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Faulty Foreclosures

By Adam Levitin

Here's a real disconnect in the faulty foreclosure story:

Last week Bank of America announced that it was restarting foreclosures after conducting a thorough review of its foreclosure process in two weeks and found everything to be all right.

Today the Wall Street Journal reports that Bank of America has found problems in 10-25 of the first "several hundred" loan files it has reviewed as it refiles foreclosures.  

So what's going on?  I think the only way to read these two stories together is to conclude that Bank of America didn't actually conduct much of a review during its brief foreclosure freeze.   At best, they engaged in some sampling of loan files, and at worst, they merely reviewed procedures, not actual files.  

Frankly, it was never credible that BofA (or GMAC) undertook a serious review of foreclosure problems.  BofA has taken months, if not years, to achieve a paltry number of loan modifications; why would anyone think that they could possibly give themselves a clean bill of health on foreclosures in a couple of weeks? 

Indeed, everything about this story seemed strange to me and left me wondering why the reporter wasn't more incredulous (maybe he was and BofA just didn't answer).  For example, are there 10 problem loans or 25?  Why can't BofA produce an exact number?  And what sort of problems was BofA even looking for?   If they were only looking for things like missing signatures or misspelled names, of course they would only find a limited number of problems.   But the BofA line seems to be "trust us."  Can anyone really trust mortgage servicers at this point?  

I was glad to hear Ben Bernanke announce this morning that federal regulators would be looking into the faulty foreclosure process.  But how is this inspection going to work?  The only way to actually answer whether we have a systemic faulty foreclosure problem is to have legally trained personnel examine a healthy sample of actual loan files on both the servicer and trustee level.  Is that what the federal bank regulators are going to do?  Do they even have the personnel?   I don't think bank examiners have the training to know what sort of legal documentation and procedures are required to properly consummate a foreclosure; it's just not part of what they do.  And are they going to look at the actual loan files or just talk to the servicers and get reassurances?  

The credibility of the federal response rests on the investigative process; unless there are sufficiently trained personnel looking at the actual files, we won't know the real scope of the problem, and any clean bill of health will be a white wash.  

Full post as published by Credit Slips on October 25, 2010 (boomark / email).