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Robo-Signers Spell More Trouble for Banks

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Last week, "cream of the crop" banking giant JPMorgan Chase (NYSE: JPM  ) got slapped with charges of foreclosure laxity. Investors should take the hint: This is still no time to start piling back into banking stocks.

In a May 17 deposition, one Chase Home Finance employee admitted to signing about 18,000 foreclosure documents a month, among a group of eight managers. Unfortunately, these managers didn't take the time to actually read over the documents or verify the loan history in the majority of these cases.  Beth Ann Cottrell, the Chase employee in question, said, "My review is more or less signing the document unless it's questionable.  That means, somebody has a question and brings it to me and says, 'Beth, can you take a look at this?'"

Follow the leader
Yes, ladies and gentlemen, this is our country's finest banking institution. And in an industry that loves to follow the leader, JPMorgan Chase isn't alone in its negligence. One Bank of America (NYSE: BAC  ) employee also recently went on record to acknowledge that the bank employs "robo-signers" of its own. Renee Hertzler says that she signed as many as 8,000 foreclosure documents a month without looking through them. In a February deposition, Hertzler said, "I typically don't read them because of the volume that we sign."

Of course, JPMorgan Chase and Bank of America aren't the only two banking giants with robo-signers on their staffs. Cases are also pending against Wells Fargo (NYSE: WFC  ) , Deutsche Bank (NYSE: DB  ) , and Citigroup (NYSE: C  ) , among others.

Title insurers suffer
The accused banks could face court investigations for fraud, if evidence supports the allegations that these robo-signers intended to speed up the process of removing homeowners close to default. In response, both Bank of America and JPMorgan Chase have declared a foreclosure freeze in 23 of the states that require court approval to foreclose upon homes. JPMorgan's Chase Home Finance unit will halt more than 50,000 foreclosure cases. Currently, about 2 million homes are in foreclosure; in August, distressed sales or foreclosed homes accounted for 34% of all homes sold in the United States.

But now, those who bought these homes and their title insurers may be subject to claims because of the faulty documentation these banks submitted. As a result, one of the nation's largest title insurers, Old Republic International Corp. (NYSE: ORI  ) , will no longer provide insurance for any Chase foreclosed properties until the documentation issues get resolved. Shares of the company's stock fell Friday, along with those of other top title insurers such as First American Financial (NYSE: FAF  ) and Fidelity National Financial (NYSE: FNF  ) , as investors considered how the foreclosure freeze might affect the companies.

More housing problems
If you can't buy title insurance on a foreclosed house, then why would anyone actually buy the property? This issue certainly means more trouble for the banks with robo-signers, the aforementioned title insurers, as well as the economy and housing market as a whole. The last thing the housing market needs is more inventory, but that's exactly what this fiasco could produce.

Glenn Russell, a Massachusetts attorney who has already been successful in overturning foreclosure cases, told Bloomberg, "This is the most important issue of the whole mortgage mess, because families are being thrown out of their homes by people who may not have the right to do that."

This means foreclosure cases must be reevaluated, and lawsuits will be flying in as fast as the courts can handle the complaints. The process could take years to straighten out.

The Foolish bottom line
The media's made a lot of noise about recovery in the housing market, but I'm not convinced. I won't believe the hype until a great deal of housing's unsold inventory gets worked off, and foreclosures slow from their current rates. In August, foreclosures hit a new record high: 91,000 families were thrown out of their homes, and another 304,000 were in default.  Given the recent revelations, who knows how many of these foreclosures will be held up in a court of law? Until these issues are resolved, it makes sense for investors to be wary of banks with large mortgage portfolios, and the title insurers who protect buyers of foreclosed homes.

How much will these claims hurt the housing market? Let us know in the comment box below.

Andrew Bond owns no shares in the companies listed. Fidelity National Financial and First American Financial are Motley Fool Inside Value recommendations. The Fool owns shares of Fidelity National Financial. Try any of our Foolish newsletter services free for 30 days. The Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2010, at 8:46 PM, xetn wrote:

    I wonder if the "robo-signers" took their cue from out congress, where it seems none of them ever read the legislation they vote on.

  • Report this Comment On October 06, 2010, at 12:42 AM, hachmujt wrote:

    A councilor once told me that it is more effective to communicate without using absolutes. For example, it may be more productive for us to use statements such as: There are reports of many politicians signing legislation without reading it.

    In response to the article I wonder if regional banks such as GBCI are having problems like this. Does anyone know if this subject supports regional banks or hurts them also?

  • Report this Comment On October 06, 2010, at 1:36 AM, ilovesumm wrote:

    Geez , do the banks do anything right?

  • Report this Comment On October 06, 2010, at 2:10 AM, bigcat1969 wrote:

    What could get interesting is a trend that started in Florida to fight a foreclosure because the foreclosing bank sold the mortgage and no longer has the note. I gather that only the holder of the actual note can foreclose. Plus some notes are simply lost in the midst of all these transactions of slicing and dicing notes into investments and cannot be produced in court. If no note can be found, how can the home owner be forced to pay?

    Also some condo folks won a suit that claimed they were harmed by the bank refusing to foreclose and sell one of the condos, the got the condo scoot free and the bank got nothing.

    If banks keep losing lawsuits, losing the entire value of the home, getting fined, etc... won't the cost of getting a mortgage go up? The current cost assumes no problems with foreclosure mills and the current way of doing business, but if banks actually have to follow the law, the cost of doing business will increase.

  • Report this Comment On October 14, 2010, at 1:39 PM, windinhishair wrote:

    In August, I paid Chase (1) my Oct. mortgage paymt. & (2) paymt. on principal. Never got my Nov. bill. I called them: Oooops! You caught us, we're sorry. Due to "error," we put it all on principal, & never applied your Oct. mortgage paymt, so you're LATE. (Are they TRYING to put me in default w/o my knowledge?! No notice from them either... could have blown past my attention window.) I've had similar baloney with BofA and PNC on interest rates. Always an "error" - IN THE BANK'S FAVOR, a big argument with IDIOTS who can't even figure percentages, until I produce documents & my SUPERIOR math knowledge to prove them wrong. Then it's "oops, we made a mistake..." I feel sorry for average Americans w/o a good education up against these vultures. Don't get me started on Fleet Bank, Merrill Lynch, etc. DON'T TRUST ANY OF THESE GUYS! EVER!

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