The "robo-signing" foreclosure documentation scandal could make it easier for financially distressed homeowners to get a loan modification - if it doesn't throw a wrench into the entire process first.

The Congressional Oversight Panel's (COP) newly released report on the robo-signing controversy notes that straightening out the foreclosure documentation mess could make it more expensive for banks to pursue foreclosures. That could make banks more willing to grant loan modifications and on more favorable terms to at-risk borrowers.

At the same time, the mortgage documentation problems revealed by the scandal could undermine the loan modification process itself, including the government's Home Affordable Modification Program (HAMP) by calling into question the right of mortgage servicers to grant loan modifications in the first place.

Trail of ownership may be compromised

Here's the problem: In the robo-signing controversy, it was revealed that representatives of at least some major banks were routinely signing off on tens of thousands of foreclosure affidavits without reading them. That's a problem, because by signing the affidavits they're supposed to be certifying the accuracy of the information it contains - namely, that the bank owns the mortgage note or represents the owner and has the right to foreclose.

The banks involved, including Bank of America and JP Morgan Chase, have indicated they are confident that the affidavits are accurate and that addressing the problem is primarily a matter of getting the paperwork in order.

However, the COP report expresses concern that the robo-signing controversy could be a sign of a far more serious problem - that in the complication process of mortgage securitization, in which mortgages are repeatedly resold and bundled into investments, lenders may have lost track of who exactly owns an individual mortgage or, at least, the documentation trail needed to prove it.

Loan modifications could be challenged

That creates several problems for loan modifications, in particular the government HAMP program. If a lender can't prove ownership of a mortgage, it can't prove the right to foreclose - and if it doesn't have the right to foreclose, it doesn't have the right to modify the mortgage either. And if the modification is invalid, there's the possibility that the investor holding the mortgage could demand full payment for the accumulated difference between the original and modified monthly mortgage payment.

Legal underpinnings called sound

Many analysts believe that the documentation trail underlying contemporary mortgages will prove to be sound and that mortgage servicers will be able to prove ownership of the loans. In a white paper released today in response to the COP report, the American Securitization Forum concluded that contemporary mortgage trading practices are consistent with long-established legal principles under the Uniform Commercial Code and common law.

Even so, the question remains as to how difficult it may prove to document those claims, should attorneys for foreclosure-threatened homeowners seek to test them. If that happens in significant numbers, lenders may find it faster and cheaper to cut a deal, either through a loan modification or perhaps with greater willingness to approve a short sale or other foreclosure alternative.

Published on November 17, 2010