The latest chapter of the mortgage crisis may actually help some homeowners facing foreclosure rather than hurt them. Recently, it has come to light that many of the nation’s biggest lenders, including Bank of America, JP Morgan Chase and GMAC, have been using questionable documentation to foreclose on homes all across the country.
In some cases, the lenders have been instructing employees to sign thousands of foreclosure documents a day without proper witnesses and notaries. These so-called “robo-signers” are signing affidavits that say they have reviewed the loan documents personally and that the banks have a legal right to foreclose on the delinquent mortgages. However, in many cases, the employees have not reviewed the documents and the lenders may not even have a legal right to foreclose on the properties.
In other cases, the underlying mortgage documents themselves have been forged. In one example, a former bank employee claimed that the bank’s attorney instructed employees to create mortgage documents after the fact in order to file the foreclosure because the bank had lost the original mortgage note.
These questionable documentation practices led Bank of America and other lenders to call a temporary freeze on foreclosures in most if not all states while they review their internal practices and assess how big the problem might be.
How is this Beneficial to Homeowners?
Lenders claim that the documentation errors are mere technicalities and are not grounds for stopping foreclosures. The lenders argue that despite the procedural errors, the fact remains that the homeowners have failed to pay their mortgages — and that this gives lenders a legal right to foreclose on the properties.
Not everyone agrees that the errors are mere technicalities, however. It could be that the banks are trying to circumvent the law. Currently, there is a joint investigation by all 50 State Attorneys General as well as a federal probe into the extent of the documentation fraud. Some bankruptcy judges have refused to allow foreclosures to continue, telling the banks that they have not been able to sufficiently prove ownership of the mortgage and, until they do, they are not entitled to repayment of the debt.
All of this may be good news for homeowners either facing foreclosure or already in foreclosure. In many cases the lenders will only have to refile new foreclosure documents to continue the process. In other cases, it will not be so simple. Some lenders will not have the proper documentation to prove ownership of the mortgage, leaving them in a serious bind.
Without the necessary proof of ownership, lenders risk losing most if not all of the money owed under the mortgage. For example, if the homeowner has filed for bankruptcy , lenders who cannot prove ownership of the mortgage will be demoted to the status of unsecured creditors. That means they would face a very real prospect of being able to recover little to nothing from the homeowner.
The other option lenders will have is to enter into time-consuming and costly litigation to try to prove their claim. This option also is not likely to be appealing to lenders, who already are losing thousands on bad mortgages and properties that are waiting for foreclosure.
Together, these conditions create a powerful incentive for lenders to consider renegotiating the terms of the mortgage so they can at least recoup some money on the loan – which is good news for homeowners who want to stay in their homes, but need a lower payment to do so.
The mortgage fraud crisis also has renewed calls for improved federal efforts to help homeowners in foreclosure. Previous attempts by the federal government to encourage banks to renegotiate the terms of mortgages have proven largely unsuccessful. Although some banks have offered to cut interest rates and give homeowners another opportunity to become current on their payments, so far they have been unwilling to reduce the principal balance owed on the mortgage. With thousands of homeowners owing more money on their houses than they are currently worth, cutting interest alone will not help them regain value in their investment.
Homeowners who have fallen behind on their mortgages but want to keep their homes out of foreclosure may be able to do so by filing for bankruptcy . Once a person has filed a bankruptcy petition, an automatic stay goes into effect, which prevents the individual’s creditors from continuing to pursue any collection activities against them. This includes mortgage debt.
Bankruptcy will not be able to stop a foreclosure that is already in progress, but it can give the homeowner additional time to try to work out an agreement with the lender. If the homeowner is simply behind on their mortgage payments but a foreclosure action has not yet been initiated, bankruptcy can give them an opportunity to catch up on the late payments and keep the house.