will be paid by crediting banks for every dollar of principal that they forgive.

In exchange for these concessions, the banks will be released from claims brought by the states and the federal government for servicing, foreclosure, and loan origination abuses. Individual consumers will still be able to bring lawsuits, but those lawsuits will likely be less effective than ones brought by the government. With deep pockets and an army of attorneys, it isn't hard to fight individual lawsuits -- in some cases it is merely a matter of outspending the plaintiff.

The biggest problem with this latest version of the settlement is the same as it has always been -- it does not do enough. $17 billion towards principal writedowns is a good start, but with 25% of mortgages underwater nationwide (almost 50% in the City of Chicago), it is not enough to fix every underwater loan. The $5 billion to the states will end up in the pockets of some borrowers, but likely only $1500 to $2000 per person. Those aren't small sums of money, but likely aren't large enough to truly remedy the harm of foreclosure fraud and lending abuses.

If the banks are going to obtain a broad waiver of liability, the steps they must take to obtain that remedy should be equally broad. Given that the state of Nevada is suing Bank of America/Countrywide for violating a previous settlement agreement, even an optimist has little reason to expect that the banks will comply with the settlement this time around.

Reports are that the new settlement terms will be made public in January. Until then, I'd advise against holding your breath.

It has not been a banner couple of weeks for Fannie Mae and Freddie Mac. The two GSEs have been under heavy fire lately, in the press and otherwise. In addition to the usual suspects trying to blame Fannie and Freddie for the subprime mortgage crisis, legitimate critics are cropping up.

The SEC has filed a lawsuit against former Fannie and Freddie executives for misrepresentations that they allegedly made while at the helm of the GSEs. The lawsuit involves disclosures made by the GSEs to the SEC. The SEC alleges that the entities grossly understated their exposure to subprime loans, making the companies seem more stable than they actually were.

In other litigation news, California Attorney General Kamala Harris has sued Freddie and Fannie in an attempt to force their compliance with 51 investigative subpoenas that call on the GSEs to identify all of the California homes on which they have foreclosed.

California also seeks information regarding the homes being used for illegal activities such as prostitution, drug dealing, and the storage of weapons and explosives. The state also wants information that demonstrates Fannie and Freddie's compliance with state and federal anti-discrimination laws.

Finally, it appears that the FBI is following in the SEC's footsteps and is investigating the allegations of fraud itself. Given that the SEC can only bring civil charges, the FBI's involvement indicates that at least one person in federal law enforcement believes that there is the potential for bringing criminal charges as well.

While this is all good news (unless you're at Fannie or Freddie), I wonder when we'll see similar things happening to the major lenders. While state action is nice, I wonder when the FBI will go sniffing around at Bank of America.

The Federal Housing Finance Agency, the entity that oversees Fannie Mae and Freddie Mac, has filed a lawsuit challenging Chicago's vacant property ordinance. When I last blogged about the ordinance, it was to note that it had been amended and significantly toned down from previous versions.

Although that version had been drafted with the cooperation of several major lenders, the FHFA has stated that the $500 building registration fee is effectively a "tax" on Fannie and Freddie. Continuing violations of the ordinance can carry a fine of $1,000 per day. FHFA claims that the ordinance also represents an impermissible regulation upon Freddie and Fannie, which are currently regulated by the FHFA. The agency also maintains that the registration fee and daily fines prevent it from fulfilling its Congressional mandate, which is to preserve and conserve the assets of Fannie and Freddie.

While the FHFA may be correct that a local ordinance cannot trump its regulatory authority, I find it odd that requiring Fannie and Freddie to secure properties they intend to eventually repossess via foreclosure somehow puts the GSEs' assets at risk. Abandoned properties drive down the value of the properties that surround them. Given that Freddie and Fannie back more than 250,000 mortgages in Chicago, I would think that preserving property values would do more to preserve and conserve the GSEs' assets. Abandoned properties are frequently vandalized and gutted, leaving worthless shells in the place of once valuable housing. Again, I don't see how protecting these properties from further harm could ultimately hurt Fannie or Freddie.

