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SEC Whistleblower Program and Mortgage Industry Foreclosure Fraud

  
  
  
  


Ohio’s Attorney General has sued GMAC Mortgage and its parent Ally Financial Inc. alleging that GMAC, acting as a mortgage servicer, filed fraudulent documents during court proceedings in which GMAC was foreclosing on homes in Ohio.  Apparently a GMAC employee testified that he signed thousands of affidavits in foreclosure cases without verifying the content of the affidavit.  The Ohio AG is asking the court to grant an injunction preventing GMAC from proceeding to foreclosure in any pending Ohio case.

So what? 
On the chalkboard, a foreclosure is a straightforward legal proceeding and forging or committing some type of fraud is sort of like looking at the test of a buddy sitting next to you in school during an open book quiz.  Generally, an employee of a mortgage servicer prints out a fill-in-the-blank form affidavit.  The employee checks his computer system to determine the unpaid amount owed by the borrower.   The affidavit has boilerplate language in which the employee avers that the mortgage servicer has reviewed a true and correct copy of the mortgage and note.  Often times then the employee of the mortgage servicer attaches these three documents as exhibits to the foreclosure affidavit.   (I know this is an oversimplification.)

What if the mortgage servicer does not have the file?
Now it starts to get interesting.  Proving nonpayment is simply reviewing a computer screen from the mortgage servicer’s internal computer system.  Two minutes and done.    What about the mortgage?  Worst-case scenario is that the employee can get that from the appropriate real estate records office, which today is often a computer click away.  Done.  Now the fun part – the note itself.  The mortgage servicer may not have it!     

Where is the note?
I have no idea.  Apparently, GMAC may not either.  Keep in mind that the note may have past hands four to six times already or should I say the economic interest in the note has changed hands.  The originator of the loan may be defunct.  (Think Option One and New Century.)   The current owner may be one of those fancy Wall Street Asset backed trusts, which certainly does not have an office or warehouse.  Apparently it is easier to diagram the flow of the economic interest of the note holder (and when necessary park those economic interests off-balance sheet) than it is to keep tract of the physical note itself.   

Earning a SEC Whistleblower Reward.
If it is true then that mortgage companies and mortgage servicers are foreclosing on a large scale on homes without the proper paperwork but averring to the court that they do have the right paperwork, potentially these actions can amount to securities fraud.   Employees of these mortgage companies can report this misconduct to the SEC and/or a whistleblower lawyer, and potentially receive a cash reward under the new SEC Whistleblower Program.