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Wrongful Foreclosure Investigation to be Launched by 40 States

Oct 12, 2010 | Parker Waichman LLP

As many as 40 state attorneys general will launch a joint probe into wrongful foreclosures. The multi-state investigation follows announcements by GMAC Mortgage, JP Morgan Chase, Bank of America and other lenders that they would suspend foreclosure proceedings and foreclosure sales in some states because of problems with documentation.

The banks’ actions came after it was learned that some mortgage servicers employed people who could sign foreclosure affidavits so quickly they popularized a new term for them: “robo-signer.” In depositions taken by lawyers for embattled homeowners, some robo-signers said they or their team had signed 10,000 or more foreclosure affidavits a month. Those affidavits say the preparer personally reviewed the files, but in their depositions, the workers acknowledge they had no time to actually do that. In some cases, the affidavits weren’t properly notarized.

According to a report in The Wall Street Journal, the first goal of the attorneys general wrongful foreclosure investigation will be to determine the scale of the document problems and correct them. However, several have said it could ultimately lead lenders and servicers to agree to mass loan modifications or principal forgiveness schemes, as well as changes in the way mortgages are processed. Some lenders and servicers could also end up facing financial penalties.

The investigation is being led by the Iowa attorney. So far the number of servicing companies that will be included in the probe hasn’t been determined. The states involved will likely use their respective laws against unfair and deceptive acts and practices to pursue claims against lenders, as well as laws that govern foreclosures, the Journal said.

Some of the state attorneys want the investigation to go beyond the robo-signing issue. For example, Arizona’s attorney general said he would like the probe to look into foreclosure proceedings that occur while homeowners are engaged in the modification process with their banks.

In the past, state attorneys general have been successful in convincing lenders to modify mortgages when pursuing mortgage fraud claims, according to The Wall Street Journal. For example, in 2008, Bank of America Corp. settled charges brought by 15 attorneys related to accusations of predatory lending in its Countrywide Financial Corp. unit, granting loan modifications worth $8.4 billion to thousands of homeowners. Last March, in a case that did not involve documentation problems, the Massachusetts Attorney General pressured Bank of America to reduce mortgage-loan balances by as much as 30 percent for thousands of borrowers.

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