JPMorgan Chase & Co. (JPM), Bank of America Corp. and Ally Financial Inc. (ALLY), defending allegations of fraudulent home foreclosures from customers and Congress, may face the most financial peril from investigations by state attorneys general.
Authorities in at least seven states are probing whether lenders used false documents and signatures to justify hundreds of thousands of foreclosures, and the number of these inquiries will grow, according to state officials and legal experts.
“You’re going to see a tremendous amount of activity with all the AGs in the U.S.,” Ohio Attorney General Richard Cordray said in an interview. “We have a high degree of skepticism that the corners that were cut are truly legal.”
Cordray announced today that he filed a lawsuit against Ally in state court, claiming its GMAC unit committed fraud and violated state consumer law by filing false affidavits in foreclosure proceedings.
JPMorgan, Bank of America and Ally have curtailed foreclosures or evictions in 23 states where courts have jurisdiction over home seizures.
While homeowners in those states and elsewhere must usually show damages to win a lawsuit, “attorneys general can just sue over deceptive sales practices and get penalties,” said Christopher Peterson, a University of Utah law professor who specializes in commercial and contract law.
In Ohio, penalties include fines of up to $25,000 per violation, with each false affidavit or document considered a violation, according to state law enforcement officials. In Iowa, fines rise to a maximum of $40,000 for each violation.
This penalty would apply to “every instance of an affidavit that was filed improperly or every time facts were attested to that weren’t true,” Cordray said. His counterpart in Connecticut, Richard Blumenthal, has called for a freeze on foreclosures and said the submissions are a “possible fraud on the court.”
Officials in Ohio and Connecticut, along with Florida, Texas, North Carolina, Iowa and Illinois, said they are investigating mortgage foreclosure practices.
Attorneys general in Colorado and California asked Ally’s GMAC unit to halt foreclosures in their states. GMAC and Colorado Attorney General John W. Suthers plan to meet to discuss the matter, said Mike Saccone, spokesman for Suthers.
‘Talking to Them’
“We’re talking to them,” Jim Finefrock, spokesman for California Attorney General Jerry Brown, said in a telephone interview about Detroit-based Ally.
Massachusetts Attorney General Martha Coakley yesterday asked GMAC, JPMorgan, Bank of America and Wells Fargo & Co. to suspend foreclosures and evictions in that state.
North Carolina Attorney General Roy Cooper said today he was expanding his investigation into questionable foreclosure tactics to include 14 more lenders. Cooper, who announced earlier he was looking into allegations about GMAC, also asked lenders to stop foreclosures in his state until they can confirm they are complying with laws.
In addition to the investigation of Ally which began last month, Texas Attorney General Greg Abbott on Oct. 4 asked 30 loan servicers operating in his state -- including Charlotte, North Carolina-based Bank of America and New York-based JPMorgan -- to stop foreclosures pending a review of business practices. Abbott also asked lenders and servicers to halt “all sales of properties previously foreclosed upon” and stop all evictions.
Lenders took possession of a record 95,364 U.S. homes in August and issued foreclosure filings to 338,836 homeowners, or one of every 381 U.S. households, according to RealtyTrac Inc., an Irvine, California-based data seller.
Lenders, loan servicers and even title insurance companies are facing litigation on multiple fronts, said Peter Henning, a law professor at Wayne State University in Detroit and a former federal prosecutor who worked on cases involving bank fraud.
“This is going to become a hydra,” he said in an interview. “You’ve got so many potential avenues of liability. You don’t even know the parameters of this yet.”
Reviews of affidavits and other loan documents that may have been signed without personal examination by the signers should be completed in a few weeks, JPMorgan and Bank of America said last week.
“We believe the accuracy of the factual loan information contained in the affidavits was not affected by whether or not the signer had personal knowledge of the precise details,” JPMorgan said in its statement. “The affidavits were prepared by appropriate personnel with knowledge of the relevant facts.”
“We don’t believe the procedural errors in these affidavits led to inappropriate foreclosures,” Gina Proia, a spokeswoman for Ally, said in a telephone interview.
