New Jersey's Looming Foreclosure Crisis
As long as NJ allows major lenders to file documents using a private electronic system, there's no way of achieving a transparent review process.
Foreclosure irregularities are as common in New Jersey as they are in San Francisco, where a recent audit revealed problems in almost every case studied, according to homeowner advocates.
But that's where the similarities end.
San Francisco went public with its foreclosure problems. In New Jersey, the county clerks and sheriff's officers who are responsible for making sure that all aspects of foreclosures are handled properly have raised an alarm with the attorney general, governor, and the legislature.
To date there has been no response.
Even as residential foreclosure activity has resumed in New Jersey following a lifting of a court-ordered moratorium, county clerks and other officials said the validity of many documents being used here remains questionable.
Both groups said many mortgage-related documents are still being filed privately, via an electronic system established by major lenders, rather than by traditional public methods at county courthouses throughout the state.
As a result, there's no transparency to the process. Evidence remains anecdotal, making it impossible to verify the extent of various irregularities.
Still, problems have persisted despite last year's court-ordered moratoriums and studies of foreclosure practices in New Jersey, according to observers. For the most part, they said, the state reviewers accepted assurances from banks that their current procedures adequately protect borrowers and have allowed them to proceed.
The San Francisco audit reveals just how pervasive foreclosure problems can be. It found a wide range of irregularities, including some outright violations of the law, in 98 percent of cases from January 2009 and October 2011. The report, authorized by city Assessor-Recorder Phil Ting, said records in 82 percent of cases showed "suspicious activity indicating potential fraud."
Those findings are "totally in line with everything we see here," said Professor Linda Fisher of the Seton Hall Law Center for Social Justice. "The percentages are overwhelming. Anyone who does this [foreclosure law] here will tell you that."
"I'm not surprised [investigators] would find a high percentage of irregularities, even fraud," said Phyllis Salowe-Kaye, executive director of New Jersey Citizen Action, which counsels people fighting foreclosure.
But E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, cautions against overreacting. He warns that the clerks and others need to be careful not to confuse irregularities in the handling of documents with fraudulent loan practices.
Salowe-Kaye's clients often question foreclosure measures, but have limited financial resources to challenge them, she said. As a result, it is possible for a lender to take a home through foreclosure although it may not properly hold title to the property, she said.
"I'm not at all surprised that's what they're finding," said Union County Clerk Joanne Rajoppi. "That's what they found in Massachusetts and other places where they've looked at it."
In December, Massachusetts Attorney General Martha Coakley sued the five largest mortgage lenders, Ally Financial (GMAC), Bank of America, Citibank, JP Morgan, Chase and Wells Fargo, alleging that they have failed to comply with her state's property registration laws.
The difference in New Jersey is that no government agency has undertaken a similar audit, said Salowe-Kaye. San Francisco authorities "are to be commended for their seriousness in performing their own study" instead of accepting certifications from the banks, she said.
In December, the Constitutional Officers Association of New Jersey sent "a very strongly worded resolution about this situation to the Attorney General," Jeffrey S. Chiesa, Rajoppi said. "And not just to the AG, but to the Governor and our legislators." But she and officials in other counties said they have not received any response.
A spokesman for Chiesa pointed to a provision in the national settlement requiring mortgage servicers be "the proper party" in order to bring a foreclosure action, and have "a documented, enforceable interest" in the loan under applicable state laws.
But county officials said that merely means lenders should obey current laws, not that enforcement will be stepped up or public access restored to mortgage documents filed in the big banks' privately owned Mortgage Electronic Registration System (MERS).
Chiesa spokesman Lee Moore noted the national deal would allow an independent monitor, as yet undetermined, to go to federal court to enforce the settlement provisions.
Because New Jersey courts have approved lenders' procedures here, though, "If they put in an affidavit certifying a filing that the facts are true . . . then we have to accept it," Rajoppi said.
Asked whether Rajoppi's description is correct, Moore said the Attorney General's Office has no further comment at this time.
"They have no further interest in it right now," said Warren County Clerk Patricia Kolb, the association's new president. "It's not affecting them personally, so they have bigger fish to fry."
In a closely watched New Jersey case, the state Supreme Court ruled on February 27 that notices of intent to foreclose must list the name and address of whoever holds the mortgage note, not merely the company servicing the loan. The reason for this is so homeowners know who to contact if they want to negotiate an extension or a repayment plan.
There are differences between foreclosure procedures in California and New Jersey, but officials here said all states face similar problems from practices adopted by lenders during the boom and bust in the housing market. One nationwide factor is the private mortgage recording system.
MERS is the child of the big banks along with two government-sponsored institutions, the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corp. (Freddie Mac), which guarantee roughly half the nation's mortgages.
The electronic system allowed them to quickly transfer and assign loans during the 2000s, when many home mortgages were bundled and packaged as investments. To create more investment vehicles, lenders increasingly issued "sub-prime" mortgages, with less than usual security, higher than normal rates of interest, or both.
Although many of these mortgages were inherently risky, ratings agencies paid by the banks routinely declared them safe as investments. As the bubble in housing values started to leak, the investments came crashing down, leading to failures on Wall Street and the subsequent federal bank bailout.
