Did I Mention Something About the Foreclosure Foulups?

Why, yes, I did. For a while now, I’ve been writing about how improper paperwork could completely screw up the foreclosure process. While I’ve never thought foreclosure was the way to go (I wanted subsidized cramdowns), we can’t even get foreclosure to happen, which is a huge drain on the economy:

Lawyers for distressed homeowners and law enforcement officials in several states on Friday seized on revelations by GMAC Mortgage, the country’s fourth-largest home loan lender, that it had violated legal rules in its rush to file many foreclosures as quickly as possible.

Attorneys general in Iowa and North Carolina said they were beginning separate investigations of the lender, and the attorney general in California directed the company to suspend all foreclosures in that state until it “proves that it’s following the letter of the law.”

In the wake of these titling issues, there seem to be many miraculous ‘document discoveries’ (boldface mine):

The letter in particular mentions an allonge. An allonge is a separate sheet of paper which is attached to a note to allow for more signatures, in this case, endorsements, to be added. Allonges have had a way of magically appearing in collateral files while trails are in progress (I’ve seen it happen in cases I was tracking; it’s gotten so common that some attorneys warn judges to be on the alert for “ta dah” moments).

The wee problem with an allonge miraculously being discovered is that the allonges that show up are inherently in violation of UCC (Uniform Commercial Code) provisions (UCC has been adopted by all states, a few states have minor quirks, but the broad provisions are very similar).

An allonge is NOT to be used unless all the space on the original note, including the margins and the back side of pages, has been used up. This is never the case. Second, an allonge has to be so firmly attached to the original document as to be inseparable. Thus an allonge suddenly being discovered is an impossibility (well impossible if it were legit), yet it seems to happen all the time.

So as much as GMAC and its fellow servicers no doubt hope there little document mess will fade from public view, attorneys are using it as a new weapon to fight questionable foreclosures or force servicers to negotiate principal mods, which investors like Wilbur Ross (the antithesis of a charity, he’s a very successful distressed investor) have found to be a win/win.

The various parties are using these issues as a de facto cramdown, since the legislative and executive branches utterly failed to solve the underlying problem of underwater mortgages. This should have never required a judicial remedy.

And make no mistake: this is not some sort of technical violation. This strikes at the heart of property law, a law those who run corporations believed they didn’t have to honor.

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