This lawsuit seems a bit like a snake eating its own tail. Taxpayers effectively own Fannie and Freddie. Taxpayers in Chicago also supported the ordinance over which FHFA is suing. Given that FHFA is a taxpayer-funded entity, are taxpayers technically suing themselves to protect their own interests from their other interests? It's almost like a game of "stop hitting yourself." If we allow continued urban blight, Chicago will take that much longer to recover from the foreclosure crisis. If we hold lenders accountable for securing properties before they take legal title, we expose our investments in Freddie and Fannie to the risk of loss in the form of fees and fines.

As a spokesperson from Mayor Emanuel's office notes, this lawsuit demonstrates that the state needs to step in and take action to "hold lenders responsible for securing vacant properties."

More to come as the case develops.

I recently wrote about Nevada's lawsuit against Lender Processing Services when the first indictments were brought against two LPS officials for allegedly overseeing a scheme to file thousands of fraudulent foreclosures in Nevada.

The Nevada Attorney General's office has just announced that it has charged three notaires in the lawsuit. Each is accused of falsely attesting to legal signatures on foreclosure documents. Given that each notary is being charged with one count, my guess is that the state hopes they will become witnesses against the two LPS executives already named or that they will give up other people in the LPS corporate structure.

One other notary, who was also charged in the case, was found dead last week. While authorities are not investigating it as a homicide, some observers were a bit dubious. Nevada is an interesting state to watch given that it has been the hardest hit by the foreclosure crisis. Even though Nevada uses a non-judicial process for handling its foreclosures, it may still be a bellwether for future actions by other states. If Nevada is successful, I wouldn't be surprised to see other states bring criminal charges against corporate officials involved in foreclosure fraud.

Although Massachusetts has recently filed its landmark lawsuit against the five major lenders and MERS, it is a civil, not a criminal proceeding.

Back in September, I posted about Eileen Foster and the re-telling of her story by the Center for Public Integrity. 60 Minutes has picked up on the story. In an excellent two-part report, 60 Minutes tells the story of systemic fraud and fraud cover-ups at Countrywide. The report also features an interview with a Department of Justice attorney who attempts to explain why no criminal cases had been brought against executives from major lenders that were involved in the 2008 financial crisis.

Although the DoJ has some significant enforcement power via Sarbanes-Oxley, it maintains that Sarbanes-Oxley is just one tool in the regulatory tool kit. The representative interviewed by 60 Minutes indicates that Sarbanes-Oxley requires proving the "specific intent" to make false statements -- which is difficult to prove. While he indicates that investigations are ongoing, the question remains -- why aren't the whistleblowers featured in the 60 Minutes piece part of that investigation?

The second segment of the report addresses similar problems at CitiGroup. Both segments total about 27 minutes, but they are well worth a watch.

Here is part 1:

Here is part 2:

On the whole, these reports are even more damning than the article I blogged about in September. I'm glad to see the TV media pick this up. The more often these issues are aired to the public, the more likely it is that people will demand action.

On Friday, GMAC Mortgage announced that it will cease purchasing third-party mortgages issued in the State of Massachusetts. The lender stated that, "[R]ecent developments have led mortgage lending in Massachusetts to no longer be viable." It seems pretty obvious that this move is related to the lawsuit filed last Thursday by Massachusetts Attorney General Martha Coakley.

The majority of GMAC's business is purchasing loans from correspondent lenders and wholesale brokers, but that doesn't mean that GMAC can't or won't directly lend money to the citizens of Massachusetts. Perhaps GMAC is hoping that other lenders will follow its lead and refuse to lend in Massachusetts as well. Here's the thing -- only five major lenders were sued by AG Coakley. There is no indication that credit unions and community/local banks are exposed to any additional risk for lending in Massachusetts.

