With recent revelations of the fraudclosure scandal, and a spike in interest toward all things REO, we decided to go back to basics and present some "appendices" over why this process of excess bank inventory clearance is so important and what its implications are, especially in a world in which foreclosing has suddenly become legally impossible.
First, courtesy of UBS, an outline of the Foreclosure process:
The Foreclosure Process
The foreclosure process may vary significantly across states and even across countries, but the following description is general enough that it should be applicable to most of the US.
Delinquency and foreclosure. After a homeowner with a mortgage loan has missed three monthly payments, he or she is considered to be “90 days delinquent,” and the servicer of the mortgage (the company to which the mortgage payments are made) can initiate foreclosure proceedings.
Auction. At some point, the borrower will be asked to vacate the home, and if necessary at some later point, the borrower will be compelled to vacate the home by local authorities. The home will then go up for auction.
REO. If the auction bids do not reach a high enough level to cover the outstanding balance of the loan, the lender can take ownership of the property. Once the lender owns the property (referred to as real-estate-owned or REO), it will typically remain vacant until the lender is able to sell it.
A quick back of the envelope analysis that shows how much incremental inventory foreclosure creates:
A flow chart of the foreclosure process:
The charts below show the geographic/spatial concentration of foreclosure filings, as well as concentration of GSE in selected states:
The states where foreclosure accounts for the bulk of transactions:
A snapshot of contagion effects of foreclosure on homes in the same naighborhood:
Those who wish to dig into the fascinating topic of contagion (in foreclosures, not in default European countries), can find more info below:
As those who have been following our RealtyTrac updates know, in the last quarter the discount between a regular home sale and that in foreclosure just hit an all time record. Here is how the pricing matrix looks like by state and nationally:
And possibly the scariest chart of all: the end buyer of all the REOs, the properties that end up having the lowest salvage value, for the most part end up being acquired by the nationalized GSEs. And since the GSEs are on the US shadow balance sheet, these are simply more "assets" that collateralize US treasurys, and therefore, the US currency.
Take all the data above, and layer on top the complete confusion courtesy of the self-imposed foreclosure moratorium, and the utter confusion in the market becomes apparent.
If you thought robo signing was bad, you ain’t seen nothin’ yet.
The website 4ClosureFraud presents the gory details of a potential major new front in the foreclosure mess. A Pennsylvania foreclosure mill, Goldbeck McCafferty & McKeever, is accused by Patrick Loughren of allowing non-attorneys to file and prosecute foreclosures. A DailyFinance story gives the overview:
Two Pennsylvania cases, one state and one federal, have exposed new types of document problems in foreclosure cases. One of the cases has potentially transformative consequences for thousands of troubled Pennsylvania homeowners. At the center of each is the same law firm: Goldbeck McCafferty & McKeever (GMM)…
As long as a lawyer supervises foreclosure filings, and at least reads them before they’re submitted to the court, that is acceptable. But Loughren is suing because all three named partners of GMM, Joseph Goldbeck, Gary McCafferty and Michael McKeever, have admitted under oath — during depositions last September and in a separate case in December 2009 — that no attorney ever read the filings. The partners made clear that the practice has gone on for the past several years.
If Loughren prevails, this case will prove to be vastly more significant than robo-signing.
Robo signing, while a fraud on the court, does not necessarily invalidate the underlying legal action. Even a punitive judge is far more likely to take action against the lawyers involved in the robo signing or to reject the new corrected affidavits and require them to restart the foreclosure action afresh than dismiss the case with prejudice. Only if the affidavits or other documents were submitted in error would it inevitably disrupt the foreclosure, and in those cases, it OUGHT to present a problem to the party trying to foreclose.
The practice of law by non-lawyers is a far more serious matter. In Pennsylvania it is a crime. In the case against GMM and its apparently unsupervised paralegals, the plaintiff is seeking disgorgement of falsely billed “attorney’s fees”.
But even more important, the lack of attorney involvement would render the foreclosures void. Pennsylvania courts have found “proceedings commenced by persons unauthorized to practice law are a nullity”. Federal courts interpreting Pennsylvania law have supported this point of view.
