Recently, several major national lenders have responded to the so-called “robo-signer” scandal by announcing either freezes or new procedures relating to foreclosures in various states, including Colorado. The scandal revolves around the admission by several low-level employees at national lending institutions that they routinely signed affidavits necessary for banks to complete foreclosures without having any actual knowledge of the facts they were swearing to, the significance of what documents they were signing, or even whether the claims in the affidavits were true. Some of these individuals claimed to have signed up to 2000 affidavits per day – a feat which spawned the term “robo-signer.”
While these claims may be unsettling, they are not altogether surprising given the fact that the recent economic downturn created two distinct situations that combined to drastically increase the number of foreclosures in the United States: 1) the overall economic downturn caused more people to become unable to pay their mortgage; 2) the collapse of the housing “bubble” caused a massive devaluation of home values, which meant that a large number of homes became “upside down” almost overnight.
What Is the Scandal About?
As major lenders struggled to keep up with the massive increase in foreclosures, they became sloppy with their internal procedures relating to these foreclosures. This sloppiness resulted in thousands of foreclosures being completed with scant factual investigations. There is increasing evidence that one reason banks did not want to closely scrutinize their default files was because they could not locate the actual original legal documents giving them interest in the property and allowing them to foreclose.
What Impact Will the Scandal Have On Foreclosures?
Ultimately, the scandal’s bark may be worse than its bite. It is clear that the vast majority of foreclosures processed by big banks, even those using robo-signers, were based on actual defaults by borrowers. Homeowners know whether or not they are paying their mortgage. In every state a homeowner who actually paid their mortgage would have had a chance to contest any truly improper foreclosure. Therefore, the number of homeowners who were actually “victimized” by this process is most likely very small.
Regardless, the public outcry relating to what is, at best, widespread negligence, and at worst, systemic fraud by major banking institutions, means that banks are being forced to delay processing new foreclosures as they evaluate their procedures and answer difficult questions about the entire foreclosure industry. (On November 16, 2010, Congress commenced hearings on the foreclosure crisis. These delays are going to prolong the process of getting the glut of foreclosed homes off of the market, which will in turn prolong the overall recovery of property values throughout the nation.
Why Associations Should Care About the Scandal
A related outcome of the scandal is that some title companies have either postponed or stopped issuing title insurance for homes that were foreclosed upon by the worst robo-signer offenders. Generally, without title insurance a home cannot be sold. Therefore, the title companies’ actions could severely impact the marketability of post-foreclosure homes and further delay the process of getting new, paying owners into communities.
While the impact of this national scandal may be somewhat less in Colorado because we are the only state that uses the public trustee system, any decrease in residential foreclosures by banks could still have a considerable negative impact on Colorado community associations.
Banks were already slow in commencing foreclosures and often waited up to one year after the initially scheduled foreclosure sale date to actually go to sale. Any additional delay resulting from the scandal will mean more abandoned homes in communities and more “lame duck” homeowners simply waiting for the bank to foreclose upon them. These owners have little to no incentive to take care of a property they know they are going to lose and even less incentive to pay Association dues relating to that same property.
While there is little community associations can do to force banks to move more quickly to foreclose on delinquent homeowners, they are not entirely without options:
- associations are free to foreclose on their assessment lien in a similar way to how the banks foreclose on their lien.
- while a variety of factors may make some properties more attractive for an association-initiated foreclosure than others, an association should always consider foreclosure as a means of taking control over abandoned homes and speeding up the process of finding a new owner.
- if an association becomes the owner of a property through foreclosure, it is free to sell or rent the property in an effort to recoup some of its losses.
Usually, once an association forecloses, a bank will start its own foreclosure relatively soon afterwards. That’s why association foreclosures have an inherent value completely separate from actually collecting past due amounts – they force a bank to act when it may not otherwise.
If you have any questions about how best to respond to foreclosures – or lack of them – in your community, feel free to contact us for an analysis of your community’s situation.