Legalizing the Bank Foreclosure Mess

Under pressure from several state attorney generals, Bank of America has halted mortgage foreclosures in the 23 states that require court approval. So too, have Ally Financial (formerly GMAC) and JP Morgan Chase. Other banks are likely to do the same.

While Bank of America refuses to admit any wrong doing, the other two major mortgage service organizations have admitted to filing fraudulent documents in what could amount to hundreds of thousands of home foreclosures that should not have happened.

Ally Financial, which is owned by taxpayers because of the GMAC bailout, admitted that it had signed off up to 10,000 foreclosures per month for almost five years without doing the required reviews.

Before a bank can foreclose a home, its officials must confirm that it owns the mortgage on the property and that the bank's records reveal that the borrower is delinquent. Then, a notary must verify that the bank official has personally signed those documents.

Yet evidence uncovered by the state attorneys general reveals that these and other banks did not obey the law as they foreclosed thousands of homes. Indeed, in thousands of cases, the bank officials lied when they said they reviewed the documents. They lied when they said they signed the documents. And, they lied when they said they appeared before a notary for verification of their signatures. Just as the banks issued sub-par mortgages without doing all the checking required, they are now taking possession of homes without following the law. It is yet another bank fraud on a massive scale.

One consequence, reported by the Center for Responsible Lending, is that African-American and Latino homeowners are 75 percent more likely than white borrowers to face foreclosure, largely because they were the easiest victims in the previous bank scam -- sub-prime mortgages.

Another consequence is that in their deceptions many banks used foreclosure proceedings to take homes on which they did not own the mortgage. The paperwork was fraudulent. Now, the dispossessed owners must straighten out this bank-created legal nightmare before they can take back possession and return to their homes.

In the process of quick foreclosures and panic sales, the banks are creating a second national housing crisis by discounting the price of the foreclosed houses, often by 40 percent or more, thereby driving down the value of neighboring houses. Also, many title companies are refusing to issue title insurance, a basic requirement for securing a mortgage by even the best-qualified purchaser, further stifling an already weak sector of the economy.

The banks' faking of notary signatures is at the heart of this foreclosure debacle. A notary is supposed to be a person of reputation who is a witness that verifies that something was done in their presence. But it did not happen with hundreds of thousands of these foreclosures.

Not surprisingly, the banks are asking Congress and President Obama for a form of legal immunity - they have "wired" congressional passage of a bill that would weaken the standards by which a U.S.-based notary operates and by that help the banks slip off the hook for their mortgage foreclosure fraud.

The mechanics are simple. The standards for what a notary must do are set by the individual states. The proposed law would require every state to accept the standard used by other states. Thus, every state must accept the notary signatures of the state with the weakest requirements.

The legislation," H.R. 3808, the Interstate Recognition and Notarizations Act of 2010," passed in the House of Representatives on April 27 by a voice vote and it passed in the Senate on September 27, also be voice vote. Thus, we do not know who voted for or against this special interest legislation.

We do know, however, that the bill was presented to the President for signature or veto on September 30. And we know that as of this date, President Obama has taken no action.

Inevitably, if the President signs this bill into law, the banks' will find (if they have not already) a user-friendly state legislature and Governor. Their lobbyists will ply the locals with enough contributions and favors to get state notary rules that make legal, or almost legal, the way that the banks fake witness signatures. And, by that, some Governor and Legislature will make it almost impossible for other state and federal officials to hold the banks legally accountable for their larger fraud. Under this bill, moreover, the federal government must accept that outcome.

If President Obama is serious about holding banks accountable for their actions, he will veto this bill.