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States Launch GMAC Wrongful Foreclosure Probes

Sep 28, 2010 | Parker Waichman LLP

Several state attorneys general have opened investigations into GMAC Mortgage’s foreclosure practices. Several of the attorneys general have ordered GMAC – the nation’s fourth largest home loan lender – to freeze foreclosures in their states.

Earlier this month, GMAC Mortgage’s parent company, Ally Financial, announced it was suspending foreclosure evictions in 23 states. According to a report in The Palm Beach Post, a two-page memo dated September 17 and marked “urgent” told brokers to immediately stop evictions, cash-for-key transactions, lockouts and to suspend sales of properties already taken back by the bank in foreclosure. GMAC said employees signed foreclosure affidavits containing information that they didn’t know was true and in some cases without a notary present. All of the states mentioned in the memo require foreclosure actions to begin in court.

According to a Bloomberg News report, the rapid rise in home loan defaults is to blame for such sloppiness in foreclosure proceedings. In August, lenders took possession of a record 95,364 homes and issued foreclosure filings to 338,836 homeowners, or one out of every 381 U.S. households, according to RealtyTrac. About 2 million houses will be seized by lenders through 2011. Lenders and mortgage servicers have been unprepared for the volume.

According to The Washington Post, attorneys general in Connecticut, California, Illinois, Iowa, North Carolina and Texas have all announced investigations of GMAC. Connecticut Attorney General Richard Blumenthal on Monday accused Ally of using “defective foreclosure documents” in its filings. California Attorney Jerry Brown called GMAC’s document review process a “sham.”

Both Brown and Blumenthal have ordered GMAC to halt foreclosures in their states. California was not on GMAC’s list of states where foreclosure evictions have been halted.

Philip A. Lehman, an assistant attorney general in North Carolina, warned Ally Financial, in a letter that the “use of unverified affidavits to obtain judicial relief could constitute a fraud upon the court.”

The Washington Post is also reporting that investigations of wrongful foreclosures are now looking at other lenders. Hundreds of other mortgage companies, including Fannie Mae and Freddie Mac, used foreclosure processing services provided by Ally Financial. Homeowner attorneys and consumer advocates have also uncovered other examples of questionable practices – forged signatures, faked documents and confusion among lenders over who has ownership of a loan

“This has the potential to be an industry-wide issue,” said Patrick Madigan, an assistant attorney general in Iowa and chairman of a national foreclosure prevention group, told the Post.

The debacle is also receiving attention from some in Congress. House Financial Services Committee Chairman Barney Frank (D-Mass.) vowed to “take steps to make sure these practices stop.” Rep. Alan Grayson (D-Fla.), whose state was one of the hardest hit by the foreclosure crisis, called for an end to illegal foreclosures.

While GMAC and Ally have characterized the foreclosure problems as “technical” errors, some legal experts said they could be used by homeowners to challenge their foreclosures.

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