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 To: All Members of NAILTA From: Robert B. Holman, Esq. Chairman, Policy and Legal Affairs Committee Date: October 14, 2010 Re: The Foreclosure Moratorium Issue By now you have probably read about – and no doubt have heard about -- the fact that bank foreclosure processes across the United States are under intense levels of scrutiny due to the fact that, in some foreclosure cases, banks have allegedly utilized fraudulent documentation in their foreclosure efforts. As a service to our members, we wanted to provide you with an update on these important issues and to give you information that might be helpful in explaining these issues to your customers. Background: On June 7, 2010, during a deposition of a GMAC Mortgage/Ally Bank employee named Jeffrey Stephan, it was learned that Mr. Stephan signed roughly 10,000 mortgage assignments and foreclosure a ffidavits a month for cases across the United States. In many of those cases, the documents were signed outside the presence of a notary. In many of those cases, the affidavits were also signed although Mr. Stephan lacked personal knowledge of the matters contained therein. As a result of Stephan’s testimony, courts and defense attorneys across the country have begun to scrutinize the actions of foreclosing lenders. GMAC Mortgage/Ally Bank later suspended its foreclosure activities. Since doing so, JP Morgan Chase Bank, PNC Bank, Bank of America and others have instituted mandatory foreclosure moratoriums in either all fifty states or in those 23 states in which judicial foreclosures are the norm. Wells Fargo has begun a direct review of all of its foreclosure matters while still permitting them to proceed. State Attorney Generals in all fifty states

NAILTA Foreclosure Memo 10-13-2010

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To: All Members of NAILTA

From: Robert B. Holman, Esq.

Chairman, Policy and Legal Affairs Committee

Date: October 14, 2010

Re: The Foreclosure Moratorium Issue

By now you have probably read about – and no doubt have heard about -- the fact that

bank foreclosure processes across the United States are under intense levels of scrutinydue to the fact that, in some foreclosure cases, banks have allegedly utilized fraudulent

documentation in their foreclosure efforts.

As a service to our members, we wanted to provide you with an update on these

important issues and to give you information that might be helpful in explaining theseissues to your customers.

Background:

On June 7, 2010, during a deposition of a GMAC Mortgage/Ally Bank employee namedJeffrey Stephan, it was learned that Mr. Stephan signed roughly 10,000 mortgage

assignments and foreclosure affidavits a month for cases across the United States. In

many of those cases, the documents were signed outside the presence of a notary. In

many of those cases, the affidavits were also signed although Mr. Stephan lackedpersonal knowledge of the matters contained therein. As a result of Stephan’s testimony,

courts and defense attorneys across the country have begun to scrutinize the actions of foreclosing lenders.

GMAC Mortgage/Ally Bank later suspended its foreclosure activities. Since doing so, JP

Morgan Chase Bank, PNC Bank, Bank of America and others have instituted mandatoryforeclosure moratoriums in either all fifty states or in those 23 states in which judicial

foreclosures are the norm. Wells Fargo has begun a direct review of all of its foreclosure

matters while still permitting them to proceed. State Attorney Generals in all fifty states

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NAILTA Memorandum: The Foreclosure Moratorium Issue

October 14, 20102

have now asked judges across their jurisdictions to review their foreclosure practices to

ensure that bank documentation is correct. Ohio’s Attorney General, Richard Cordray,has even filed suit against GMAC Mortgage/Ally Capital. More suits will likely follow.

The conversation has even included talk of a nationwide foreclosure moratorium,

although the federal government has announced that it would not support such a drastic

measure.

What does the problem look like?

During the course of a foreclosure, a bank will file an affidavit to assert the date of 

default, to provide the amount owed on the mortgage and to make other fact-specificallegations concerning the note and mortgage. In order to obtain judgment from the

Court, the lender must file this affidavit and the affiant must have personal knowledge of 

the account in order to proceed. Without the affidavit, the bank cannot proceed to

foreclose. If the affiant lacks personal knowledge, the affidavit can be stricken andunless proven otherwise, can lead to the dismissal of the action.

As reported in some periodicals, banks have used what are called “robo-signers” to signthousands of affidavits and assignments without having the affidavits or assignments

properly notarized. In most states, if a document required to be recorded is not properly

notarized it is deemed fraudulent as a matter of law. If fraudulent, it passes no legal title.

