Is the Bank of America busted over its foreclosure documentation problems?
A few months ago, media reports alleged that employees or contractors of Bank of America, GMAC Mortgage, and other major loan servicers processed thousands of foreclosure documents without knowing whether the documents were accurate or true. This “robo-signing” problem brought to light the bigger problem facing the home loan market and the risk that legal challenges to haphazard foreclosure procedures could threaten the banks’ financial stability and drag out housing crisis if it is shown that the $6.4 trillion in American mortgages may be clouded by mishandling the documents and due process legally required steps to foreclose on a home.
The Congressional Oversight Panel was charged under the Emergency Economic Stabilization Act of 2008 (EESA), was tasked with restoring with reviewing the current state of the financial markets and the regulatory system. The risk being considered by the panel results from the mess created by the rapid growth of mortgage securitization which saw mortgages bundled and resold many times without an adequate paperwork trail to keep track of the original documents required to track mortgage loan ownership.
The report issued by the panel November 15th covered the current foreclosure processing problems in the mortgage market concerning the risk exposure for banks if holders of mortgage-backed securities force those banks to repurchase any loans found to be defective. The financial losses from such repurchases could easily threaten the financial viability of the banks.
“In the best-case scenario, concerns about mortgage documentation irregularities may prove overblown. In this view, which has been embraced by the financial industry, a handful of employees failed to follow procedures in signing foreclosure-related affidavits, but the facts underlying the affidavits are demonstrably accurate. Foreclosures could proceed as soon as the invalid affidavits are replaced with properly executed paperwork.
The worst-case scenario is considerably grimmer. In this view, which has been articulated by academics and homeowner advocates, the “robo-signing” of affidavits served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. In essence, banks may be unable to prove that they own the mortgage loans they claim to own.”
“To put in perspective the potential problem, one investor action alone could seek to force Bank of America to repurchase and absorb partial losses on up to $47 billion in troubled loans due to alleged misrepresentations of loan quality. Bank of America currently has $230 billion in shareholders‟ equity, so if several similar-sized actions – whether motivated by concerns about underwriting or loan ownership were to succeed, the company could suffer disabling damage to its regulatory capital.”
This is the same Bank of America that is scrupulous about slamming me with a late fee if I am even one date late on my credit card payment.
It is very tough to feel any sympathy for these big banks. Let’s hope the Government holds their feet to the fire and demands “ show me the note” every time another foreclosure is sought.