AG Coakley's response to GMAC was, "With today's action, it appears GMAC has acknowledged it has a problem following those laws and being held accountable for doing so." I think her statement is more than apt. There is really no other way to explain the lender's sudden change in position. The implication is that if forced to follow the law, lenders cannot safely make loans. This is utterly absurd. Take, for example, credit unions and local banks, which have been safely lending for years.

The government owns 74% of GMAC. This means that we, as taxpayers, own 74% of GMAC. GMAC is fully aware of this, so it has justified its temper tantrum as fulfilling its "obligation to manage risks and deploy capital in an appropriate manner and in a way that protects the investment of the U.S. taxpayer." Hogwash. If GMAC has fixed its robosigning issues, then it has nothing to fear by continuing to do business in Massachusetts. Moreover, the issues weren't with loan origination, but with foreclosing upon mortgages.

Effectively, GMAC is indicating that if it is forced to comply with the law, it will take its ball and go home. Given the attitude of GMAC's executives, I think that may very well be the best solution for everyone involved.

Yesterday, December 1, Massachusetts Attorney General Martha Coakley filed a lawsuit against Bank of America, JPMorgan Chase, Wells Fargo, Citibank, Ally Financial and the Mortgage Electronic Registration System. A copy of the complaint is available here.

This complaint is really where the rubber meets the road. The State of Massachusetts is the first state to really lay the entire robosigning scandal out for all to see. The complaint reads like a list of "I told you so's" for any consumer defense practitioner.

AG Coakley accuses the lenders of foreclosing upon homes when they lacked the authority to do so and misrepresenting to borrowers their status as holders of the debts. She accuses them of engaging in false documentation practices to facilitate their foreclosure practices (robosigning). She also takes lenders to task for their unfair and deceptive practices in loss mitigation, including misrepresenting their desire to assist homeowners and the terms of internal and Federal loss mitigation programs. She also accuses MERS of violating the state recording statutes.

On the whole, it's a doozy of a complaint. What I like best about it are the illustrative examples of the lenders' bad acts. The examples begin on page 10 of the complaint and are worth the read. There are fourteen examples given and each is tied to a specific property and the foreclosure related to it. In no uncertain terms, the complaint lays bear the central issue in the foreclosure crisis -- in the rush to foreclose, lenders have willfully taken short cuts that include document fraud. Instead of staffing up call centers to handle the volume of borrowers seeking loan modifications and other assistance, the lenders created a Kafkaesque bureaucracy that did more to hurt homeowners than it did to help them.

This lawsuit is a major step forward. It also is an indicator that Massachusetts is not going to accept any settlement brokered by Iowa Attorney General Tom Miller. Although AG Miller's camp is apparently hopeful that AG Coakley will sign back onto their negotiations, this lawsuit is truly the elephant in the room.

I'm hoping that this goes to trial, or at least produces some substantive discovery. It would be nice to shed some light on the underbelly of the industry.

Federal Judge Jed S. Rakoff rejected a proposed settlement between Citigroup and the Securities and Exchange Commission on November 28, 2011. Many observers are heralding this as a landmark opinion. So am I. In general, when the SEC settles a lawsuit, the settlements/consent orders involve no admission of wrongdoing on the part of the defendant. This same "no admission of wrongdoing" element has been a big sticking point in the discussions regarding the robosigning settlement with the state AGs.

In the context of this settlement, however, Judge Rakoff really hits it out of the park. When approving a settlement of this nature, the Judge has the power to determine whether the settlement is in the public interest. After all, the SEC is supposed to be protecting the public from the bad behavior of the entities and individuals that it regulates. As the Judge states in his opinion:

A court, while giving substantial deference to the views of an administrative body vested with authority over a particular area, must still exercise a modicum of independent judgment in determining whether the requested deployment of its injunctive powers will serve, or disserve, the public interest. Anything less would not only violate the constitutional doctrine of separation of powers but would undermine the independence that is the indispensable attribute of the federal judiciary.

