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Robo-signing – Spawning “Put Backs”

All of the media coverage of "robo-signing," the latest crisis in the mortgage industry, has made it THE news for several weeks.  Banks and lenders who are foreclosing on homes at a rapid pace are being taken to task for their procedures.  Basically, they used staff or hired attorneys to sign the required affidavits for proceeding with the foreclosure in court.  These affidavits state that the signer has personally seen the note, mortgage and other documents that prove the debt and delinquency of the borrower.

The problem is that these signers were putting out these affidavits at a scalding pace, sometimes more than 1000 a day in some offices.  Obviously, and some have admitted it, the signers had not seen the documents, much less scrutinized them.  Consequently, banks and lenders like GMAC and Bank of America have been frantically examining their documents and procedures while postponing foreclosures.  Bank of America has re-started their foreclosures stating that they're comfortable that their procedures are adequate.

All of this has resulted in investigations by Attorneys General in all states, and judges being very careful about verifying the validity of foreclosure actions.  The other problem that's surfacing is that all of this coverage is feeding another, and possibly more dangerous, activity.  It's "put backs" of MBS, Mortgage Backed Securities.  Those are securities backed by mortgages and sold in packages to investors.  The "robo-signing" isn't directly involved in mega-lawsuits trying to put back loans to the banks, but feeds investors' claims that the banks are lax in their verification procedures and this carried over into their loan practices.

When investors buy MBS, they rely on data about the types of borrowers, whether they're owners or investors, their debt-to-income ratios and other indicators of how strong the buyers are.  Investors are now suing the lenders claiming that the banks misrepresented the quality of the loans, thus the high default rates now.  Even the Federal Reserve Bank of New York is involved, suing Bank of America, the same bank that received government bailout funds.

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