Some lenders have acknowledged that employees may have completed court affidavits without confirming their accuracy. In December, a GMAC employee said in a deposition in a foreclosure case filed in West Palm Beach, Florida, that his team of 13 people signed about 10,000 documents a month without verifying their accuracy.
“My suspicion is that this will wind up being an industrywide issue,” said Patrick Madigan, an Iowa assistant attorney general. “Many companies were using robo-signers.”
His boss, Iowa Attorney General Tom Miller, is investigating GMAC, JPMorgan, Bank of America and OneWest Bank, the successor to IndyMac.
“We would intend to pursue any company that is engaged in this behavior,” Madigan said in an interview.
Homeowners in multiple lawsuits claim lenders have been using falsified documents to foreclose on homes, at times when they don’t even hold titles to the properties.
Reports of false affidavits will stall foreclosures for months and will aid homeowners fighting to retain their properties, University of Utah’s Peterson said.
“That’s what we’re seeing right now,” he said. “It’s making it harder to foreclose and recover costs for a bad loan.”
Lawyers for some homeowners blame Reston, Virginia-based Mortgage Electronic Registration Systems Inc., or MERS, which handles mortgage transfers between member banks. Multiple lawsuits claim that the system allows false foreclosures and muddies ownership of titles. MERS has denied any wrongdoing.
In a lawsuit filed on behalf of Kentucky homeowners last week, plaintiffs claimed banks, MERS and loan servicers filed mortgages with forged signatures, submitted foreclosure actions months before they acquired any legal interest in the properties and falsely claimed to own notes executed with mortgages.
Karmela Lejarde, a spokeswoman for MERS, declined to comment.
“The banks have to be very concerned about class-action lawsuits,” Peterson said. “I guarantee there are all sorts of class-action lawyers brainstorming, trying to figure out ways to file these lawsuits.”
Borrowers in the average foreclosure case haven’t made a payment in more than a year, said Guy Cecala, publisher of Inside Mortgage Finance, an industry publication. More than 5 million homes are in the process of foreclosure, so millions of people are living mortgage-free right now, he said.
‘Screwed Up’ Paperwork
“The question is what kind of deals the plaintiffs’ attorneys will reach with lenders,” Cecala said. “If someone hasn’t made any mortgage payments in a year, are we really going to give them a home just because someone screwed up the paperwork?”
Title insurers will also face -- and file -- lawsuits, Wayne State’s Henning said.
“If you foreclose on a house and sell it,” the title should be certain, he said.
Title insurers will be “on the hook if foreclosures are reopened,” Henning said. “The title insurers will be going after the banks or whoever assured them there was a clear title.”
Fidelity National Financial Corp. (FNF), the largest U.S. title insurer, and First American Financial Co. (FAF), the second-largest, have declined more than 5 percent since Sept. 30 over concerns that investigations into foreclosures would cause legal problems affecting title companies. The Standard & Poor’s 500 index of large U.S. stocks has gained about 1.7 percent in that period.
“Questionable foreclosures will ultimately have little adverse impact” on new owners of properties or title insurance claims, the American Land Title Association said in an Oct. 1 statement.
“If a new homeowner’s title is challenged because of a faulty foreclosure, the title insurer may have an obligation to defend the challenge,” Kurt Pfotenhauer, chief executive officer of the trade group, said in the release. “However, it is unlikely that a court will take property from an innocent current homeowner and return it to a previous homeowner who failed to make payments.”
Individuals who signed false affidavits or falsely claimed clear titles to properties can be subject to criminal prosecution, including perjury charges, Peterson said.
Corporations would probably face obstruction charges rather than perjury, according to legal experts.
“Did they know about gaps in the system and lie about it,” Henning said, referring to companies. “This is certainly a concern for MERS but it could be, too, for the banks. Any action of any employee can be looked at, but what they’re looking at is the volume of transactions and the involvement of senior level management.”
More civil litigation is a certainty, Henning said.
“The sandstorm is coming,” he said. “You can see it off in the distance and know it’s about to hit, but no one knows how long it’s going to last.”
To contact the reporter on this story: Margaret Cronin Fisk in Southfield, Michigan, at email@example.com.