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Monday, March 7, 2011

How robo signing impacts home owners

Robo-signing is a process used by mass mortgage owners that can impact homeowners by facilitating a confusing and potentially fraudulent foreclosure process. Instead of using the proper officials to verify and notarize ownership and delinquency information on mortgages, robo-signing expedites this process via proxy authentication, human or computer. Since home ownership documentation is typically both recorded and required to prove ownership, the use of robo-signing may have the potential to overlook actual ability to verify ownership, and right to foreclose via abuse of the affidavit procedure.

The issue of robo-signing is a legalistic and bureaucratic one. Since mortgages are highly regulated financial instruments, robo-signing holds the potential to sidestep regulatory requirements such as authentic documentation and homeowner rights. However, due to a rule called 'safe harbor', a certain amount of good faith in transfer of securities such as mortgage backed securities is in some ways permissible. If good faith is violated through fraudulent practice however, the mortgage owners could have a legal problem on their hands. Thus, in cases where robo-signing has been proven to be in violation of good faith, safe harbor may not apply due to the competing affidavit authentication requirement.
The above robo-signing scenario impacts the homeowner by placing them in a situation of bureaucratic limbo. Moreover, homeowners can be harmed by robo-signing because a process that should be fairly straight forward for them becomes navigation of a maze of mortgage repurchases to determine who to pay and what the next step should be. In other words, robo-signing impacts homeowners by complicating and obfuscating servicer information. This can lead to undue stress for the homeowner and may also delay the mortgage modification process.

Robo-signing can also impact homeowners by stalling the foreclosure process. If, in some cases the authentication cannot take place or is delayed due to a filing error, locating and verifying the documents authorizing foreclosure is, or should be postponed. Whether or not this is a good impact on homeowners is debatable. The delay may allow them more time to live without making mortgage payments, but it may also make it that much more difficult to catch up on the mortgage given the opportunity.

How robo-signing impacts homeowners is an example of how documentation short-cuts can lead to financial problems for financial institutions later on. By gambling on the fact ownership papers can be located, rather than should be located, is an act of faith that requires the mortgage buyers to take on additional risk. This derivative risk is related to the problems that caused credit default swaps and mortgage backed securities to be an issue during the financial crisis of 2008. That is to say, risk is underestimated due to overconfidence in the derivative processing.

Sources:

1. http://bit.ly/c6zuyf (New York Attorney General)
2. http://bit.ly/bdpBFf (Federal Deposit Insurance Corporation)
3. http://bit.ly/bybalj (FDIC: Safe harbor extension)
4. http://bit.ly/ciFACS (NOLO)