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Lenders Forced to Suspend Thousands of Foreclosures after Admitting to Faulty Review Process

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The banking industry’s handling of home foreclosures is coming under increasing scrutiny after revelations that employees at several lenders had approved thousands of foreclosure affidavits and other documents without proper vetting. The banking giant JPMorgan Chase has suspended some 56,000 foreclosures after admitting some may have been authorized without proper review. Last week, another major lender, Ally Financial, suspended evictions in twenty-three states. We speak to Andy Kroll of Mother Jones magazine and New York Supreme Court Justice Arthur Schack, who has made national headlines for rejecting dozens of foreclosure filings due to faulty paperwork from banks and lenders. [includes rush transcript]

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This is a rush transcript. Copy may not be in its final form.

JUAN GONZALEZ: The banking industry’s handling of home foreclosures is coming under increasing scrutiny after revelations that employees at several lenders had approved thousands of foreclosure affidavits and other documents without proper vetting. The banking giant JPMorgan Chase has suspended some 56,000 foreclosures after admitting some may have been authorized without proper review. Last week, another major lender, Ally Financial, suspended evictions in twenty-three states. On Thursday, the acting director of the Office of the Comptroller of the Currency, John Walsh, directed JPMorgan Chase, Bank of America, Citibank, HSBC, PNC Bank, US Bank and Wells Fargo to review their foreclosure processes.

We’re joined now by two guests. Andy Kroll is a staff writer at Mother Jones magazine. He’s been closely following this story. He joins us from Washington, DC. We’re also joined by New York Supreme Court Justice Arthur Schack, who has made national headlines for rejecting dozens of foreclosure filings due to faulty paperwork from banks and lenders.

Welcome to both of you. I’d like to begin with Judge Schack. Could you talk —-


JUAN GONZALEZ: Tell us what caused your decision as you were reviewing many of these cases.

JUSTICE ARTHUR SCHACK: Well, as time went on, I got to see many, many problems. I’d look at the papers, review them, and I noted what I would call very questionable practices in a number of foreclosure filings. My job is to do justice. I mean, there are foreclosures that I approve. In New York State, to approve a foreclosure, a lender has to do three things. They have to show me that there’s a mortgage, that they owned the mortgage the day the case commenced, and there’s a default by the borrower. The biggest problem seems to be proving that they owned the mortgage the day the case commenced. And this is where we run into numerous problems with assignments of mortgages, questionable affidavits of merit, and just sloppy paperwork in general, which causes tremendous problems not only for the bank, but for the borrower, or if someone ultimately buys a house, it could cause title problems down the road. It’s -— to put it mildly, it’s a mess.

JUAN GONZALEZ: Well, I was reading an article in the Washington Post this week about some of these problems in terms of who actually owns the loans, and the — that article reported basically that because there was so much securitization and switching of assignments, that even the banks themselves often didn’t know who was the real legal owner, who had the proper documentation.

JUSTICE ARTHUR SCHACK: In fact, you’d be amazed. We have settlement conferences, where we try to modify mortgages, and one of the great mysteries sometimes is who is the investor. Who actually owns the securitization? When you see a particular bank — it could be a Chase, an HSBC, banking or cooperatives — as the trustee for these securitization trusts, technically — they’re not really the owner. They represent the owner. The question is, who owns this mortgage? If you really want to get to approvals of modifications — so it really becomes a major problem to get to the bottom of this.

JUAN GONZALEZ: And what happens to the homeowner, in the cases that you’ve reviewed, if the banks themselves don’t really know who owns the loan, when they’re trying to get an adjustment or some kind of a refinancing of their mortgage that’s already in arrears?

JUSTICE ARTHUR SCHACK: It’s hard to generalize it. Every case is unique. Each case is — at least by me — is reviewed on a case-by-case basis. So it’s very hard — I can’t say one size fits all. I have to look at each case. Except I and my colleagues — and throughout the country, I imagine — we’re being buried in paperwork. Right now, active foreclosures in Brooklyn, which is Kings County, my county, are probably one-quarter of all the civil cases that we have. There are right now 12,000 foreclosures that are somewhere in a — pending, whether it be in early stages or further down the road as the case develops, whereas if we went back four, five years ago, maybe there were probably three or four thousand. So we’re getting buried.

