Erroneous documents. A freeze on foreclosures. Charges of fraud.
A flurry of developments have sketched an alarming scenario: that major U.S. banks rammed through foreclosure after foreclosure without giving many borrowers a fair shot at keeping their homes.
Questions have arisen about the scope of the problem, the effect on the nation's foreclosure epidemic and the likelihood that some people could regain their foreclosed homes.
Here's what you need to know about the unfolding foreclosure mess:
Q: What's the problem I'm hearing about foreclosures?
A. Four of the nation's largest banks _ JPMorgan Chase & Co., Ally Financial's GMAC Mortgage unit and PNC Financial _ have stopped foreclosures in some states. The biggest bank, Bank of America Corp., has done so in all 50 states. JPMorgan has done so in 41. They're checking to see if their employees made errors in loan documents needed to complete foreclosures. The banks say they think they'll resume foreclosures in those states within weeks. Others think it could drag on longer, especially as more state and federal officials intervene.
Q. What kinds of errors?
A: Evidence has surfaced of mistakes in the documents that mortgage companies present to a judge to foreclose on a home. Lenders failed, for instance, to show they have a legal right to foreclose on borrowers' homes. And some mortgage company employees have acknowledged they signed foreclosure documents without reading them. Many documents also appear to have been signed without a notary public witnessing that signature. That's a violation of law.
Q: How did this happen?
A: Mortgage companies have been overwhelmed by paperwork involving millions of foreclosures and defaults. Consumer advocates say the companies took shortcuts to manage the onslaught rather than hiring more staff. One way was to have a bank or a bank representative "robo-sign" thousands of documents he or she hadn't actually read.
Q: How widespread is the problem?
A: Only JPMorgan Chase has spelled out how many foreclosures it's suspending: about 115,000. But consumer advocates say the problems with foreclosure documents are widespread. Two of the biggest lenders, Wells Fargo & Co. and Citigroup Inc., say they have no plans to suspend foreclosures. They say they're confident they complied with state laws.
Q. Why is this all becoming known just now?
A. Consumer advocates had warned for years about shady foreclosure practices at mortgage companies and law firms they used. But the practices seized national attention only after GMAC's Sept. 20 announcement that it would halt some foreclosures. GMAC acted after evidence surfaced in Maine and Florida that a company employee had signed thousands of foreclosure documents without reading them. Another likely factor in GMAC's move was the Florida attorney general's August decision to review foreclosure practices at two law firms GMAC used.
Q: Why did some lenders halt foreclosures only in 23 states?
A: Those states require foreclosures to be approved by judges. Statements before a judge are made under oath. Any falsehoods are subject to perjury charges. If false documents in such cases aren't corrected, it's possible these foreclosure cases could be dismissed.
Q: What about the 27 other states and Washington, D.C.? What's happening with foreclosure cases there?
A: Except for Bank of America, major lenders are still pursuing foreclosures in those states _ for now, anyway. But attorneys general in all 50 states are reviewing whether mortgage companies violated their states' laws. Many of those states require mortgage lenders to complete detailed paperwork before homeowners can be evicted. It's harder for homeowners to challenge foreclosures in these states. They can still do so by filing their own lawsuits. But it's an uphill battle.
Q: What do banks mean when they say they're halting foreclosures?
A: It all depends on the bank. Most, like GMAC, are still initiating foreclosures but are no longer evicting people or selling foreclosed homes in states that require judges' approval. Others, like Bank of America, have stopped seizing foreclosed homes but continue to sell homes that had already been foreclosed on and are still processing new foreclosures.
Q: Why is the paperwork for mortgages so complex?
A: A big reason is that mortgages have increasingly been bundled into investments that were sold from investor to investor. Accurate ownership records weren't always kept. An electronic system was set up so banks could track a mortgage and avoid paying fees each time a mortgage was transferred. This system is called the Mortgage Electronic Registration System _ MERS for short. Lawyers have argued that MERS lacks the documentation to prove mortgage ownership. They say that means banks foreclosed on some homeowners whose loans the banks didn't actually hold. JPMorgan says it no longer uses MERS.
Q: What does all this mean for the foreclosure crisis?
A: The foreclosure freeze should cause only a temporary slowdown in the number of homes seized by lenders. One reason is that four states hardest hit by foreclosures _ Nevada, Arizona, California and Michigan _ aren't among the 23 states where many lenders are halting foreclosures. Even if the pace of foreclosures slows, some analysts say it should pick up again by spring.
Q: How will all this affect home prices and sales?
A: In home markets where foreclosures are on hold, prices could stop falling, at least for a while. That's because fewer foreclosed homes will be for sale. Agents who manage sales of foreclosed homes are already seeing some of those sales put on hold. These agents can't complete transactions involving mortgages handled by the lenders that have halted foreclosures. And a major title insurance company, Old Republic National, has said it won't insure foreclosed homes sold by JPMorgan and Ally Financial. It says it worries that flawed foreclosure paperwork could put the home's ownership in doubt. Another, Stewart Title, is clamping down on sales of foreclosed homes that may be linked to flawed documentation.
Q: Title insurance companies? What are they, and how are they involved?
A: Title insurers protect a homebuyer and mortgage provider in case any unpaid taxes, questionable ownership or other problems surface. Lenders won't issue mortgages without title insurance. Title insurers are trying to come up with a way to ensure they don't have to pay claims to the buyer of a foreclosed home if inaccuracies end up voiding the home purchase.
Q: What if I'm a homeowner in the middle of foreclosure? Could I get my home back?
A: You can hire a lawyer or approach a housing counselor who will examine your mortgage and foreclosure paperwork. Lawyers for homeowners will look for errors and use them to pressure lenders to at least forgive a portion of the homeowners' loans. But most experts say people who have lost homes to foreclosure don't have much hope in the long run, especially if banks can show judges that they have corrected any errors.
Q: What if I bought a foreclosed property? Could somebody take it back?
A: Not in most cases. Previous owners can sue the lender that sold the property. That won't be easy. Even if such lawsuits succeed, title insurance protects homebuyers from any claim on the property that surfaces after the deal has closed.
Q: Is anybody doing anything about this?
A: The attorneys general of all 50 states have announced a joint investigation. The federal agency that regulates government-controlled mortgage buyers Fannie Mae and Freddie Mac has told mortgage companies to fix their problems. Federal bank regulators are also examining the issue, as is Attorney General Eric Holder.
Zibel reported from Washington. Choi reported from New York. AP Real Estate Writer Alex Veiga contributed to this report from Los Angeles.