If Loughren succeeds, the ramifications would be wideranging. For GMM foreclosures, it would cloud the title of the properties sold. The parties who lost their homes could seek recourse. It is unlikely they could reverse the foreclosures. As Bob Lawless noted at Credit Slips:
The law, however, strongly protects the finality of past foreclosure sales.
At first, these rules might seem unfair. Why should the law protect old court proceedings that have been tainted by mistake or, even worse, fraud? The answer, of course, is for the instrumental reason that a court system could not operate where every old judgment was open to attack. Losing parties will almost always feel the judge make a mistake or the opposing party misled the court through half-truths or outright lies. Before a court enters final judgment, procedural rules and court appeals are designed to maximize the possibility the truth will win out and to minimize the possibility of judicial error. The law imposes a very heavy burden on those seeking to attack final court judgments.
The same ideas strongly protect the finality of a court’s foreclosure judgment. The foreclosure judgment, however, is only an interim step to the ultimate disposition of the property at the foreclosure sale and the transfer of the deed. Now, third party rights will come into play, and the need for finality becomes even stronger. If foreclosure deeds were subject to attack, at worse we might have no bidders at the sale, and at best we would have drastically lower prices. Even if the successful purchaser at the foreclosure sale is the lender, it will be selling later to a third party, and we will have the same need for finality.
For these reasons, and not surprisingly, most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales.
But that does not mean the borrowers do not have other avenues. The logical targets are the foreclosure mills, and perhaps most important, the servicers and trustees. And per the lawsuit:
Plaintiff avers, on information and belief, that the “clients” of the non-lawyers – consisting of banks, loan servicers, REMIC trusts, and other creditors – are all aware that the non-lawyers are engaged in the unauthorized practice of law. The individuals employed at the entities (i.e., at the “clients”) all interact with the Non-Lawyer-Defendants on a day-to-day basis via e-mail and phone and they are aware that the Non-Lawyers are responsile for preparing, signing and filing these foreclosure cases and that the cases are being filed without attorney review.
Proving that the clients knew the paralegals were not supervised might be a stretch, but I suspect that the charge is accurate, particularly since as 4ClosureFraud points out, Bank of America was involved in a case where GMM staff admitted to the lack of attorney supervision and did nothing:
Loughren notes that in both cases involving the partners’ testimony about the practice, Bank of America (BAC) was the foreclosing bank. It was actually present during the December 2009 trial when the admissions were first made. Loughren points out that BofA’s representative at that trial, John Smith, is himself a lawyer, and so presumably understood the legal significance of GMM’s admission.
Other BofA employees surely learned about the practice too, given that the December case was an effort by the U.S. Bankruptcy Trustee to sanction both the bank and GMM for misconduct, and evidence submitted for it showed the involvement of “high-ranking” BofA people not normally involved in a foreclosure, such as its assistant general counsel.
So why is this such a big deal? Non-lawyers practicing law is impermissible in other states.
Most foreclosure mills are run on the same template: impossibly high staff to attorney ratios, 90 or 100 to every attorney. The ratios alone make meaningful supervision impossible. And this high leverage wasn’t due solely to partner greed. Some foreclosure mills, contrary to the laws of many states, had private equity funds as investors. And other foreclosure mills were keen to secure PE monies. So most industry incumbents had the same profile: an extraordinarily high staff to partner ratio, with standardized processes to maximize profits.
As a result, just as with the robo signers, it appears likely that documents were signed improperly. Matt Weidner has examples of signatures from an Ohio law firm by attorney Edward M. Kochalski that are so different that it is pretty implausible that one person signed them all. But here, the ramifications are far more serious.
The Loughren complaint looks solid and has detailed factual allegations.
Patrick J Loughren Complaint in Equity on Non-Attorneys Filing and Prosecuting Foreclosures
So where have the state bar associations been? It’s appalling that there have been no sanctions or disbarments over the robo signing scandal. We need to see some lawyers lose their licenses, or better yet, their freedom. Otherwise, it will be clear that the legal profession is siding with its meal tickets rather than the rule of law.
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
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The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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With recent revelations of the fraudclosure scandal, and a spike in interest toward all things REO, we decided to go back to basics and present some "appendices" over why this process of excess bank inventory clearance is so important and what its implications are, especially in a world in which foreclosing has suddenly become legally impossible.
