Turn On The Lights, Watch The Roaches Scatter, Part 37

Time for another Forclosuregate update, and it's from right here in Ohio.

When James Renfro had to stop making payments on his two-story fixer-upper in Parma, Ohio, a suburb of Cleveland, he triggered events that were supposed to result in the forced sale of his home.

That Nov. 15 auction has been canceled because of defects in documents submitted by his loan servicer, Ally Financial Inc.’s GMAC Mortgage unit. Two affidavits about Renfro’s home were signed by Jeffrey Stephan, a GMAC employee who said in sworn depositions in Florida and Maine that he hadn’t read thousands of affidavits he’d signed.

Renfro’s case has created a showdown between GMAC and Ohio’s Attorney General Richard Cordray. Cordray has asked Cuyahoga County Court of Common Pleas Judge Nancy Russo not to let GMAC simply submit new documents to cure defects without consequences. He’s taken the same stand against Wells Fargo & Co., which has said it found defects in 55,000 foreclosures.

“This is just the first,” said Cordray, who filed an amicus, or friend-of-the-court, brief in the Renfro case. He argued that Russo should punish GMAC, the fourth-largest U.S. mortgage lender, for its conduct.

The judge today in Cleveland set an accelerated schedule for evidence-gathering in the case, leading up to a Feb. 17 hearing on the integrity of the loan documents. Cordray’s office plans to file a motion tomorrow asking to take part in the case and participate in so-called discovery. 

So why is the Renfro case so important?  This is why.

The precedent set by the case might hasten a settlement between home lenders and the attorneys general of the 50 U.S. states, who are investigating allegations of fraud in foreclosure filings. Those being probed include San-Francisco- based Wells Fargo, which has said it will re-file foreclosure affidavits involving statements that “did not strictly adhere to the required procedures.”

In potentially thousands of cases across the U.S., judges have the power to impose “sanctions, penalties, fines and even default,” as the banks try to submit substitute paperwork to proceed with flawed foreclosures, Cordray said.

“The banks want to wish this away and pretend like it doesn’t exist,” he said. 

And that settlement, plus the fines, penalties and defaults may cost the banks hundreds of billions, that's why.  Couldn't have happened to a more deserving pack of jackals.

The judgment in favor of the homeowner, Diane Yano-Horoski, which is being appealed, has alarmed the nation's biggest lenders, who say it could establish a dramatic new legal precedent and roil the nation's foreclosure system.

It is not the only case that has big banks worried. Spinner and some of colleagues in the New York City area estimate they are dismissing 20 to 50 percent of foreclosure cases on the basis of sloppy or fraudulent paperwork filed by lenders. 

Their decisions illustrate the central role lower court judges will have in resolving the country's foreclosure debacle. The mess came to light after lawsuits and media reports showed lenders were routinely filing shoddy or fraudulent papers to seize the homes of borrowers who had missed payments. 

The banks are in deep trouble now and they know it.