And what makes it more of a societal — what I’ll call a societal problem is if we — at least in my county, if we look at where these foreclosures are happening, it’s primarily in minority neighborhoods, not in Caucasian neighborhoods, because we have lots of people who maybe shouldn’t have gotten mortgages, of people who struggle, they lose jobs, and families have problems. So then you have the societal problem: what happens when you start foreclosing on houses on a block? Well, the houses become vacant. No one’s in there. People can break in. They’re squatters, drug dealers, you name it. So, there are many, many ramifications for us as a society with foreclosures.

JUAN GONZALEZ: And the issue of when banks actually move in to foreclose in the default process? I’ve seen reports that someone falls sick and three months behind in their mortgage, and there’s already a move to foreclose on them.

JUSTICE ARTHUR SCHACK: I think it depends on the lenders. I don’t think it’s quite that bad in New York. I think, in fairness to the banks, they really don’t want the property. They want their money. That’s — they’re in the money game, not the real estate game. But it gets to a point where people are put on notice, and ultimately, if they fall behind, there is a — the process begins. In New York State — I believe in New York State it takes longer to foreclose on a property than any other state, primarily because we have judges, and you just can’t do it without a judge, and further, we’re so backed up in the paperwork. We only have so many clerks, so many judges, and it takes time to review these cases. We’re dealing with people’s lives and their homes and roofs over their heads. And we want to do it right. So it takes time to foreclose, whether we get to a successful conclusion to end the case or whether we ultimately have a judgment and the people are forced out.

JUAN GONZALEZ: Well, I’d like to bring in Andy Kroll into the conversation, staff reporter at Mother Jones magazine. You’ve been writing about this issue, and especially about Ally Financial, which, as a subsidiary of General Motors, it was in essence partially owned by the federal government?

ANDY KROLL: That’s right, yeah. It’s GMAC that’s the subsidiary of Ally Financial, and Ally Financial is sort of a rebranding to burnish its image, to be more consumer-friendly. But yeah, these are partially government-owned banks. And these are the banks that are — you know, GMAC and Ally was basically the institution that sparked this whole issue now of dubious paperwork and these investigations by attorneys general and also members of Congress.

JUAN GONZALEZ: Well, tell us what you found in terms of Ally Financial and the way that it dealt with those who were in default on its mortgages.

ANDY KROLL: What I found — and this comes from a number of depositions by foreclosure defense attorneys — was that GMAC, a subsidiary of Ally, relied on what defense attorneys and critics call robo-signers. They’re essentially employees whose job it is to mass sign foreclosure affidavits. You know, as the foreclosure crisis heated up, banks, servicers, foreclosure law firms sought ways to speed up the process as fast as possible to get the paperwork in and out the door as quickly as they could. And so, they essentially employed people who sat around and signed documents all day long. But as these depositions revealed — one is in Maine, one in Florida, both judicial foreclosure states — they revealed that, in GMAC’s case, there was an employee, a robo-signer, if you will, who was signing just tens of thousands of documents, but admitted under oath that he really didn’t have any idea what they said. And that violates federal rules of civil procedure. You do have to have personal knowledge of what a foreclosure legal document says, yet here this employee was admitting he didn’t know what was in these documents, what was contained. And that’s really what’s at the heart of this GMAC debacle. Now GMAC is forced to go back and try to fix this paperwork problem in twenty-three various states, states where the judicial system handles foreclosures, and it’s become a huge headache.

JUAN GONZALEZ: And then, what triggered then other banks, like JPMorgan Chase, now to also halt their foreclosures?

ANDY KROLL: Well, the same law firm in southeastern Florida that deposed a GMAC employee and basically stumbled upon this revelation that this employee didn’t know what was going into his foreclosure affidavits, they also deposed a similar equivalent employee, if you will, within Chase Home Finance, which is a housing subsidiary of JPMorgan Chase, the Wall Street denizen. And the employee of Chase Home Finance essentially admitted the same thing. She, too, didn’t really know what was contained in the foreclosure documents she was signing, and so that opened the door — just as in the GMAC case, that opened the door for, as you said, 56,000 foreclosures of JPMorgan Chase’s to be challenged.

Now, what foreclosure defense attorney — their attorneys, what judges, especially in a state like Florida — it’s kind of an epicenter of the housing meltdown — what they’re doing now is they are going back, and they’re really — or some of the judges, at least, are really scrutinizing not just JPMorgan Chase, not just GMAC/Ally Financial, but other banks who they fear or worry relied upon these same kind of robo-signing processes to push foreclosure through as fast as possible. And the whole banking system relied on this, you know, quick and dirty method to deal with foreclosures, even though that — you know, that’s not how the law works, that’s not how the judicial system works, as Judge Schack can tell you. And so, now everyone — you know, there are serious cracks appearing in the foreclosure pipeline, so to speak, and all the banks are being scrutinized now. And you mentioned that yourself.