He goes on to explain that the situation is different than one where two private parties are involved in a lawsuit. When a government agency is asking a court to assist it in enforcing the law, the importance of the public interest is made clear:

But when a public agency asks a court to become its partner in enforcement by imposing wide-ranging injunctive remedies on a defendant, enforced by the formidable judicial power of contempt, the court, and the public, need some knowledge of what the underlyin facts are: for otherwise, the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.

Reading between the lines a little here, I'd say that Judge Rakoff is knocking the SEC for two things: 1) generally being lax on regulation and enforcement and 2) its common practice of not demanding admissions of wrongdoing. Essentially, if the SEC is going to be bothered to enforce the law, it must be pretty darn important.

By the next paragraph, it's no longer necessary to read between the lines:

H

ere, the SEC's long-standing policy -- hallowed by history, but not by reason -- of allowing defendants to enter into Consent Judgments without admitting or denying the underlying allegations, deprives the Court of even the most minimal assurance that the substantial injunctive relief it is being asked to impose has any basis in fact.

Judge Rakoff also notes that allowing these kinds of settlements does not conclusively settle the allegations raised by the initial lawsuit. "As a matter of law, an allegation that is neither admitted nor denied is simply that, an allegation." In fact, case law supports the idea that once a consent judgment is entered, it cannot be used as evidence in subsequent litigation. By refusing to allow the settlement, the Judge is implicitly stating that he does not want to prevent further lawsuits against Citigroup that are based on the allegations brought in the SEC lawsuit.

The Judge also tears into the motivations of the parties in crafting such a settlement. He notes that Citigroup has violated past consent judgments, that Citigroup would escape the instant lawsuit with a fine that can be described as "the cost of doing business," and that only has minor preventative remedies that only last for three years. If ever there was a slap on the wrist, this settlement is it.

In finding that the settlement was not fair, reasonable, adequate or in the public interest, the Judge stated:

It is not reasonable, because how can it ever be reasonable to impose substantial relief on the basis of mere allegations? It is not fair, because despite Citigroup's nominal consent, the potential for abuse in imposing penalties on the basis of facts that are neither proven nor acknowledged is patent. It is not adequate, because, in the absence of any facts, the Court lacks a framework for determining adequacy. And, most obviously, the proposed Consent Judgment does not serve the public interest, because it asks the Court to employ its power and assert its authority when it does not know the facts.

An application of judicial power that does not rest on the facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free-roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts -- cold, hard, solid facts, established either by admissions or by trials -- it serves no lawful or moral purpose and is simply an engine of oppression.

That oppression, by the way, comes at the hands of some less-than-transparent financial markets and how they led to the current economy. Judge Rakoff acknowledges as much in his opinion, chiding the SEC for not fulfilling its mission to see that the truth emerges. Barring a consent judgment that admits to guilt, it appears that SEC v. Citigroup is set for trial on July 16, 2012.

I almost want to be in the gallery for this trial. I'm curious to see if Judge Rakoff is as sharp of a speaker as he is a writer.

At the end of the day, this is a massive victory for those seeking some truth about the financial meltdown, as well as those who simply want to see the rule of law enforced.

The State of Nevada has indicted two Lender Processing Services employees on 606 counts of various violations of Nevada state law including, aiding and abetting the notarization of documents not signed in the presence of a notary, offering false instruments for filing or recording, and aiding and abetting the false certification of specific instruments.

Essentially, they are being indicted for robosigning hundreds of documents used in the Nevada foreclosure process. In particular, the two defendants, Gary Trafford and Gerri Sheppard, are accused of producing fraudulent notices of default, which are filed with Nevada's county recorders at the outset of the state's non-judicial foreclosure process. The alleged offenses range from gross misdemeanors to class C felonies.