The banking industry created the Mortgage Electronic Registration System (MERS) to

allow for the fast transfer of mortgages and notes without the requirement of filing

assignments in county recorder’s offices across the United States. MERS coincided withthe securitization efforts of Wall Street and allowed banks to quickly bundle groups of 

MERS mortgages into asset pools and be sold. In some cases, states require “wet ink”

signatures to transfer or assign mortgage interests. MERS does not provide for this typeof transfer. In those cases, a minority of courts have held that MERS lacks standing to

foreclose on behalf of banks that used MERS to quickly trade the mortgages on the open

market. It is estimated that there are 62 million MERS mortgages in the United States. If this argument gains traction, there could be massive problems for the MERS product.

These are technical problems that can foul up a foreclosure. These are the same

allegations being made in the current crisis.

What is the Risk?

The risk in this situation is that lenders who are foreclosing do not have the legal standing

to foreclose. In addition, the risk is that if they lack legal standing and/or proceed to

foreclose with fraudulent affidavits, the underlying foreclosure process will be reversedleaving the title insurers in a position where they will have to defend the unsuspecting

new owner through an issued owner’s policy of title insurance or the lender whose

employees may have created the defective condition in the first place. This could amountto huge claims losses if foreclosure sales across the country are undone.

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NAILTA Memorandum: The Foreclosure Moratorium Issue

October 14, 20103

Moreover, the risk to title insurers has enough potential to cause some, like Old Republic

Title and Stewart Title, to issue bulletins limiting their insurance and/or avoiding insuringtransactions involving the transactions in which these questionable foreclosure practices

were committed. Without title insurance, many of these foreclosed properties will remain

idle thereby jamming up an already overloaded system.

Though each state is different, the general legal consensus is that if a homeowner

purchases a home for value without knowledge of fraud or a defect in title, it becomes abona fide purchaser with rights greater than those possessed by the foreclosed prior

owner. In other words, the court is not likely to take away the home recently purchased

by an owner through an REO sale if they had no knowledge of the fraud committed bythe bank.

Additionally, even if a foreclosure would happen to be overturned by a court, the

resulting damage would, generally speaking, be the responsibility of the lender to repayto the Court or aggrieved party. This is a concept called equitable rescission and would

require the bank to pay the amount it obtained from an unlawful sale of the property tothe Court or wrongly foreclosed mortgagor.

However, this does not mean that a claim cannot be filed or that attorney’s fees will not

become necessary to defend against the attacks. As a result of the Stephan deposition andthe corresponding moratoriums, class action litigation is inevitable. Title insurers will be

asked to defend these actions. Class litigation is also extremely expensive. Therefore,

there is some risk to title insurers that this issue will result in losses to the industry.

What is the Potential Solution?

Right now, the national title insurance underwriters are working with the banks inquestion to arrive at a solution that will allow the foreclosures to continue and provide

title insurers with the assurance that if there is a defect, the banks will indemnify the

insurers for it.

There are a couple of noteworthy concerns with the indemnity concept. First, an

indemnity from a bank is only as good as the solvency of that bank. If the bank does not

survive, the indemnity is no longer valid. Second, as a result of the fraudulentforeclosure documents, many secondary market investors will be asking banks to take

back the mortgages that were sold as valid liens, but now are subject to scrutiny by the

courts as a result of the alleged fraudulent actions of the bank. These forced repurchaseswill cost the banks a considerable amount of money and lead to the first concern – bank 

insolvency.

Therefore, in our view, the indemnity concept will provide only a stopgap for the

industry. It is not a perfect solution to the problem. At this point, it is unknown if there

are any other public rescues to properly back up the insolvency issue.

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NAILTA Memorandum: The Foreclosure Moratorium Issue

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What Should You Do?

First, remain calm. There is no need to report that the sky is falling.

Second, check with your underwriters for more guidance. Follow their advice. Banks

are attempting to mitigate losses to their bottom lines. You should do the same. Theunderwriters may suggest their own due diligence measures that they want you to take

independent of obtaining an indemnity from the bank in question.

Finally, pay close attention to the foreclosure transactions that you are handling. If you

do REO or foreclosure related work, contact the banks and ask them if they will provideyour agency and your underwriter with an indemnity for any foreclosure related defect

that occurs in the process of foreclosing the subject property. Make sure that the

indemnity covers the expense of legal fees in defending those claims.

While we do not believe that there will be a significant number of foreclosures that will

be overturned to the detriment of title insurers, it would be better to remain vigilant to thepossibilities that exist so as to caution your customers between the fact and fiction thatcurrently guides this crisis.

If you have any questions created by this memo, please feel free to contact me via [email protected] or via telephone at (800) 344-7445.

I look forward to seeing all of you in Baltimore, Maryland at the Hyatt Regency Hotel –

Inner Harbor on April 11-12, 2011 for our Annual Conference where this and otherimportant title insurance related issues are sure to be discussed. Check our website at

www.nailta.org for more information.