Last week, GMAC Mortgage's parent company, Ally Financial, called for a halt on residential foreclosures and a suspension of REO sales in 23 judicial states that may have been impacted by what the company said was a glitch in its internal procedures
It soon came to light that the ""glitch"" traced back to one GMAC servicing executive who testified in a sworn deposition that he was signing off on foreclosures right and left because of the sheer volume of case files crossing his desk, without checking the paperwork for accuracy or signing the documents in the presence of a notary.
Reports have surfaced that a whole host of GMAC staff members are guilty of the same thing, sending cases through the foreclosure assembly line without verifying they were legally justified, as mandated by state law.
GMAC says all new foreclosures are proceeding as planned; the foreclosure freeze applies to only certain cases impacted by the procedural error. In a statement released last week, the company said any resulting foreclosure delays ""are expected to be resolved within the next few weeks and certainly before year end, without serious consequence.""
But concerns have surfaced that the incident could give cause for homeowners to file lawsuits against the lender, bondholders of the affected mortgages could be impacted, and that the problem could reach beyond just GMAC since the company also services mortgages for other firms, including Fannie Mae and Freddie Mac.
A number of analysts have since weighed in on GMAC's foreclosure snafu. On Friday, Moody's Investors Service placed GMAC's primary and special servicer quality ratings on review for possible downgrade, citing ""irregularities in GMAC Mortgage's foreclosure process that have recently come to light.""
""These incidents could result in delayed foreclosures and longer REO timelines, as well as reputational risk, legal challenges to previously completed foreclosures, and
long-term liquidity concerns for GMAC Mortgage,"" Moody's said.
The credit ratings agency also issued a notice Monday stating that it was placing places $7.6 billion of GMAC-serviced residential mortgage-backed securities (RMBS) under review for possible downgrade.
Moody's says GMAC Mortgage's improper affidavit preparation procedure could cause the RMBS securitization trusts to experience higher losses due to (i) extended foreclosure and liquidation times, with some foreclosures possibly having to be redone and (ii) litigation costs, including class-action suits, that could result in legal expense, damages and other court fees.
According to Moody's, GMAC has implemented revised affidavit submission procedures and increased staffing levels in its default servicing unit to address the foreclosure operational issues.
The analysts at Barclays Capital say the procedural fix should resolve the issue because the information in question should be easy to substantiate.
""However, the added scrutiny is likely to further slow down the foreclosure process in these states. Severities are likely to increase as well as a result of both longer timelines and higher legal costs of processing judicial foreclosures. There remains some possibility that this added scrutiny could reveal some unanticipated issues,"" Barclays said in commentary released to DSNews.com.
Interestingly enough, the research firm said, ""This could be a mild positive for housing if distressed supply is curtailed in the winter months in some of these states,"" but noted that housing recoveries for these states would be prolonged by keeping a lot of shadow inventory outstanding for longer.
A number of state attorneys general have begun to speak out on GMAC's problems. Even those in non-judicial states have expressed their intent to explore the company's foreclosure processes further. Moody's says the scope of the investigation might not just be limited to the 23 states initially targeted by GMAC's foreclosure freeze.
IllinoisÃ¢â‚¬Ëœ attorney general has sent a letter to Ally Financial demanding a meeting to explore whether GMAC violated the state laws in its pursuit of Illinois homeowners in foreclosure. Illinois is among the states where GMAC suspended some foreclosure actions.
Attorneys general in California, Colorado, Connecticut, and Ohio have also publicly confirmed that they are launching inquiries into GMAC's internal procedures, with some calling for a full-out moratorium on GMAC foreclosures.