The "robo-signing of affidavits and Assignments of Mortgage and all other mortgage foreclosure documents served to cover up the fact that loan servicers cannot demonstrate the facts required to conduct a lawful foreclosure. If it turns out that robo-signers did indeed sign off on loans without review, they committed fraud by claiming knowledge of a financial matter of which they had no personal knowledge. It could also mean that some people have been wrongly evicted from their houses because the foreclosure is based on fraudulent documents.
A second problem has been the lack of original paperwork required by judges in foreclosure proceedings. At JPMorgan Chase & Co. from 2005 to November 2008, about a third of foreclosure files were missing mortgage assignments. Servicers would often write new assignments when judges requested proof that the party seeking to repossess a property had the right to do so.
The foreclosure crisis opened up this process to scrutiny, as banks claimed to have lost thousands of promissory notes and were instead showing judges "copies." Missing or incomplete paperwork has forced lenders to routinely recreate documents to show courts they have standing to seize properties.
To the extent that these transfers are not "copies" but new documents and were completed retroactively, raises issues about honesty in the creating and dating of the assignments/transfers and about what parties can do, if anything, if an entity in the securitization chain, such as Lehman Brothers or New Century, is no longer in existence. So another legal issue for the courts, centers on whether assignments can be created to show transfers between banks that happened years earlier.
Spurred by descriptions of these practices in depositions of employees involved in robo and the potential for abuse, the attorneys general in all 50 states last month opened an investigation into whether banks and loan servicers used false documents and signatures or improper practices to justify hundreds of thousands of foreclosures.
Several large banks like Bank of America, GMAC, JPMorgan Chase and Co have all suspended foreclosures or evictions in recent weeks after these allegations surfaced of shoddy loan documents in foreclosure cases. Citigroup, another large player had failed to do so, but has been ordered by a federal court to defend a lawsuit alleging that it foreclosed using questionable documents.
And, the robo-signer scandal could be the tip of the iceberg. From underwriting fraudulent mortgages; to shuffling it through the mortgage securitization chain without following proper legal procedures like the simple act of passing along paperwork; to concealing or doctoring basic facts when securitizing the mortgages and selling them to investors, large lenders and their partners on Wall Street could face hundreds of billions of dollars in losses by being forced to buy back faulty mortgages, some of which have already defaulted, from misled investors.
During the housing bubble, trillions of dollars of these securities were churned out. When banks found themselves with loans that did not conform to minimum requirements for securitization - rules meant to protect MBS investors from the risk of widespread defaults - their response was to sprinkle these "subprime" loans into other MBS bundles. Auditors only sampled about 5-10% of the loans making up any one MBS, so if a particularly egregious loan was rejected, it could simply be shuffled into another MBS. In the rare case that the loan was spotted a second time, it was shuffled again.
Investors bought mortgage-linked securities with the promise that the underlying mortgages conformed to basic underwriting standards, and that proper procedures were followed in the chain of securitization. Steep losses on those investments and the discovery of potentially fraudulent activity are pushing investors to force banks to buy them back. In essence, MBS buyers were sold Ferraris but took delivery of Dodges.