Each defendant's bail has been set at $500,000, although neither one has been arrested yet. LPS released a statement responding to the indictment stating:

The Nevada Attorney General has elected to charge two Lender Processing Services (NYSE: LPS) employees for document execution and notarization practices related to notices of default and deeds of trust filed in Clark County, Nevada from 2005 to 2008. Based on the company's reviews, LPS acknowledges the signing procedures on some of these documents were flawed; however, the company also believes these documents were properly authorized and their recording did not result in a wrongful foreclosure.

Each of the class D felonies carry a potential 1-4 year prison sentence and a fine of up to $5,000. The class C felonies carry a potential 1-5 year prison sentence and a fine of up to $10,000. The gross misdemeanors carry a potential sentence of up to 1 year in jail and a fine of up to $2,000. Given that there are 606 counts, if both defendants were convicted on all counts, it could add up to some significant prison time and fines.

So what's really going on here? LPS was not part of the indictment. However, going after mid-level officials like Trafford and Sheppard can be an effective method of finding bigger fish further up the chain. If one or both defendants makes a deal with the state, it's possible that people higher up in the LPS corporate hierarchy will be indicted. Unless Trafford and Sheppard were the sole master minds behind the robosigning taking place in Nevada, my guess is that they were acting based on instructions given by superiors.

Long ago, I wrote a post about renting becoming the new normal. It was my hope that we would see foreclosed properties ending up as rentals. According to this study, recently released by the DePaul University Institute for Housing Studies, Cook County faces a shortage of affordable rental properties that is expected to last until 2020.

According to the study, 40 percent of Cook County residents rent. This number is likely to increase as the foreclosure crisis continues to displace current homeowners. If you take into account the fact that almost half of the mortgages in Chicago are underwater, then you can expect that owners who choose to walk away from those bad investments will also be seeking rental housing.

As it stands right now, the gap between the supply of affordable housing and the demand for affordable housing has increased by 9% since 2005. At the same time, rental prices increased by 14% in Chicago and 13% in the suburbs. From 2005 to 2010, incomes also declined. This means that housing that may be deemed "affordable" is in even shorter supply. In order for housing to be deemed "affordable," it should cost no more than 30% of a family's monthly household income.

The study defined, "affordable" as being affordable to households with an annual income of $32,931 or less. This means that a rental payment would need to be at $823 or under to qualify as affordable. The study found that there were only 302,842 affordable housing units available in Cook County, leaving almost 180,000 households facing paying more than 30% of their income to obtain housing.

In addition to increased demand, the real estate bubble years saw chunks of rental property converted to condominiums, combined to make larger apartments, or demolished to make way for new single-family home construction. Some of these properties are now likely bank-owned or in foreclosure. In fact, Cook County has lost 15,874 rental properties since 2000.

On the whole, it looks like the shortage will last until 2020.

Two different headlines grabbed my eye today.

In one, a Georgia state judge issued a rather scathing order denying U.S. Bank's motion to dismiss a wrongful foreclosure complaint filed against it. The judge noted that one of the main complaints made by the Plaintiff was that he was not given a reason for being denied for a HAMP modification, even though the program's guidelines requires that a reason be given. He went on to state that U.S. Bank should have been able to produce a reason, with specific numbers, as to why the modification was denied.

The fact that no such document had been produced led the judge to believe that no such evaluation was ever performed. The opinion is a great read, and is an example of judges taking notice of the financial crisis and the various lenders' roles in the crisis. My favorite take-away (aside from the Arlo Guthrie reference) was, "This court cannot imagine why U.S. Bank will not make known to Mr. Philips, a taxpayer, how his numbers put him outside the federal guidelines to receive a loan modification. Taking $20 Billion of taxpayer money was no problem for U.S. Bank."

It's a question that I wish more judges would ask. Every time I see opinions like the one linked above, I have some hope.

In New York, a similar result recently played out, as described in this New York Times article. Justice Catherine M. Bartlett called out an attorney representing Bank of America stating, "Bank of America got a bailout, and this is an outrage, how this man has been treated. Hard-working, middle-class Americans are trying to make it, trying to refinance with your bank." Her statement reflects a growing frustration over the ineffective loss mitigation process that most banks require borrowers to endure.