First, courtesy of UBS, an outline of the Foreclosure process:
The Foreclosure Process
The foreclosure process may vary significantly across states and even across countries, but the following description is general enough that it should be applicable to most of the US.
Delinquency and foreclosure. After a homeowner with a mortgage loan has missed three monthly payments, he or she is considered to be “90 days delinquent,” and the servicer of the mortgage (the company to which the mortgage payments are made) can initiate foreclosure proceedings.
Auction. At some point, the borrower will be asked to vacate the home, and if necessary at some later point, the borrower will be compelled to vacate the home by local authorities. The home will then go up for auction.
REO. If the auction bids do not reach a high enough level to cover the outstanding balance of the loan, the lender can take ownership of the property. Once the lender owns the property (referred to as real-estate-owned or REO), it will typically remain vacant until the lender is able to sell it.
A quick back of the envelope analysis that shows how much incremental inventory foreclosure creates:
A flow chart of the foreclosure process:
The charts below show the geographic/spatial concentration of foreclosure filings, as well as concentration of GSE in selected states:
The states where foreclosure accounts for the bulk of transactions:
A snapshot of contagion effects of foreclosure on homes in the same naighborhood:
Those who wish to dig into the fascinating topic of contagion (in foreclosures, not in default European countries), can find more info below:
As those who have been following our RealtyTrac updates know, in the last quarter the discount between a regular home sale and that in foreclosure just hit an all time record. Here is how the pricing matrix looks like by state and nationally:
And possibly the scariest chart of all: the end buyer of all the REOs, the properties that end up having the lowest salvage value, for the most part end up being acquired by the nationalized GSEs. And since the GSEs are on the US shadow balance sheet, these are simply more "assets" that collateralize US treasurys, and therefore, the US currency.
Take all the data above, and layer on top the complete confusion courtesy of the self-imposed foreclosure moratorium, and the utter confusion in the market becomes apparent.
If you thought robo signing was bad, you ain’t seen nothin’ yet.
The website 4ClosureFraud presents the gory details of a potential major new front in the foreclosure mess. A Pennsylvania foreclosure mill, Goldbeck McCafferty & McKeever, is accused by Patrick Loughren of allowing non-attorneys to file and prosecute foreclosures. A DailyFinance story gives the overview:
Two Pennsylvania cases, one state and one federal, have exposed new types of document problems in foreclosure cases. One of the cases has potentially transformative consequences for thousands of troubled Pennsylvania homeowners. At the center of each is the same law firm: Goldbeck McCafferty & McKeever (GMM)…
As long as a lawyer supervises foreclosure filings, and at least reads them before they’re submitted to the court, that is acceptable. But Loughren is suing because all three named partners of GMM, Joseph Goldbeck, Gary McCafferty and Michael McKeever, have admitted under oath — during depositions last September and in a separate case in December 2009 — that no attorney ever read the filings. The partners made clear that the practice has gone on for the past several years.
If Loughren prevails, this case will prove to be vastly more significant than robo-signing.
Robo signing, while a fraud on the court, does not necessarily invalidate the underlying legal action. Even a punitive judge is far more likely to take action against the lawyers involved in the robo signing or to reject the new corrected affidavits and require them to restart the foreclosure action afresh than dismiss the case with prejudice. Only if the affidavits or other documents were submitted in error would it inevitably disrupt the foreclosure, and in those cases, it OUGHT to present a problem to the party trying to foreclose.
The practice of law by non-lawyers is a far more serious matter. In Pennsylvania it is a crime. In the case against GMM and its apparently unsupervised paralegals, the plaintiff is seeking disgorgement of falsely billed “attorney’s fees”.
But even more important, the lack of attorney involvement would render the foreclosures void. Pennsylvania courts have found “proceedings commenced by persons unauthorized to practice law are a nullity”. Federal courts interpreting Pennsylvania law have supported this point of view.
If Loughren succeeds, the ramifications would be wideranging. For GMM foreclosures, it would cloud the title of the properties sold. The parties who lost their homes could seek recourse. It is unlikely they could reverse the foreclosures. As Bob Lawless noted at Credit Slips:
The law, however, strongly protects the finality of past foreclosure sales.
