In a bizarre twist to the mortgage crisis that has swept across the U.S. in recent months, the Attorneys General for dozens of states are taking steps to halt foreclosures in the their states.  

Most recently, the Texas Attorney General,  Greg Abbott, sent a letter to thirty or so mortgage-loan servicers doing business in Texas.  Here is a list of the mortgage companies receiving letters from the AG’s office.  The letter demands that the recipients immediately halt:  

     1. all foreclosures;

     2. all sales of properties previously foreclosed upon; and

     3. all evictions of persons residing in previously foreclosed upon properties.

The AG is demanding that the banks cease these activities until a review of their internal processes can be conducted. 

Whether or not the AG has the actual authority to stop anything is arguable.  After all, these are banks with contractual agreements with their customers (in the form of deeds of trust) that spell out what the parties to that contract can and can’t do.  What is clear in most deeds of trust is that “if you don’t pay, you can’t stay.”  That is, if you don’t make your mortgage payment then the mortgage company has the contractual right (with proper notice and opportunity to cure any default) to foreclose on the lien that secures your repayment. 

The AGs are not saying that foreclosures in and of themselves are evil and their citizens should be above the law and beyond their contractual agreements.  That would be silly. 

What they are saying though is that there appears to be evidence that some of these foreclosures may not be being handled in a lawful manner.  In that case, they may be invalid, unlawful, and/or most significantly, give rise to claims of fraud.  The allegations are that of widespread sloppiness, corner-cutting and perhaps outright fraud in the way some banks are processing the multitude of delinquent loans, foreclosures, loan modifications, evictions and the like that have inundated their industry over the last few years.

Specifically, Mr. Abbott’s office charges these banks with, among other things: 

     Signing thousands of documents a month without even reading them;

     Making affidavits to facts they couldn’t possible be aware of;

     Notarizing documents before they are signed by the party; and

     Signing documents with inaccurate statements about loan balances, changes, payments, etc.

So what can the Attorney General do about all is? 

Well, what the office does have the right to do is bring lawsuits against companies and individuals who are alleged to have committed fraud against the state’s citizens.  So what Mr. Abbott’s office has done is send a demand letter to these loan servicers saying basically ” it has come to our attention that you may have engaged in certain conduct and if you have we may sue you on behalf of our constituents for engaging in deceptive trade practices in our state”.  (That’s not exactly what was said, but you get the point.)  The demand letter is a required step under the Texas Deceptive Trade Practices Act before a lawsuit can be filed.

Whether lawsuits will be filed or not, whether the loan servicers will be able to properly document their files, whether any missteps were made, etc., will remain to be determined.  But it seems highly unlikely that the recipients of the letter will be able (by any stretch of the imagination) to meet the 10-day deadline issued for producing the documentation demanded by the AG’s office.  That would seem to suggest that this move was merely a formality and a necessary first step in a grander plan.

The processes for approving short sales, loan modifications, foreclosures, and the like these days is ludicrous at best.  I have just negotiated my way through one recently for a client and it was a joke how many twists and turns we took.  That story will be the subject of another blog.  But the point is that there are literally millions of stories just like mine waiting to be told. It’s an enormous problem waiting for a solution. 

In its unprecedented move, the AG’s office has certainly added to the drama of this unfolding story.  Whether it will be part of the solution remains to be seen.   At the moment it would appear that it’s business as usual.  See this video report regarding foreclosure activity as recently as yesterday in Houston’s massive Harris County.

Stay tuned.