JUAN GONZALEZ: Well, and Judge Schack, what would be the remedy for someone who has been, in essence, foreclosed on illegally and is maybe already out of their home?

JUSTICE ARTHUR SCHACK: Well, probably — I mean, I don’t want to give legal advise, but if someone feels that there’s a judgment or there’s a problem with it, I mean, obviously they might have to move to vacate the judgment. But with respect to robo-signers, I have discovered this — not the names I’ve read about recently in the Washington Post or some other names that have been out there in the last few days over the wire service, but I have come across certain people — if you read my decisions — I don’t want to go into names or name names, but there are names I see all the time, who — and there are — who are obviously robo-signers. In fact, there’s one individual — I’m working on a decision; I’m not going to go any further — where I have very strong evidence this person admits to being a robo-signer.

JUAN GONZALEZ: Now, you’ve come under a lot of heat for your standing up and saying, “Hey, the law has to be followed in every one of these cases.”

JUSTICE ARTHUR SCHACK: Aren’t we a government of laws, not of men?

JUAN GONZALEZ: And what’s been the reaction within the court administration to this heat and attention on your decisions?

JUSTICE ARTHUR SCHACK: Well, the court administration itself is fine. I mean, I’m a judge. I’m elected, not appointed, I might add, elected by the people of, actually, at the time, Kings County and Staten Island, Richmond County. Now it’s just Kings, because we’ve changed the districts. But I am an elected judge. I’ve received no heat from the court administration. If banks do not like what they — what I have done, or anyone else, they have a right to appeal. This is how our system of justice works. I know that in my own county more judges now scrutinize these mortgages than they did before, looking for — looking for any — looking to make sure that everything’s done legally correct. I don’t want to say that we look for defects. We look to make sure that justice is done. So, if the little guy wins, he wins; the bank wins, they win. It isn’t a matter of we’re out to — we’re out with an agenda. Our agenda is justice.

JUAN GONZALEZ: And Andy Kroll, there was a — the lead article in the New York Times today suggests that this moratorium, in effect, that’s occurring across the country on foreclosures may actually provide a jolt, a positive jolt, to the real estate crisis by preventing the continued decline in real estate values. Your sense of what the long-term impact of these revelations, now this second wave of scandals now with the mortgage — with mortgages in the United States?

ANDY KROLL: It’s really hard to tell right now, because we’re really at the front end of what’s going on with this issue, with the dubious documents and the robo-signers. I mean, it’s hard to envision a huge amount of relief coming out of this, you know, that these 56,000 foreclosures JPMorgan Chase is looking at are all going to be cured or the judgments are going to be thrown out. You know, I think it’s an important — it’s an important process, it’s an important step, for looking at this larger foreclosure crisis problem.

You know, as Congressman Alan Grayson said in a video that came out this week, you know, the foreclosure process, especially in Grayson’s state of Florida, is just rampant with corner cutting and fraud and deception upon the court. You know, if only the courts and the judges were as diligent about their work as Judge Schack is in Florida — I mean, they’re having foreclosure hearings in a hallway, and they have a mandate from the state to plow through their foreclosure docket as fast as possible. They’re not scrutinizing documents down there. They’re not — they’re not even taking the time to barely look at them at all. I mean, it’s basically a rubber stamp process. I’ve been down there. I’ve seen it myself firsthand.

So if this problem we’re having, this sort of mess we’re having now, gets the judges, gets the foreclosure attorneys to go back and really scrutinize this, I think it will do a serious — it will put a serious dent in this foreclosure crisis. And, you know, and that will be good for the economy. Whether it’s some wholesale fix-all for the housing market, I don’t think that’s the case. I think there are much — there are many more problems plaguing housing right now than the foreclosure crisis, but on the whole, you know, I think this is an important, potentially corrective measure for this, you know, just epidemic of fraud and graft and deceit, really.

JUAN GONZALEZ: Well, I want to thank you both for being with us, and we’re going to continue to follow this enormously important story. Andy Kroll is a staff reporter at Mother Jones magazine, and Arthur Schack is a New York Supreme Court justice.

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