At first, these rules might seem unfair. Why should the law protect old court proceedings that have been tainted by mistake or, even worse, fraud? The answer, of course, is for the instrumental reason that a court system could not operate where every old judgment was open to attack. Losing parties will almost always feel the judge make a mistake or the opposing party misled the court through half-truths or outright lies. Before a court enters final judgment, procedural rules and court appeals are designed to maximize the possibility the truth will win out and to minimize the possibility of judicial error. The law imposes a very heavy burden on those seeking to attack final court judgments.
The same ideas strongly protect the finality of a court’s foreclosure judgment. The foreclosure judgment, however, is only an interim step to the ultimate disposition of the property at the foreclosure sale and the transfer of the deed. Now, third party rights will come into play, and the need for finality becomes even stronger. If foreclosure deeds were subject to attack, at worse we might have no bidders at the sale, and at best we would have drastically lower prices. Even if the successful purchaser at the foreclosure sale is the lender, it will be selling later to a third party, and we will have the same need for finality.
For these reasons, and not surprisingly, most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales.
But that does not mean the borrowers do not have other avenues. The logical targets are the foreclosure mills, and perhaps most important, the servicers and trustees. And per the lawsuit:
Plaintiff avers, on information and belief, that the “clients” of the non-lawyers – consisting of banks, loan servicers, REMIC trusts, and other creditors – are all aware that the non-lawyers are engaged in the unauthorized practice of law. The individuals employed at the entities (i.e., at the “clients”) all interact with the Non-Lawyer-Defendants on a day-to-day basis via e-mail and phone and they are aware that the Non-Lawyers are responsile for preparing, signing and filing these foreclosure cases and that the cases are being filed without attorney review.
Proving that the clients knew the paralegals were not supervised might be a stretch, but I suspect that the charge is accurate, particularly since as 4ClosureFraud points out, Bank of America was involved in a case where GMM staff admitted to the lack of attorney supervision and did nothing:
Loughren notes that in both cases involving the partners’ testimony about the practice, Bank of America (BAC) was the foreclosing bank. It was actually present during the December 2009 trial when the admissions were first made. Loughren points out that BofA’s representative at that trial, John Smith, is himself a lawyer, and so presumably understood the legal significance of GMM’s admission.
Other BofA employees surely learned about the practice too, given that the December case was an effort by the U.S. Bankruptcy Trustee to sanction both the bank and GMM for misconduct, and evidence submitted for it showed the involvement of “high-ranking” BofA people not normally involved in a foreclosure, such as its assistant general counsel.
So why is this such a big deal? Non-lawyers practicing law is impermissible in other states.
Most foreclosure mills are run on the same template: impossibly high staff to attorney ratios, 90 or 100 to every attorney. The ratios alone make meaningful supervision impossible. And this high leverage wasn’t due solely to partner greed. Some foreclosure mills, contrary to the laws of many states, had private equity funds as investors. And other foreclosure mills were keen to secure PE monies. So most industry incumbents had the same profile: an extraordinarily high staff to partner ratio, with standardized processes to maximize profits.
As a result, just as with the robo signers, it appears likely that documents were signed improperly. Matt Weidner has examples of signatures from an Ohio law firm by attorney Edward M. Kochalski that are so different that it is pretty implausible that one person signed them all. But here, the ramifications are far more serious.
The Loughren complaint looks solid and has detailed factual allegations.
Patrick J Loughren Complaint in Equity on Non-Attorneys Filing and Prosecuting Foreclosures
So where have the state bar associations been? It’s appalling that there have been no sanctions or disbarments over the robo signing scandal. We need to see some lawyers lose their licenses, or better yet, their freedom. Otherwise, it will be clear that the legal profession is siding with its meal tickets rather than the rule of law.
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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Live Blog: President Obama's <b>news</b> conference – CNN Political <b>...</b>
President Obama will hold a previously unscheduled news conference on Tuesday at 2:20 p.m. likely focusing on the compromise with Republicans on tax cuts, the White House announced. Check back here for CNN's live blog of the press ...
Breaking <b>News</b>: Watch A Gigantic Looping Solar Prominence
The Solar Dynamics Observatory never fails to deliver absolutely stunning images from the Sun: as of 18:49 UT today, the above picture is what the Sun looked like in the ultraviolet spectrum. The prominence that you are seeing looping ...
