The Story Behind The Foreclosure Crisis

By Tim Parker | October 19, 2010 AAA

First there was Robocop. It's election season now so you are surely getting a lot of robocalls, and there are even robohamsters (look it up). Now, a new robo is in the news: robo-signers. And if you are one of those who have run in to hard times and your house is in foreclosure, you want to read about robo-signers. (For related reading, also check out Fend Off Foreclosure - With Bankruptcy?)

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A Little House in Maine
As if the so-often vilified big Wall Street banks weren't at the bottom of enough people's Christmas lists, it looks like they've found themselves in hot water again. It started with a small little house in Maine.

Nicolle Bradbury and her family were living in a trailer, and after years of hard work, they had saved enough money to purchase their first home. They were as happy and proud as everybody is when they finally save enough to purchase their own home, but what has happened to nearly 10% of Americans happened to Nicolle: she lost her job.

Once she lost her job, her $474 house payment became impossible and she stopped making payments. Foreclosure proceedings began and what should have been an uneventful procedure of removing Nicolle and her home was far from it. Nicolle had no place to take her family. Desperate, she contacted a local non-profit group for legal assistance.

Fact Checking
Her file was pulled by a retired lawyer. He knew a lot about foreclosures because he once worked for a bank where he evicted people just like Nicolle. He noticed that the documents were signed by somebody whose title was "limited signing officer" which indicated to him that this person probably had very limited knowledge of Nicolle's case. Thomas Cox, the lawyer, won the right to question this employee and, in his own words, here's what he found:

"When Stephan says in an affidavit that he has personal knowledge of the facts stated in his affidavits, he doesn't. When he says that he has custody and control of the loan documents, he doesn't. When he says that he is attaching 'a true and accurate' copy of a note or a mortgage, he has no idea if that is so, because he does not look at the exhibits. When he makes any other statement of fact, he has no idea if it is true. When the notary says that Stephan appeared before him or her, he didn't."

What Mr. Cox found was that Mr. Stephan was one of many "robo-signers" who was signing large amounts of foreclosure documents without having any knowledge of the contents. When these documents are signed and courts review them, mortgage companies make the declaration to the court that the signers have firsthand knowledge of the details of the case. The judge who presided over the case said, "Filing such a document without significant regard for its accuracy, which the court in ordinary circumstances may never be able to investigate or otherwise verify, is a serious and troubling matter."

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This $75,000 house in a virtually unknown area of Maine could be the spark that ends up costing banks up to $120 billion dollars once everything is sorted out. Some fear that political pressure on the White House may force even more legislation that will eventually tighten the reins on the already overregulated big banks. (Remember too big to fail? Credit card reform? Derivatives regulation?)

Bringing it Home
If you're home is in foreclosure, can this new round of bank woes halt the process of foreclosure on your home? Some of the nation's largest mortgage brokers have halted foreclosures numerous states but Bank of America announced on October 18 that they will resume foreclosures on October 25, and the many other lenders will do the same very soon. So any halt in your foreclosure proceedings will most likely not be noticeable unless this story further develops. (For related reading, take a look at Can You Dispute A Foreclosure?)

The Bottom Line
Some believe that this will be the next major crisis to hit the housing market, while others believe that the story is vastly overblown. Long story short, one little house in Maine could end up costing the mortgage industry a large amount of money. (For more, check out The 6 Phases Of A Foreclosure.)

For the latest financial news, see Water Cooler Finance: The Beginning Of A Foreclosure Crisis?

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