These judges won't have much impact on Illinois courts. After all, they are from entirely different states. However, as the foreclosure crisis wears on, I have seen more judges in Illinois beginning to hold lender attorneys accountable for the documents that they file, even in undefended foreclosures. Although this blog is often loaded with cynicism, sometimes there are glimmers of hope on the horizon. Obviously, the biggest changes will be catalyzed by homeowners defending their foreclosures and taking the fight to lenders and servicers. However, they cannot win those fights without first winning over the judges that hear their cases. As these two articles demonstrate, some judges have already been convinced.

When the government assumed Fannie Mae and Freddie Mac, it guaranteed that the two GSEs would have unlimited funds until the end of 2012. So far, the two companies have cost taxpayers about $145 billion, which accounts for the repayment of $30 billion since 2008.

Blaming a down housing market and high unemployment, Freddie and Fannie are both set to record some further losses. Freddie is seeking an additional $6 billion and Fannie is seeking an additional $7.8 billion towards their respective budget shortfalls. The Federal Housing Finance Administration, which oversees Fannie and Freddie, has predicted that the net cost to American taxpayers will reach up to $193 billion through 2014.

So is it really that nobody is buying homes? California's Attorney General, Kamala Harris, thinks not. Some of the GSEs' losses must be related to the fact that they are doing very little to keep borrowers in their homes. Every defaulted mortgage tends to rob Fannie and Freddie of long-term income, as well as short-term income.

AG Harris is demanding that the director of FHFA step aside if he will not approve principal writedowns for underwater borrowers whose loans are owned by Fannie and Freddie. Since Fannie and Freddie own about half of the mortgages in the nation, the impact of such a move would be significant. Although it would mean some short-term losses for the two GSEs, turning underwater at-risk mortgages into better investments for homeowners would mean that more homeowners would stay in their homes.

Those same homeowners would continue to make their mortgage payments. Over time, the GSEs would recover their losses in the form of interest payments on the loans. It is entirely possible that this would also stabilize the housing market, in particular by preventing home values from plummeting further as more underwater borrowers default and enter foreclosure. Once that happens, it is not too far-fetched to assume that we would see more buyers returning to the market.

This is why so many observers are harping on the need for meaningful principal reductions for underwater borrowers. If the housing market is ailing to the point that our previously bailed-out GSEs need another bailout, we should probably seek to repair that problem. Freddie and Fannie are not subject to this proposed settlement with the state Attorneys General. Even if that settlement magically became worthwhile, it would have no impact on 50% of the nation's mortgage loans.

Hopefully AG Harris's demands will gain some significant traction.

The L.A. Times recently ran a three-part series about Buy Here, Pay Here auto dealerships. For those unfamiliar with the concept, Buy Here, Pay Here auto dealers sell cars to people with poor or no credit, often at interest rates as high as 26%. Borrowers are required to make their payments to the dealership, and often have to visit the dealership to do so.

In addition to collecting steep interest payments, Buy Here, Pay Here dealers also repossess about 25% of the vehicles that they sell. Those same vehicles go back on the lot, ready for the next person to come along and buy them at interest rates that are often three times the national average for a traditional auto loan. The average profit on these loans is 35%.

Given the huge profit margin, it's no wonder that investors are looking for a piece of the action. These sub-prime auto loans are being bundled and sold as securities. Those of you following the implosion of the housing market foreclosure crisis have probably heard this one before.

This trend is something to watch for consumer defense practitioners. Depending on how the securitization chain for these instruments works, there may be some title issues involved with these trusts. Illinois law provides for the assignment of liens on an auto title, but it also requires that a borrower be notified of the assignment. If these loans are being sold outright, with no valid assignment of interest, then they have, arguably, been paid off.

In that case, Illinois law would tend to indicate that the lien should be released, and either a) a new lien be applied by the purchaser of the loan or b) the title should be mailed to the borrower and the debt is now unsecured as to the debt buyer's interest.

