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Wells Fargo Exec Admits Faulty Document Review, as Borrowers Get Wise to Foreclosure Fraud

It was just a few days ago that Wells Fargo insisted their procedures for foreclosures were just fine and nothing to worry about. Well

A Wells Fargo executive has acknowledged that he verified only the dates on up to 150 foreclosure documents he signed daily.

The executive made his admission in a May deposition involving a Washington state homeowner. He said he relied on co-workers to ensure that other information in the documents was correct.

Three other lenders, Ally Financial Inc.’s GMAC Mortgage unit, Bank of America Corp. and JPMorgan Chase & Co. have halted tens of thousands of foreclosures after similar practices became public.

Wells Fargo & Co. is confident that foreclosure documents involving the bank are accurate, and it has no plans to halt foreclosures, said Vickee Adams, a spokeswoman for the San Francisco-based bank. She noted that the Washington homeowner’s case was dismissed.

It’s a matter of time before they stop their procedures. It’s simply too dangerous for them, should they have an adversary like Israel Machado:

Israel Machado’s foreclosure started out as a routine affair. In the summer of 2008, as the economy began to soften, Mr. Machado’s pool-cleaning business suffered and like millions of other Americans, he fell behind on his $400,000 mortgage.

But Mr. Machado’s response was unlike most other Americans’. Instead of handing his home over to the lender, IndyMac Bank FSB, he hired Ice Legal LP in nearby Royal Palm Beach to fight the foreclosure. The law firm researched the history of Mr. Machado’s loan and found two interesting facts.

First, the affidavits IndyMac used to file the foreclosure were signed by a so-called robo-signer named Erica A. Johnson-Seck, who routinely signed 6,000 documents a week related to foreclosures and bankruptcy. That volume, the court decided, meant Ms. Johnson-Seck couldn’t possibly have thoroughly reviewed the facts of Mr. Machado’s case, as required by law.

Secondly, IndyMac (now called OneWest Bank) no longer owned the loan—a group of investors in a securitized trust managed by Deutsche Bank did. Determining that IndyMac didn’t really have standing to foreclose, a judge threw out the case and ordered IndyMac to pay Mr. Machado’s $30,000 legal bill.

Mr. Machado and his lawyer, Tom Ice, say they now want to convince the owners of the mortgage to cut Mr. Machado’s loan balance to between $150,000 and $200,000—the current selling price for comparable homes in his community near West Palm Beach. “The whole intent was to get them to come to the negotiating table, to get me in a fixed-rate mortgage that worked,” Mr. Machado said.

Suddenly, foreclosure fraud has become the potential stick that homeowners have long needed to force lenders to the negotiating table. It could theoretically operate in the same fashion as cramdown: instead of lenders wanting to modify the loan before a bankruptcy judge gets to do so, the lender would want to modify and not risk a years-long foreclosure process where they find out they have no standing to foreclose.

It doesn’t mean that everyone will suddenly get a loan modification, but it’s another tool in the shed to try and force compliance. Because this is dangerous territory for the banks.

The flawed practices that GMAC Mortgage, JPMorgan Chase and Bank of America have recently begun investigating are so prevalent, lawyers and legal experts say, that additional lenders and loan servicers are likely to halt foreclosure proceedings and may have to reconsider past evictions.

In some cases, documents have been signed by employees who say they have not verified crucial information like amounts owed by borrowers. Other problems involve questionable legal notarization of documents, in which, for example, the notarizations predate the actual preparation of documents — suggesting that signatures were never actually reviewed by a notary.

Other problems occurred when notarizations took place so far from where the documents were signed that it was highly unlikely that the notaries witnessed the signings, as the law requires.

On still other important documents, a single official’s name is signed in such radically different ways that some appear to be forgeries.

It just takes a few judges to throw down the hammer on some lenders, and call into question their entire practices, for them to put a “Loan Modifications Now!” sign out in front of the door so they don’t have to deal with foreclosures. If borrowers know their rights, they can really put the screws to these banks.

UPDATE: Just for those who think the borrower is still at fault for failing to pay his mortgage, and shouldn’t get out of it on a technicality – the banks are full of big boys and girls. They knew the acceleration of mortgage defaults, and going all the way back to the top of the bubble they knew how many mortgages were circulating through the system. They could have hired the appropriate number of people to track ownership of the title, and perform the due diligence if the mortgage failed. They didn’t want to spend the money to do it correctly. And I could care less if this comes back to bite the lender in the ass now. It’s called bad business practices. And they deserve everything they’re getting.

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David Dayen

David Dayen