Texas, Iowa and Illinois have started investigations into mortgage practices at Ally, while California, which isn’t affected by GMAC’s action, ordered the company to stop foreclosures unless it can prove compliance with state law, according to statements. Ally said it has issued a “more robust policy” on processing foreclosures, increased staff to handle documents and instituted more training for employees.
“Preserving the integrity of the foreclosure process is of the utmost importance,” Ally said yesterday in a statement. “While we are exercising an abundance of caution in the review process, we are confident that the processing errors did not result in any inappropriate foreclosures.”
Ally, the Detroit-based auto and home lender run by Chief Executive Officer Michael Carpenter, faces allegations that its GMAC unit evicted homeowners without verifying that borrowers actually defaulted or that the firm had legal standing to seize the homes. GMAC Mortgage notified agents and brokers on Sept. 17 that it had suspended evictions in 23 states.
Ally said this week it found a “technical” defect in its foreclosure process. Employees signed affidavits without a notary present or with information they didn’t personally know was true. The company said the information in the documents was “factually accurate.”
‘Massive Defects’
“We’re seeing and hearing massive defects across the industry,” said David Lykken, president of Mortgage Banking Solutions, an Austin, Texas-based consulting firm. “What’s going on at GMAC is endemic.”
Ally didn’t say how much more staff it added to process foreclosures. The unit was sanctioned for similar procedures in 2006, ordered to submit an explanation and confirmation that the policies were changed and told to pay defendants’ legal costs of $8,135.55, court documents show.
Iowa Attorney General Thomas Miller, who leads an 11-state working group of attorneys general and bank examiners exploring ways to prevent foreclosures, opened an investigation Thursday. Texas Attorney General Greg Abbott started a probe earlier this month. Illinois Attorney General Lisa Madigan said the company may have violated the state’s consumer fraud act, and demanded a meeting and information, according to a statement.
California Attorney General Jerry Brown said yesterday that “prior to resuming foreclosures here, the company must prove that it’s following the letter of the law,” according to a statement.
Corrected
Ally said in its statement that the defect was identified and corrected “a few months ago” and that it expects to resolve the “vast majority” of cases by the end of the year.
Ally told mortgage-finance company Freddie Mac about the potential for faulty foreclosures weeks before halting its own evictions, according to two people briefed on the matter. Ally informed Freddie Mac on Aug. 25 that affidavits for court proceedings might not be valid, according to a person with direct knowledge of the matter.
By Sept. 1, Freddie Mac had notified its lawyers and stopped related foreclosures and evictions, said the person, who declined to be identified because the matter hasn’t been formally disclosed.
Fannie Mae, the largest government-backed mortgage firm, said it told lawyers of flaws in GMAC documentation after it was alerted. Fannie Mae spokesman Brian Faith declined to say when GMAC contacted the Washington-based company.
U.S. Bailout
Ally, Freddie Mac and Fannie Mae are majority-owned by the U.S. government, which has been pressing lenders to reduce foreclosures as evictions hit record levels. Ally is the beneficiary of more than $17 billion in U.S. bailout funds, and the U.S. holds a 56.3 percent stake.
Ally declined to say how many loans may be affected. The firm, formerly known as GMAC Inc., ranked fourth among U.S. home-loan originators in the first six months of this year with $26 billion, and fifth among loan servicers, with a $349.1 billion portfolio, according to Inside Mortgage Finance, an industry newsletter.
Servicers conduct billing and collections on mortgages, sometimes for other firms that actually own the loans, and handle foreclosures when borrowers default.
Florida Attorney General William McCollum said last month he was investigating three Florida law firms handling foreclosures.
Lawyers
In a letter to Fannie Mae Chief Executive Officer Michael J. Williams, House Financial Services Committee Chairman Barney Frank of Massachusetts and two other Democrats on the panel questioned the firm’s selection of lawyers and servicers to manage its loans.
“Fannie Mae seems to specifically delegate its foreclosure avoidance obligations out to lawyers who specialize in kicking people out of their homes,” the lawmakers wrote in the letter. “The legal pressure to foreclose at all costs is leading to a situation where servicers are foreclosing on properties on which they do not even own the note.”
Representatives Alan Grayson and Corrine Brown, both of Florida, joined Frank in signing the letter.
Regulators have initiated reviews of GMAC Mortgage’s foreclosure process. The Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, will “take appropriate action,” agency spokesman Stefanie Mullin said.
The Office of the Comptroller of the Currency asked its examiners to talk to their banks about the procedures as part of the agency’s ongoing supervision, spokesman Bryan Hubbard said.
--With assistance from Lorraine Woellert in Washington, Denise Pellegrini in New York, Margaret Cronin Fisk in Detroit and Joel Rosenblatt in San Francisco. Editors: Dan Reichl, Paul Tighe.To contact the reporter on this story: Dakin Campbell in San Francisco at dcampbell@bloomberg.net.
To contact the editor responsible for this story: Alec McCabe at amccabe@bloomberg.net.
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