Evictions of many up in air

Mortgage titan admits ‘defect’

— Some of the nation’s largest mortgage companies used a single document processor who said he signed off on foreclosures without having read the paperwork - an admission that experts said may open the door for homeowners across the country to challenge foreclosure proceedings.

The legal predicament compelled Ally Financial Inc., the nation’s fourth largest home lender, to halt evictions this week of homeowners in 23 states. Arkansas is not among those states.

Ally officials say hundreds of other companies, including mortgage giants Fannie Mae and Freddie Mac, may also be affected because they use Ally to service their loans.

As head of Ally’s foreclosure-document-processing team, Jeffrey Stephan, 41, was legally required to review cases to make sure the proceedings were justified and the information was accurate. He was also required to sign in the presence of a notary.

In a deposition, he testified that he did neither.

The reason, analysts said, may be the sheer volume of the documents he had to hand-sign: 10,000 a month.

Stephan’s job at Ally is arguably one of the least enviable in the mortgage business: formally signing off on foreclosure papers that his company would submit to the courts to get approval to evict delinquent homeowners and resell their homes. He had been at that job for five years.

From his office in suburban Philadelphia, Stephan oversaw a team of 13 employees that brought documents to him for his signature at a rapid clip. Stephan did not respond to messages left at his work and home.

Ally Financial, whose GMAC Mortgage unit halted the evictions, said its filings contained no false claims about home loans.

The “defect” in affidavits used to support evictions was “technical” and was discovered by the company, Gina Proia, an Ally spokesman, said in an e-mailed statement to Bloomberg News. Employees submitted affidavits containing information they didn’t personally know was true and sometimes signed without a notary present, according to the statement.

“The entire situation is unfortunate and regrettable,” Proia said.

Ally spokesman James Olecki said the company services loans “from hundreds of different lenders,” but he declined to provide names. Olecki said Stephan still works for Ally but added, “We cannot comment further about his position.”

Spokesmen for Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., confirmed Tuesday after inquiries from The Washington Post that they use Ally to oversee some mortgages. The companies have opened internal reviews to assess the scope of any potential issues.

Ally, Fannie Mae and Freddie Mac - all troubled mortgage companies that received bailouts by the federal government during the financial crisis - declined to say how many loans might be affected. The Treasury Department, which owns a majority stake in Ally and seized Fannie Mae and Freddie Mac in 2008, also declined comment.

Fannie Mae and Freddie Mac, created by Congress to finance mortgages and encourage home ownership, have in recent years been repossessing houses at record numbers. Fannie Mae alone reported recently that 450,000 of its single-family loans were seriously delinquent or in the foreclosure process as of June 30. That’s nearly 5 percent of all the loans it guarantees.

JUDICIAL FORECLOSURES

While the lenders may have had legitimate cause to foreclose, the mishandling of the paperwork has given homeowners ammunition in their fight against foreclosure.

Lawyers defending homeowners have accused some of the nation’s largest lenders of foreclosing on families without verifying all of the information in a case, but it has been hard for them to stop foreclosure proceedings.

Ally Financial’s moratorium comprises only the 23 states that mandate a court judgment before a lender can take possession of a property. But if Stephan signed documents related to foreclosures in states without this requirement (it’s unclear if he did), it could help a much broader range of borrowers.

Iowa Assistant Attorney General Patrick Madigan, chairman of a national foreclosure prevention group composed of state attorneys general and lenders, said the fallout from the Ally review could be enormous because Stephan’s actions could be considered an unfair and deceptive practice.

“If servicers are submitting court documents that aren’t true or that have not been verified, that is of great concern,” Madigan said.

Aaron Sadler, a spokesman for Arkansas Attorney General Dustin McDaniel, said Wednesday that the mishandling was a technicality and that foreclosure laws in Arkansas are written in such a way that a technicality in document handling wouldn’t preclude a foreclosure proceeding.

Stephan revealed his shortcuts when reviewing the files in depositions taken in December and June for two court cases involving families trying to keep their homes. He said he would glance at the borrowers’ names, the debt owed and a few other numbers but would not read through all the documents as legally required. He would then sign them. The files were packed up in bulk and sent off for notarization several days later.

Stephan testified he did not know how the “summary judgment” affidavits he signed were used in judicial foreclosure cases.

At the rate Stephan was reviewing files, if he worked an eight-hour day he would have had an average of only 1.5 minutes for each document.

“A ridiculous amount of time for something so critically important,” said Thomas Cox, an attorney in Maine who was one of those who deposed Stephan. He added that Maine and Florida law enforcement officials are investigating the matter.

Stephan was the only employee signing papers for foreclosures that were to be submitted to courts that did not involve bankruptcies. The latter cases, which were more complex, were handled by a separate department.

Attorneys working on behalf of homeowners said the setup at Ally was not unusual.

“All the banks are the same; GMAC [Ally Financial] is the only one who’s gotten caught,” said Patricia Parker, an attorney at Jacksonville, Fla.-based law firm Parker & DuFresne. “This could be huge.”

Christopher Immel, an attorney in Florida who deposed Stephan for a case in Palm Beach County, said he thinks Stephan was not a rogue employee but one who was performing his job responsibilities as the company told him to do.

ALLY UNIT SANCTIONED

Ally Financial’s GMAC Mortgage unit was sanctioned in 2006 for similar practices, court documents show.

GMAC gave “false testimony” when it justified foreclosures by submitting sworn affidavits signed by a mortgage executive who later said in a deposition she didn’t actually review the loan documents or sign in the presence of a notary, according to a 2006 court order filed in Duval County, Fla. In response to the sanctions, GMAC Mortgage directed employees to “read and fully understand” court documents before signing.

Mark Paustenbach, a spokesman for the U.S. Treasury Department, which owns 56.3 percent of Ally Financial, didn’t respond to requests for comment. Kim Fennebresque, a director named by the Treasury to serve as an independent board member, didn’t return calls.

Ally Financial told brokers and agents to stop evictions in Connecticut, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Nebraska, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin.

Information for this article was contributed by Julie Tate of The Washington Post, Dakin Campbell and Lorraine Woellert of Bloomberg News and Paul P. Quinn of the Arkansas Democrat-Gazette.

Front Section, Pages 1 on 09/23/2010

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