Untangling The Complex Foreclosure Mess

Attorneys general in all 50 states are investigating improper foreclosure procedures that may cause sweeping consequences for the banks and institutions that bought mortgage-backed securities during the housing boom -- and affect the cases of thousands of homeowners facing eviction.

Since the housing bust two years ago, when millions of homeowners fell behind on their loans, the foreclosure industry has grown into a multibillion-dollar business. To deal with the thousands of defaulted loans needing to be processed, banks relied on thousands of temporary employees who often had little experience and training to handle the foreclosure paperwork.

This resulted in many mistakes being made throughout the foreclosure process. Reports of sloppy documentation -- including the questionable notarization of documents, the loss of key paperwork needed to begin foreclosure proceedings and missing paperwork on original mortgages -- temporarily halted foreclosure proceedings across much of the country in early October. It also triggered at least five separate federal investigations into the ways mortgage lenders have handled foreclosures.

On today's Fresh Air, Gretchen Morgenson, who covers the world financial markets for The New York Times, untangles the complex foreclosure mess and explains the flawed paperwork trail that has led to the reexamination of hundreds of thousands of foreclosure cases.

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Morgenson explains that for every mortgage, there are two pieces of paperwork necessary to complete the transaction: the note, which is the homeowner's promise to repay, and the mortgage, which is the lien on the property.

"Then the note and the mortgage are supposed to be in the loan file, so that if there is a foreclosure we understand that everybody knows that these are the right parties that are interacting here: the institution that has the right to foreclose and the borrower who has to deal with the foreclosure," she explains. "What has ended up happening is in the loan file, there's no note. The note's gone missing."

In other cases, she says, the dates on the paperwork necessary to foreclose come after the foreclosure proceedings -- resulting in judges telling banks they don't have the right to foreclose on the property. In some cases, notarized signatures on the foreclosure documents are clearly forged -- or signed in a completely different location, meaning the loan officer didn't look at the paperwork.

"It was all about expedience. It was all about speed," Morgenson says. "It's just a really sad commentary on the way the business was approached ... but this is exactly what the banks did when they were making the mortgages, so why are we surprised on the other end of it, that they're doing it again?"

A few weeks ago, Bank of America, GMAC, JPMorgan Chase and other major mortgage lenders across the country announced that they were temporarily halting foreclosures to examine the paperwork filed in many of the cases. But Morgenson says proceedings have restarted in many states after the banks said they reexamined all of their paperwork -- and that could be problematic.

"I think that this is a whistling-past-the-graveyard exercise because there is just no way that they can know that all of these practices are sound given the really horrible, horrifying examples that we've seen and these scary depositions that we've read from employees at some of these firms about how lackadaisical some of the practices were," Morgenson says. "I don't see how the banks could really have 'solved' this problem because it's really so loan-by-loan. It's so labor intensive. I just don't think it's over."

Morgenson is an assistant business and financial editor and a columnist for The New York Times and the author of the Forbes publication Great Minds Of Business. She won the Pulitzer Prize in 2002 for her "trenchant and incisive" coverage of Wall Street.

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