I would argue that b) is the proper result, but a) may be possible depending on how the debt buyer attempts to perfect the security interest.

Given how mortgage securities were ineptly managed, my guess is that there was no actual assignment of the lien and very little paperwork, if any, to substantiate a sale for value of the security interest. I'm also wondering how these securities handle buybacks. If 1 in 4 of these loans default, then that means that new loans are being issued on the same car. Each loan must end up in its respective trust by a specific date. How does Trust A pay out on a repoed car when Trust B is paying out on the new subprime auto loan?

There may be some powerful, or at least interesting, remedies in bankruptcy here. At very least, the securitization of this specific kind of debt raises my eyebrows a bit.

Here are the links to the three L.A. Times articles:

Part 1

Part 2

Part 3

Although yesterday's post indicated that I'm not too hopeful about the quality of the OCC-mandated foreclosure reviews, I did find this article at ProPublica very useful. Most helpful was the list of specific areas that regulators will be checking.

In addition to potential robosigning, it appears that regulators will be paying attention to issues with the loan modification process including specific kinds of dual-tracking and failure to honor a permanent modification. Dual-tracking is when a servicer or lender considers a loan modification or issues a trial modification yet still pushes forward on the foreclosure side of the process. If you were being considered for a modification and the lender moved on to foreclosure before you received an answer on the mod, you may be entitled to . . . something.

Sadly, nobody knows what, if anything, will be done when an issue is discovered. Since the order focuses on financial harm to borrowers, it may be difficult to put a number value on some of the specific servicer shenanigans that auditors are supposed to be finding. At the end of the day, this program may result in absolutely bupkis.

However, ProPublica is a great resource, and I fully expect to see their FAQ updated as readers report in with information related to the review process. Maybe time will prove me wrong. Given that ProPublica also agrees with yesterday's post indicates that time probably won't.

Pursuant to a consent order with the Office of Comptroller of Currency, 14 of lenders and servicers are beginning the process of sending homeowners and former homeowners letters. These letters inform the individual that they can have their foreclosure file reviewed by an independent auditor to determine whether they were harmed by any wrongdoing in the foreclosure process.

Although some are describing this as a positive step forward, I am a bit more skeptical.

On October 12, I posted about the job listings for foreclosure auditors that Georgetown's Adam Levitin discovered. It now seems absolutely clear that these positions were for auditors related to the OCC consent order. These are not attorneys doing the file review, yet they are to determine whether a borrower was financially harmed during the foreclosure process. How a non-lawyer is supposed to make a credible determination regarding a legal issue, I do not know.

Moreover, as I've noted several times on this blog, our regulators aren't really doing their jobs. Even though the audited files are to be reviewed by a regulatory entity, it seems unlikely that these reviews will be very thorough.

I'm also concerned that looking only to whether there was a financial harm is really the proper analysis. Arguably, anyone who bought or refinanced during the height of the real estate bubble was harmed by the bubble itself. That bubble was created by a lending industry hungry for loans to stuff into real estate-backed securitization trusts. It is widely accepted that property values were artificially inflated, and often done so in order to issue more loans. However, the analysis proposed by the OCC consent decree doesn't seem to touch on that.

Based on the prevailing attitude in the lending industry, I think the analysis be as follows:

1. Did robosigning occur?
2. If no, analysis over. If yes, goto 3.
3. Did the borrower default?
4. If yes, analysis over.

I really don't see how you can quantify a financial harm when what we're really talking about is violating the rule of law. What isn't being examined is the damage done to the substantive due process rights of homeowners. Forging documents in order to foreclose is absolutely wrong, regardless of whether the borrower is in default. Clouding title to millions of properties is absolutely wrong, regardless of whether the borrower is in default.

Let's face it, would you rather your file be reviewed by someone with a vested interest in protecting your rights or someone like this?

I'm going for the former over the latter.