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader <b>...</b>
Adobe releases Lightroom 3.3, ACR 6.3 & Lens Profile Downloader: Adobe has released Photoshop Lightroom 3.3, Camera Raw 6.3 and DNG Converter 6.3. These are final versions of updates that were originally posted as 'release candidates' ...
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With recent revelations of the fraudclosure scandal, and a spike in interest toward all things REO, we decided to go back to basics and present some "appendices" over why this process of excess bank inventory clearance is so important and what its implications are, especially in a world in which foreclosing has suddenly become legally impossible.
First, courtesy of UBS, an outline of the Foreclosure process:
The Foreclosure Process
The foreclosure process may vary significantly across states and even across countries, but the following description is general enough that it should be applicable to most of the US.
Delinquency and foreclosure. After a homeowner with a mortgage loan has missed three monthly payments, he or she is considered to be “90 days delinquent,” and the servicer of the mortgage (the company to which the mortgage payments are made) can initiate foreclosure proceedings.
Auction. At some point, the borrower will be asked to vacate the home, and if necessary at some later point, the borrower will be compelled to vacate the home by local authorities. The home will then go up for auction.
REO. If the auction bids do not reach a high enough level to cover the outstanding balance of the loan, the lender can take ownership of the property. Once the lender owns the property (referred to as real-estate-owned or REO), it will typically remain vacant until the lender is able to sell it.
A quick back of the envelope analysis that shows how much incremental inventory foreclosure creates:
A flow chart of the foreclosure process:
The charts below show the geographic/spatial concentration of foreclosure filings, as well as concentration of GSE in selected states:
The states where foreclosure accounts for the bulk of transactions:
A snapshot of contagion effects of foreclosure on homes in the same naighborhood:
Those who wish to dig into the fascinating topic of contagion (in foreclosures, not in default European countries), can find more info below:
As those who have been following our RealtyTrac updates know, in the last quarter the discount between a regular home sale and that in foreclosure just hit an all time record. Here is how the pricing matrix looks like by state and nationally:
And possibly the scariest chart of all: the end buyer of all the REOs, the properties that end up having the lowest salvage value, for the most part end up being acquired by the nationalized GSEs. And since the GSEs are on the US shadow balance sheet, these are simply more "assets" that collateralize US treasurys, and therefore, the US currency.
Take all the data above, and layer on top the complete confusion courtesy of the self-imposed foreclosure moratorium, and the utter confusion in the market becomes apparent.
If you thought robo signing was bad, you ain’t seen nothin’ yet.
The website 4ClosureFraud presents the gory details of a potential major new front in the foreclosure mess. A Pennsylvania foreclosure mill, Goldbeck McCafferty & McKeever, is accused by Patrick Loughren of allowing non-attorneys to file and prosecute foreclosures. A DailyFinance story gives the overview:
Two Pennsylvania cases, one state and one federal, have exposed new types of document problems in foreclosure cases. One of the cases has potentially transformative consequences for thousands of troubled Pennsylvania homeowners. At the center of each is the same law firm: Goldbeck McCafferty & McKeever (GMM)…
As long as a lawyer supervises foreclosure filings, and at least reads them before they’re submitted to the court, that is acceptable. But Loughren is suing because all three named partners of GMM, Joseph Goldbeck, Gary McCafferty and Michael McKeever, have admitted under oath — during depositions last September and in a separate case in December 2009 — that no attorney ever read the filings. The partners made clear that the practice has gone on for the past several years.
If Loughren prevails, this case will prove to be vastly more significant than robo-signing.
Robo signing, while a fraud on the court, does not necessarily invalidate the underlying legal action. Even a punitive judge is far more likely to take action against the lawyers involved in the robo signing or to reject the new corrected affidavits and require them to restart the foreclosure action afresh than dismiss the case with prejudice. Only if the affidavits or other documents were submitted in error would it inevitably disrupt the foreclosure, and in those cases, it OUGHT to present a problem to the party trying to foreclose.
The practice of law by non-lawyers is a far more serious matter. In Pennsylvania it is a crime. In the case against GMM and its apparently unsupervised paralegals, the plaintiff is seeking disgorgement of falsely billed “attorney’s fees”.
