Four years into what has become a protracted state review of foreclosure cases brought by New Jersey’s six largest mortgage lenders, the courts have approved the document-handling procedures of two of the big banks.
But even as he accepted the recent foreclosure practices of Wells Fargo and OneWest Bank, the special master in charge of the monitoring-- retired state Supreme Court Judge Richard Williams -- said the banks have only nominally cooperated on a key issue. That finding could send the matter back to where it began at the state Supreme Court.
The issue at stake is whether the lender’s lawyers have done enough to verify information supplied by the bank’s employees.
For now, though, the findings are good news for the two banks, relieving them of ongoing scrutiny of their foreclosures.
“We continue to work with the New Jersey court system to process foreclosures according to all applicable state and federal laws,” said Kevin Friedlander, regional corporate communications manager for Wells Fargo.
In the wake of an intervention by state Chief Justice Stuart Rabner in December 2010, Friedlander said, “Loans that are in the foreclosure pipeline appear to be moving through the process better and proceeding to foreclosure sale when no other options are available to borrowers.”
Still, critics of the banks are not pleased, suggesting the effort by the high court to clean up foreclosure cases has fallen short.
“I don’t have any faith in the Supreme Court rules because they have not been followed,” said Joshua Denbeaux, a leading foreclosure defense attorney. Wells Fargo “has gotten even more aggressive” about pursuing foreclosures in court, he said. “They never want to settle, they argue over every fact.”
The debate arises as the foreclosure crisis has receded in much of the country, but is returning to Great Recession levels in New Jersey. Last year, lenders filed more than 54,000 foreclosures here, the third-highest number since records were kept.
For much of the 21st century, Wells Fargo has been the leading private mortgage lender, and at times, the leading servicer of mortgage loans. In New Jersey, it has annually been the number one foreclosure plaintiff, except in the immediate aftermath of Rabner’s order, when it ranked second, according to data from the state Administrative Office of the Courts. In 2009 through 2014, the San Francisco bank filed 37,942 foreclosures here, court records show.
The numbers also show that OneWest has frequently been among the top 10 plaintiffs, filing 5,275 foreclosures in the six-year period, but only 120 last year.
Responding to irregularities in foreclosure cases in New Jersey and elsewhere in the nation, in late 2010 Rabner ordered major lenders to demonstrate the accuracy of their documentation in such cases.
Court directives aimed the scrutiny at the six largest foreclosure plaintiffs, and another two dozen very active in New Jersey. Along with OneWest and Wells Fargo, the big six are Ally Bank (the former GMAC), Bank of America, Citigroup, and JP Morgan Chase. Each group was shepherded before a judge to defend its processes for producing documents and testimony to support foreclosures.
Their accuracy and reliability is critical, the chief justice said at the time. While New Jersey is among two dozen states that require a judge to sign off before a lender can take a house, 95 percent of those court cases were going uncontested, the Chief Justice noted.
The action also reflected the greatly changed nature of mortgages in the United States. Once a straightforward transaction between a lender, often local, and a would-be homebuyer, an American mortgage has become a product to packaged and resold, sliced, diced, and whipped together with others, passing through many lenders into the hands of investors large and small as part of mortgage-backed securities (MBS). This situation still persists, although the MBS market is smaller.
Many of these transactions occur out of sight, in digital forms traveling along a private data highway, the Mortgage Electronic Registration System established by the biggest banks and government-backed entities like the Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corp. (Freddie Mac).
During boom times, the pressure was on lenders to provide more investment vehicles for sale. Happily, this great chain of sales meant the original lender might feel little or no effect if a deal later went bad. So when it came to making bad deals, there was nothing but blue skies.
Once the housing boom went bust, though, the institutions and investors who ended up owning the multitudinous bad deals -- to say nothing of borrowers suckered into accepting unsustainable debts at onerous terms -- faced a reckoning.
Much of that MBS was floating around, chopped into many parts, with no clear chain of ownership.Contested cases around the country showed that in some cases documents were faulty and in others they were fraudulent. A common occurrence was employees for lenders or loan servicers swearing that they had reviewed and certified documents they had never seen. The legal terms are false swearing and fraud, but business media awarded the technique with a less judgmental nickname, “robo-signing.”
Responding to these situations, the courts designated Judge Williams in March 2011, as the special master to study a “statistically significant” sampling of foreclosures filed after Rabner’s order by the six big plaintiffs.
At the time, the study was expected to take a year or so. But many of the lenders covered by Rabner’s order drastically reduced their foreclosure filings while seeking blanket approval of their document handling. The number of new foreclosure cases dropped from 58,445 in 2010 to 11,037 in 2011, according to the AOC.
In part because of that temporary slowdown, it has taken longer than expected to amass sufficient new cases to study, Williams said.
But in an addendum to his reports on Wells Fargo and OneWest, the special master pointed to another issue, one that he described as being beyond his authority to address.
Williams zeroed in on Rabner’s requirement that attorneys for lenders themselves certify to the courts that their clients are submitting accurate documents. He noted that the news rules call these statements certifications or affidavits “of diligent inquiry.” They must confirm that the lawyer communicated with employees who directly reviewed foreclosure documents, identify their names and titles, and describehow and when the communication occurred.
In studying the cases, though, Williams said he found that the common practice is that there is “no person-to-person contact.” The bank attorneys merely follow the old procedure of reviewing documents sent to them.
“The attorney will follow up and directly contact the employee who signed the Statement of Review only if necessary,” Williams wrote.
While court rules and the procedures of other states provide little insight, the designation of the attorney certification as an affidavit of diligent inquiry “presupposes a certain level of action and affirmative conduct taken by the attorney,” Williams said.
Looking closer, the master said he encountered cases where attorney certifications listed the “communication” as having occurred on the date they prepared their affidavits, not when employees of servicing firms wrote or sent over the reviews.
Williams raised this issue with the six banks in October 2013, requesting more specific descriptions of the dates and types of communications. But he has received “only nominal compliance with this request by foreclosure counsel.”
The six major banks are not the only lenders providing limited information, and the definition of “communication” goes beyond his charge as master, Williams said. But he called it to the court’s attention “because it would appear to directly relate to a critical provision of the Supreme Court’s rule amendments in response to the ‘robo-signing’ crisis.”
Judge Mary Jacobson, who received Williams’ reports, approved them. As for the addendum, she noted that she retains jurisdiction over the issues raised.