The “robo-signer” foreclosure scandal has been around for some time. To date, however, most of the evidence of improper and illegal conduct by banks in foreclosing on homes has come from Florida, New York, and other states that require “judicial foreclosures.” In a judicial foreclosure, the lender files a lawsuit against the debtor/homeowner to obtain court authority to sell the property as a means of collecting on the debt.
Here in Washington, the vast majority of foreclosures are non-judicial. A non-judicial foreclosure happens outside of the court system and thus without judicial oversight. How does the process work? When the buyer of a home borrows money for the purchase, the buyer signs two important documents: a promissory note, and a deed of trust. The note is the legal document that establishes the debt owed. The deed of trust is the legal document that pledges the home being purchased to secure the debt if the borrower defaults. When the borrower defaults, the lender (the “beneficiary” under the deed of trust) notifies the trustee (the person identified in the deed of trust with the authority to sell the property upon default). After complying with various legal requirements primarily dealing with notice to the debtor/owner, the trustee can sell the property at public auction.
If the borrower believes that the foreclosure is inappropriate, the borrower must file a lawsuit against the lender to stop the foreclosure. Absent such a lawsuit, the entire non-judicial foreclosure process happens outside of court. Since very few borrowers file such a lawsuit, most non-judicial foreclosures come and go without anyone really examining whether the process was completed appropriately.
But now somebody has opened the lid of this non-judicial “black box” and peered inside — and boy is it ugly in there. Really ugly. The San Francisco (City and County) recorder’s office audited about 400 files of non-judicial foreclosures, about 16% of the non-judicial foreclosures over a nearly three year period (January of ’09 through November of ’11). Of these files, 99% of them at least suggested some legal violation or suspicious documentation; 84% had at least one clear legal violation; and fully two-thirds had four or more clear legal violations or irregularities.
But that’s California, right? It’s different here in Washington, right? Sadly, while that may be true as to our weather and our easy-going attitude, its not true in this context. The actual report of the audit makes for fascinating reading, beginning with its description of the non-judicial foreclosure process in California. It turns out that the process there is basically identical to the process here. And the mortgage market is a national one. So whatever shenanigans were going on in the Golden State were likely going on here as well. So its safe to assume that an audit of non-judicial foreclosures in King County would reveal a similar number and percentage of non-judicial foreclosures that did not comply with the law. And that simply is not good.
In a future post I’ll examine the implications for buyers of REO (i.e., bank-owned) homes, since all of these homes were previously foreclosed upon by the bank.