A surprisingly honest and thorough article regarding the foreclosure mess written by Peter J. Henning for the New York Times:
Home foreclosures may come to a sudden halt in some states because of problems in the documents filed in court as part of the process to take title to the properties. GMAC Mortgage, JPMorgan Chase and Bank of America have asked judges to stop legal proceedings while they determine whether proper procedures were followed, and it would not be a surprise if other mortgage lenders did the same while reviewing their actions.
The revelation that misstatements may have been made to court filings, and that mortgage documents might not have been as they were portrayed to be, raises potentially serious legal problems for the banks, mortgage processors and law firms that have been involved in the tidal wave of home foreclosures over the last three years. There are likely to be a wide range of government investigations and private litigation that could hound the banks and others for years to come.
In some states, foreclosing on a house requires a judicial proceeding, and it appears that affidavits and other documents filed with the courts contained misstatements regarding whether the mortgage file was reviewed by the person affirming the propriety of the foreclosure. Even in those states that do not require resorting to the courts to seize property when borrowers default on their home loans, it is likely that some filing must be made regarding the validity of the procedure, so improprieties may also crop up in other jurisdictions.
As the issues related to flaws in the foreclosure process come to light, even lenders unaffected by problems in pursuing foreclosures are moving more cautiously in dealing with borrowers in arrears.
Here are a few areas where there are likely to be legal developments related to potentially misleading documents and faulty mortgage foreclosures:
Government Investigations Any misstatements to a court in a foreclosure proceeding could result in the judge holding the party in contempt, and perhaps even referring the case for a perjury or obstruction of justice prosecution. Not surprisingly, judges do not take kindly to being misled, so any individual proceedings in which problems arise can result in the court imposing a sanction, such as dismissing the case.
On a larger scale, the various parties accused of misleading the court could be investigated for fraud if there is evidence of systematic action designed to improperly speed up the foreclosure process at the expense of the defaulting homeowners.
The potential breadth of the problem, involving multiple states and thousands of foreclosures, means that the Justice Department could initiate a grand jury investigation to look at how companies acted throughout the country. Mail and wire fraud are the most likely violations that would be considered, based on any misstatements in legal filings that were transmitted to courts. If the foreclosures involved loans guaranteed by the federal government, like programs administered by the Departments of Housing and Urban Development and Veterans Affairs, then the federal false statement statute, 18 U.S.C. § 1001, could come into play for any documents submitted to those agencies.
For this type of broad investigation, it would be better if the Justice Department coordinated a single inquiry rather than having United States attorney’s offices from around the country start issuing subpoenas for records. The Financial Fraud Enforcement Task Force created by President Obama would appear to be the most likely body to take control of the investigation at the initial stages so that it does not become fragmented or mired in inter-agency battles.
Because JPMorgan and Bank of America are public companies, I would not be surprised if the Securities and Exchange Commission were to open a civil investigation of their disclosures to investors about foreclosures and potential losses. The new S.E.C. whistle-blower program in the Dodd-Frank Act offers significant rewards to those who disclose information about securities fraud, and that may prove to be one avenue for gathering information from those involved in the foreclosure process who spotted alleged wrongdoing at companies.
Even if there is a coordinated federal investigation, the various state attorneys general are sure to get involved in scrutinizing how the banks and others conducted foreclosures in their states. Any number of criminal and civil statutes could be involved, such as false statement and consumer protection provisions.
Civil Suits The revelation of potential problems stretching across the foreclosure landscape means that civil suits against the parties to the process are inevitable. In individual foreclosure proceedings, homeowners would probably challenge any attempt to take title to the property, which may allow them to remain in their houses a while longer, or even stop the proceeding altogether.
On a larger scale, there are likely to be two potential classes of plaintiffs pursuing civil suits against the banks and others for their roles: first, homeowners who earlier lost their properties to foreclosure in which questionable documents were filed, and second, title insurance companies that may be on the hook for claims by purchasers of foreclosed properties who now have a cloud on the title to their house. Each may claim that the faulty documentation in the foreclosure cases caused them harm.
Normally these types of claims would be under state law for fraud, misrepresentation and civil conspiracy, but the cases could be brought in federal court under the Racketeer Influenced and Corrupt Organizations Act, better known as RICO. That statute, one of the few criminal provisions that authorizes civil suits in addition to criminal prosecution, makes it a violation in 18 U.S.C. § 1962(c) for any person to be associated with an “enterprise” who is involved “in the conduct of such enterprise’s affairs through a pattern of racketeering activity or collection of unlawful debt.”
In a RICO suit, the plaintiffs would probably allege that the banks, mortgage processors, law firms, and any other participants in the foreclosure process formed an informal enterprise known as an “association in fact,” which is really just a group acting together for a particular purpose. The “pattern of racketeering activity” could be alleged quite easily as mail and wire fraud, and as an alternative the plaintiffs could also assert that any faulty foreclosure proceedings constituted the “collection of an unlawful debt.”
The allure of civil RICO is that the potential liability for a violation includes triple damages and – music to any lawyer’s ears – payment of the plaintiff’s attorney’s fees, recoveries that are usually not available in state court actions. In addition, any state law claims, such as fraud, can be brought as part of the federal RICO suit under the doctrine of supplemental jurisdiction, allowing plaintiffs to bring the entire case in a single proceeding.
This year may go down as one marked by mass litigation, starting with the Toyota defect recall, moving on to the gulf oil spill, and now with the potential for broad claims against those involved in mortgage foreclosures. For the banks, mortgage processors, and law firms involved in the foreclosure process, their potential exposure is not yet clear, but they can expect to face legal battles on a number of fronts as this unfolds.
Peter J. Henning follows issues involving securities law and white-collar crime for DealBook’s White Collar Watch.