Since the revelations regarding the robo-signers — bank employees who were approving foreclosures without verifying basic information — first broke, the banks have attempted to frame the issue as one of simple paperwork mistakes like misspelled names, and not flagrant disregard for due process and property rights. Both Bank of America and Wells Fargo tried to sweep the robo-signers under the rug, quickly refiling foreclosure paperwork and not owning up to improper foreclosures.
In response to the robo-signing scandal, all 50 state Attorneys General launched a coordinated investigation into the banks’ practices. During a Senate Banking Committee hearing today, Iowa Attorney General Tom Miller — who is leading the AG’s effort — said the AGs don’t agree with the banks that this is a technical issue that boils down to paperwork errors, but is an “affront to state courts”:
First of all, let me say, very clearly, we don’t view that as a technical issue. It’s an issue that is an affront to state courts. Signing an oath to produce a judgment of foreclosure in a court is a very very serious matter.
Today, the Congressional Oversight Panel for TARP — which was previously headed by Harvard Law Professor Elizabeth Warren and is now led by former Sen. Ted Kaufman (D-DE) — released a report saying that if the banks portrayal of the robo-singing situation is right, then “concerns about mortgage documentation irregularities may prove overblown.” But, it added, “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…If documentation problems prove to be pervasive and, more importantly, throw into doubt the ownership of not only foreclosed properties but also pooled mortgages, the consequences could be severe.
This gets to the very heart of the matter. The banks want to submit new paperwork and quickly move on, but as Yves Smith wrote, “by definition, a replacement of a robo signed affidavit is an admission the earlier submission was improper, hence a fraud on the court.”
And that fraud can lead to a huge amount of systemic risk within the financial system, as it calls into question the validity of loads of mortgage securities. As the Oversight Panel noted, “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.” If a bunch of banks need to swallow losses like that, the financial system is in for a bumpy ride.