In yet another major setback for the foreclosure settlement, Massachusetts Attorney General (AG) Martha Coakley filed a lawsuit against – JPMorgan Chase & Co. (JPM – Analyst Report), Bank of America Corporation (BAC – Analyst Report), Citigroup Inc. (C – Analyst Report), Wells Fargo & Company (WFC – Analyst Report) and Ally Financial Inc. – for alleged violation of foreclosure practices. Further, Mortgage Electronic Registration System Inc. (MERS) and its parent company have also been named as defendants.

Allegations

The lawsuit alleges that these five major mortgage servicers used various deceiving foreclosure practices to fast track foreclosures without properly following the rules. Some of the procedures followed by these banks included use of ‘robo-signers,’ misleading homeowners in relation to loan modification processes, utilizing flawed documents and illegally foreclosing a property.

Additionally, MERS, which provides database for mortgage servicers, has been accused of sloppy record keeping, hiding the identities of the holders of mortgage debt from borrowers and evading fees. The lawsuit also charges these banks for utilizing the MERS database without paying registration fees to the government.

Motives

Ms. Coakley commented that the primary motive behind the lawsuit is to provide proper accountability for the roles played by the banks in unlawful and illegal foreclosures. Additionally, the lawsuit aims to give proper and enforceable relief to the homeowners whose property had been wrongly foreclosed by the misconducts of the mortgage servicers.

Responses from the Banks

The officials of all these five alleged companies stated that they would fight the lawsuit. They have also expressed that a joint resolution would have been a better way to deal with foreclosure mess and the present lawsuit jeopardizes chances for broader relief.

The Story Behind

It all started more than a year ago, when JPMorgan, Bank of America and Ally Finance Inc. temporarily suspended foreclosures across the country, following the detection of faulty foreclosure paperwork. Following this, the U.S. bank regulators, along with the state AGs, geared up to take actions against mortgage servicers.

The banks and regulators along with the AGs were in the middle of settlement deal designed to provide new guidelines for foreclosure practices across the nation. However, several obstacles appeared in the settlement agreement between the mortgage servicers and the AGs.

Ms. Coakley along with the AGs of New York and Delaware has been vocal in arguing that banks should not be exempted from future liability. Some other states including Minnesota, Nevada and Kentucky have been raising concerns regarding the extent of civil protection that should be given to the banks as a part of the settlement deal.

Though at present the talks have ceased, differences have cropped up between the banks and the AGs over the amount of money (nearly $25 billion) that should be placed in the reserve account for those home owners with wrongly foreclosed property.

Still a Long Way to Go

The banks have been hoping to put the foreclosure matter behind them with the agreement to settle the issue with the state AGs. However, with the Massachusetts lawsuit their plans to avoid the legal issues have been jeopardized. Apart from Massachusetts, the AGs of California, New York, Delaware and Nevada have pulled themselves out of the settlement talks and have started their own investigations.

Additionally, the banks already facing a large number of litigations related to mortgages could face further liabilities if other states also follow the suit and start their own inquiries.

However, whatever be the case, either through settlement talks or lawsuits, clearing the foreclosure clutter will go a long way to resolve the mess. However, we are optimistic that various counteractive measures, if implemented correctly, would prevent yet another foreclosure crisis. But most importantly, it would leave a lasting impact on lenders, forcing them to be extra cautious during housing transactions