Robo-signing, a term first identified by consumer and investor advocate Nye Lavalle in 1999, refers to the automatic generation and signing of documents. In the case of the most recent scandal, these documents refer to Mortgage and Foreclosure affidavits and documents.
The result has been that many people may have lost their homes or been threatened with the loss of their homes without their lender having either read the relevant foreclosure documents, ascertained that the bank actually owned the mortgage, and certainly without a notary being present, although a notary seal appears on the relevant documents. This is important because they are requirements for how the system is supposed to work.
One bank representative in a recent deposition detailed the practice of "robo-signing," as signing off on foreclosures without verifying the information in the documents. Following the credit crunch and subsequent economic downturn, lenders have been accused of robotically signing off on thousands, perhaps even hundreds of thousands of these affidavits, to deal with a huge surge in foreclosures. Essentially they have been accused of cutting an administrative corner, but a corner which happens to be a legal requirement.
In order to begin the foreclosure process on a defaulting mortgage, lenders must, by law, be able to produce a sworn affidavit verifying that the trust (bank) owns the mortgage in question, and that the mortgage is at least six months in arrears. In fact, at every transfer of property, it is vital to establish a clear chain of title against future claims. If a clear chain of title cannot be established (or is broken) claims may be rendered void, or in the alternative a property may seem to have a clear title when in fact someone has a legitimate claim against it.
There has been testimony in recent depositions, that some lenders and trusts are robotically pursuing foreclosure proceedings against mortgage loans which they do not actually own, and that some homeowners do not, in fact, know what institution owns their mortgage, and to whom they need to pay the money required to prevent the loss of their home.
Further there is a requirement that a human being actually appear before a notary to attest to the fact that s/he has reviewed the documents and for the notary then to affix a seal. Yet servicing companies have been electronically affixing notary seals to documents without meeting this requirement, sometimes months after the actual date on the document which renders this requirement meaningless.
Here's an example to illustrate the problem:
Mr. and Mrs. Jones find the "perfect house" for their family. They apply to their Local Bank down the street and take out a $250,000 loan for their dream home. They agree to pay a certain amount every month for the next thirty years. The couple moves in and continues making payments to the Local Bank.
In the olden days, pre 2005, the Local Bank would have held their mortgage for the full 30 years. Just as historically, real estate prices in the United States were driven by supply and demand, and generally tracked the rate of inflation. However, something called Securitization changed all that. A mortgage can be a rather risky asset to hold on its own and has the potential to make money for investors
Securitization means that Local Bank sold the loan to an Investment Bank, such as JPMorgan Chase or Bear Sterns, which 'sponsored' the loan. These banks acted as middle men. They packaged the Jones' mortgage together with hundreds of others into Mortgage-Backed Securities (MBS) and sold these securities to investors. At the end of the U.S. real estate boom in 2005 and 2006, about 70 percent of the $6.1 trillion in mortgage lending was packaged into bonds and sold by trusts (aka banks in finance jargon) to investors.
The trust is hands-off: it hires a Servicer to collect Mr. and Mrs. Jones' monthly loan payment on the $250,000 mortgage, and other maintenance duties. The idea is that if Mr. and Mrs. Jones default on their mortgage, no one company or investor is out- that risk is spread out across multiple investments
All of the signed, dated and notarized legal documentation accompanying a transfer of a mortgage should follow the loan at every step. For each round the Jones's mortgage is sold, there should also be additional pieces of paperwork, saying the loan has been legally sold. Investors who bought MBS did so with the promise that the underlying mortgages conformed to basic underwriting standards, and that proper procedures were followed in the chain of securitization. But we are now finding out that they weren't.