Meanwhile, it had become increasingly hard to trace who actually held title to the underlying properties, because "these mortgages were sliced and diced a million ways" among investors, Salowe-Kaye said.
In Warren County, Kolb said her office routinely questions moves to discharge or reassign title to a new party, and insists that attorneys for the lenders involved provide supporting documentation, Kolb said.
"MERS says, 'We can do that within the company,'" she said. "Well, where does it say that? Who passed that law?"
California and 28 other states allow lenders to foreclosure directly on delinquent loans, and leave it to borrowers to contest the action. The remaining states, including New Jersey, require foreclosures go through the courts.
As a practical matter, though, the prospect of judicial review has had little effect. In December 2010, New Jersey Chief Justice Stuart Rabner noted that 95 percent of the state's foreclosure cases are uncontested.
Reacting to a report by Legal Services of New Jersey that highlighted instances of fraudulent documents and testimony in foreclosure cases here and elsewhere, Rabner set in motion two procedural reviews. One considered the state's six major lenders -- the five in the national settlement and Coakley's suit, plus OneWest Bank -- the other looked at two dozen big banks active in the New Jersey real-estate market, such as PNC, Deutsche Bank and TD Bank.
The Legal Services report is.
Rabner's actions prevented the big banks from filing new residential foreclosure actions in New Jersey until two court-appointed masters reviewed their internal systems for handling documents. For much of last year, the banks submitted certifications about their training and procedures.
Although that meant home foreclosures almost halted during the first half of 2011, court records show they began to pick up in the second half of the year as more of the banks received clearance to resume filings.
Documents relating to the court reviews of foreclosure practices are available on the New Jersey Courts.
Still, an enormous backlog of pending foreclosures -- estimated by New Jersey officials at 50,000 to 100,000 cases has built up because of the moratoriums, other legal proceedings, and the negotiations over the national settlement.
The latter potentially opens the door for a surge in new filings by lifting the major legal cloud over the big banks. Their $26 billion payment would prevent states from bringing charges over the most frequent allegations of fraud and false swearing in foreclosures.
Known by the less sinister term "robo-signing," they involve the practice of bank employers or contractors attesting to the underlying facts of mortgage documents, even in instances where they did not review the paperwork or even have it. Instances of robo-signing were among the abuses highlighted by the Legal Services report.
Robo-signing has been possible because MERS has obscured many mortgage-related transactions. Some transactions have never been recorded by traditional means, according to the San Francisco report.
Because MERS is not transparent, overseen by lenders instead of public recorders or registrars, New Jersey officials said it remains difficult to track recent property transactions. Lenders and loan servicers still are not filing some transactions as public records, county officials said.
Even as foreclosure activity picked up in recent months, "our document filings have been unchanged," said Somerset County Clerk Brett Radi. In a time of budgetary crisis in many communities, that means governments are missing out on the normal filing fees. But the problem is bigger, Radi said.
Yes, it is a revenue issue," he said. "But more importantly, it's a chain of title issue. People have a right to know that their property titles are being properly recorded."
Missed fees are "a concern of recorders, county clerks and registrars here in New Jersey," agreed Cape May County Clerk Rita Marie Fulginiti. "But even more so is the integrity of the public records."
"It's difficult to quantify the loss of revenue," Fulginiti said. "It's just so disgusting to find out that foreclosures are happening and the paperwork is not valid."
Special Master Richard Williams is authorized to continue to monitor the big banks for a year, said a spokeswoman for the state courts. But "that examination is separate from the Mortgage Electronic Registration Systems, chain of title issues raised by county clerks," said spokeswoman Winnie Comfort.
Unless the legislature acts on their complaints, it will still be up to defendants in foreclosure cases to raise those issues and let the courts decide, she said.
While many local officials welcomed last year's reviews of foreclosure practices, some now worry that its main effect was creating the backlog of cases that will be harder to oversee. County sheriffs, who conduct sales of properties in foreclosure could face budget or staff problems coping with a surge.
Given the serious impacts on New Jersey homeowners and governments, Fisher said, "it was very frustrating" that the court-appointed masters largely repeated assurances from the banks about their procedures, particularly when it came to electronic records.
"The courts want to believe those systems work," she said. "I'm not sure how much difference it makes if lenders have their own employees look at the same computer screens instead of having a contractor's employees look at them."
"The banks told them they didn't do it and they'll never do it again," Salowe-Kaye said.
Fisher is the midst of a smaller study of foreclosures in Newark's Clinton Hill neighborhood. While nowhere near ready to determine results, she said, "robo-signed documents have been popping up all over."
"Any time we dig into a foreclosure case, we find irregularities," Fisher said, adding that while not every one should be called fraudulent, procedures "have been incredibly sloppy."
Homeowners who suffered a foreclosure between January 1, 2009 and December 31, 2010, can apply to theprogram, run by the Federal Office of the Comptroller of the Currency (OCC). Prior to the attorneys general settlement, the comptroller reached an agreement with 14 lenders to compensate some borrowers who suffered losses from errors, misrepresentations or other deficiencies in the servicer’s foreclosure process.