The foreclosure mess enters its litigation phase

An awful autumn for the housing lending industry: murky paper trails, sloppy securitizations and growing mountain of foreclosure proceedings. According to The American Lawyer, BigLaw firms may be able to pick up some work sorting out the mess left by the “foreclosure mill” law firms and their “robo-signer” minions:

[A] review of state and federal cases filed in the last few weeks shows lenders are turning away from the "foreclosure mills" and to large law firms when homeowners fight foreclosure and challenge banks to prove their documents are legit. In Florida alone, the following law firms have popped in contentious foreclosure cases in which judges have ruled homeowners might be onto something: Morgan, Lewis & Bockius, Greenberg Traurig, Akerman Senterfitt and Gray Robinson.

The NY Times Dealbook foresees 2 broad areas which will see a lot of legal maneuvering in the wake of these faulty foreclosures:

1.    Government Investigations

The parties accused of misleading the court could be investigated for fraud if there is “evidence of systematic action designed to improperly speed up the foreclosure process at the expense of the defaulting homeowners.” Mail and wire fraud are the possible charges. The federal false statement statute might come into play for loans guaranteed by HUD or the V.A.

2.     Civil Suits

a.     JPMorgan and Bank of America are public companies, therefore the SEC may open a civil investigation of their disclosures to investors about foreclosures and potential losses. (“The new S.E.C. whistle-blower program in the Dodd-Frank Act offers significant rewards to those who disclose information about securities fraud, and that may prove to be one avenue for gathering information from those involved in the foreclosure process who spotted alleged wrongdoing at companies.”)

b.    There are likely to be two potential classes of plaintiffs against the banks:

i.     Homeowners who earlier lost their properties to foreclosure in which questionable documents were filed

ii.     Title insurance companies that may be on the hook for claims by purchasers of foreclosed properties who now have a cloud on the title to their house.

Dealbook’s Peter Henning observes, “Normally these types of claims would be under state law for fraud, misrepresentation and civil conspiracy, but the cases could be brought in federal court under the Racketeer Influenced and Corrupt Organizations Act, better known as RICO.”

-posted by brian

(AP Photo/Frank Franklin II)

Anti-foreclosure protest outside a Bank of America office