But even more important, the lack of attorney involvement would render the foreclosures void. Pennsylvania courts have found “proceedings commenced by persons unauthorized to practice law are a nullity”. Federal courts interpreting Pennsylvania law have supported this point of view.
If Loughren succeeds, the ramifications would be wideranging. For GMM foreclosures, it would cloud the title of the properties sold. The parties who lost their homes could seek recourse. It is unlikely they could reverse the foreclosures. As Bob Lawless noted at Credit Slips:
The law, however, strongly protects the finality of past foreclosure sales.
At first, these rules might seem unfair. Why should the law protect old court proceedings that have been tainted by mistake or, even worse, fraud? The answer, of course, is for the instrumental reason that a court system could not operate where every old judgment was open to attack. Losing parties will almost always feel the judge make a mistake or the opposing party misled the court through half-truths or outright lies. Before a court enters final judgment, procedural rules and court appeals are designed to maximize the possibility the truth will win out and to minimize the possibility of judicial error. The law imposes a very heavy burden on those seeking to attack final court judgments.
The same ideas strongly protect the finality of a court’s foreclosure judgment. The foreclosure judgment, however, is only an interim step to the ultimate disposition of the property at the foreclosure sale and the transfer of the deed. Now, third party rights will come into play, and the need for finality becomes even stronger. If foreclosure deeds were subject to attack, at worse we might have no bidders at the sale, and at best we would have drastically lower prices. Even if the successful purchaser at the foreclosure sale is the lender, it will be selling later to a third party, and we will have the same need for finality.
For these reasons, and not surprisingly, most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales.
But that does not mean the borrowers do not have other avenues. The logical targets are the foreclosure mills, and perhaps most important, the servicers and trustees. And per the lawsuit:
Plaintiff avers, on information and belief, that the “clients” of the non-lawyers – consisting of banks, loan servicers, REMIC trusts, and other creditors – are all aware that the non-lawyers are engaged in the unauthorized practice of law. The individuals employed at the entities (i.e., at the “clients”) all interact with the Non-Lawyer-Defendants on a day-to-day basis via e-mail and phone and they are aware that the Non-Lawyers are responsile for preparing, signing and filing these foreclosure cases and that the cases are being filed without attorney review.
Proving that the clients knew the paralegals were not supervised might be a stretch, but I suspect that the charge is accurate, particularly since as 4ClosureFraud points out, Bank of America was involved in a case where GMM staff admitted to the lack of attorney supervision and did nothing:
Loughren notes that in both cases involving the partners’ testimony about the practice, Bank of America (BAC) was the foreclosing bank. It was actually present during the December 2009 trial when the admissions were first made. Loughren points out that BofA’s representative at that trial, John Smith, is himself a lawyer, and so presumably understood the legal significance of GMM’s admission.
Other BofA employees surely learned about the practice too, given that the December case was an effort by the U.S. Bankruptcy Trustee to sanction both the bank and GMM for misconduct, and evidence submitted for it showed the involvement of “high-ranking” BofA people not normally involved in a foreclosure, such as its assistant general counsel.
So why is this such a big deal? Non-lawyers practicing law is impermissible in other states.
Most foreclosure mills are run on the same template: impossibly high staff to attorney ratios, 90 or 100 to every attorney. The ratios alone make meaningful supervision impossible. And this high leverage wasn’t due solely to partner greed. Some foreclosure mills, contrary to the laws of many states, had private equity funds as investors. And other foreclosure mills were keen to secure PE monies. So most industry incumbents had the same profile: an extraordinarily high staff to partner ratio, with standardized processes to maximize profits.
As a result, just as with the robo signers, it appears likely that documents were signed improperly. Matt Weidner has examples of signatures from an Ohio law firm by attorney Edward M. Kochalski that are so different that it is pretty implausible that one person signed them all. But here, the ramifications are far more serious.
The Loughren complaint looks solid and has detailed factual allegations.
Patrick J Loughren Complaint in Equity on Non-Attorneys Filing and Prosecuting Foreclosures
So where have the state bar associations been? It’s appalling that there have been no sanctions or disbarments over the robo signing scandal. We need to see some lawyers lose their licenses, or better yet, their freedom. Otherwise, it will be clear that the legal profession is siding with its meal tickets rather than the rule of law.
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