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What Is Robo-Signing and How Does It Affect My Mortgage?

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In a Nutshell

Robo-signing is when documents are signed by someone who doesn't understand them. It was a problem with mortgage documents in the 2008-10 housing crisis. Mortgages were being transferred between many different parties. This made it hard to know who had the legal right to foreclosure. Robo-signing is not illegal, but the practice is no longer common.

Written by Attorney John Coble
Updated November 26, 2021

Robo-signing is when a person signs documents without knowing or understanding their contents. This is a serious problem when it's used with mortgage transfer documents. It can make it difficult to know who has the right to foreclose on your home if you fall behind on your payments. This article will discuss why robo-signing matters, the role it played in the mortgage crisis of 2010, and current laws addressing it.

What Is Robo-Signing?

A robo-signer is a person who signs important mortgage documents without properly reviewing them. This problem contributed to the 2010 housing crisis. Robo-signers didn't have the training to understand what they were signing — sometimes because they were temporary workers. But they were under pressure to meet certain quotas. Employees of major banks testified to having signed thousands of documents per month. Some robo-signers were signing as many as 10,000 documents per month.

Robo-signing often means signing foreclosure documents (like affidavits) without reviewing or understanding them. But it can also mean other things like forging a signature or signing with a false job title. There have also been issues with notary signatures. Affidavits are sworn statements that have to be notarized, a process that ensures someone can attest to the identity of the signer. But some notaries pre-notarized affidavits, while others notarized documents after they’d been signed. These would all be invalid.

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Why Does Robo-Signing Matter?

The common law statute of frauds requires all contracts related to land transfers to be in writing. Most states interpret this to mean mortgage documents must have genuine signatures to be valid. Mortgages are often transferred, and when they are the mortgage needs to be signed by a knowledgeable party. The signature shows that the signer understands and approves the document. Requiring signatures at each point of transfer protects the parties to the transfer.

A robo-signer's signature means nothing since they don't know why or what they're signing. As a result, in many states, if a transfer document has been robo-signed the transfer is considered invalid. This leaves doubt about which party has the right to foreclose.

Robo-Signing, the Mortgage Crisis, and the Great Recession

In the old days, borrowers would take out a mortgage with their local bank and make payments to that same bank. The borrower would eventually pay off the note or the bank would foreclose. This type of mortgage does still happen, but it's rare. Since there are only two parties to the mortgage — the borrower and the bank — it’s uncommon to see problems with robo-signing. 

These days, most mortgages are securitized. You may still take out a mortgage at your local bank, but it usually won't stay there. Your local bank will be the mortgage originator. It will transfer your mortgage to a "sponsor." The sponsor will transfer the mortgage to a "depositor." The depositor will transfer the mortgage to a trustee. The trustee will group your mortgage with other mortgages in what's called a pool servicing agreement (PSA). The trustee will then issue mortgage-backed securities (MBS) in the pool where your mortgage is grouped. Wall Street banks will sell these MBS to investors who are the ultimate recipients of the money you pay on your mortgage. 

You make your mortgage payments to your loan servicer. They also handle matters like loss mitigation programs. The loan servicing company makes payments to the trustee who distributes money to the investors.  

Consequences of Securitization

Before securitization, mortgage documents were only signed by you and your bank. Since your bank would have a loss if you didn't pay your mortgage the signer always understood what they were signing. Since you would lose your home if you didn't comply with the mortgage documents, you would make every effort to understand the documents. Robo-signing couldn't exist in such a system.

Now, with securitization, the risk of loss is quickly removed from the mortgage originator. The rights and responsibilities of the mortgage are split between many different parties. The signature on the mortgage documents at each transfer is critical to show that they have been reviewed by a competent party.

The Role of Outside Companies and Investors

Your mortgage servicer may be a familiar name like Wells Fargo. The trustee of the PSA where your mortgage is might be a less familiar name like Deutsche Bank. A company like Mortgage Electronic Registration Systems (MERS) may have been retained to keep track of all the transfers of your mortgage. While MERS was tracking everything, other outside contractors were needed to oversee the transfers. These included companies like Lender Processing Services (LPS) and DocX.

As complicated as this all sounds, this is a simplified explanation. The bottom line is: The securitization process is complicated. With all the transfers and splitting apart of rights that go with the securitization process, signatures are very important. The homebuyer and investor never see each other or even know who the other is. Having competent parties sign off on the documents at each step in the process is critical for the system to work.

These documents assign rights and responsibilities to different parties, including the right to foreclose on your home. Robo-signing makes it harder to determine which entities have the legal right to foreclosure. This is why companies like MERS that were meant to simply track transfer began asserting the right to foreclosure.

Securitization, the Housing Bubble, and Foreclosures

Wall Street had plenty of investors wanting to buy the MBS. This created a strong push to create more and more mortgages, which led to lenders giving homebuyers loans who couldn't afford to make the mortgage payments. With this easy money, buyers who couldn't afford these homes purchased them, which inflated housing prices. This is what's known as a housing bubble. 

The system was so fragile that a slight downturn in the economy was enough to send a lot of homes into foreclosure. The realization that banks were holding a lot of worthless loans led to a collapse of the financial system. Without government intervention, many of the largest banks in the country would have failed in a moment comparable to the Great Depression. Even with government intervention, the U.S. saw the worst recession since the Great Depression.

Since a lot of people had mortgages and couldn't afford the payments, there were a lot of foreclosures during this recession. More followed after many people lost their jobs as economic conditions got worse. With all these foreclosures, attorneys took a closer look at the foreclosure process and discovered robo-signing was happening on a massive scale.

What's the Current Law Regarding Robo-Signing?

Since robo-signing contributed to one of the worst economic recessions in American history, you may think laws were passed to address it. Unfortunately, they haven’t been. There is no federal law prohibiting robo-signing. In fact, Congress passed a bill that would’ve made robo-signing de facto legal nationwide by forcing states to respect notarizations from any other state. So if it were legal in one state, it’d essentially be legal in any state. This bill was vetoed by President Obama before being enacted into law. At the time, the public wasn't aware of how bad the robo-signing problem was. 

Laws & Practices Vary by State

Foreclosure proceedings are based on state law. Some foreclosures must go through a court process. These are called judicial foreclosures. Other states have a nonjudicial foreclosure process, meaning they don’t have to go through the court. Some of these nonjudicial foreclosure states don't require the foreclosing party to prove they have the authority to foreclose.

For example, the Arizona Supreme Court ruled that a beneficiary (foreclosing party) doesn't have to prove its authority before the trustee begins a deed of trust foreclosure. If a foreclosing party doesn't have to prove ownership under a state's law, you can see how it’s easier for robo-signing to continue unchallenged. 

But even if robo-signing is irrelevant, that doesn't make it legal. The federal government and 49 state attorneys general reached a $25 billion settlement with the nation's top five mortgage servicers for mortgage servicing abuses and abusive foreclosure practices. The abuses addressed in the National Mortgage Settlement included robo-signing. The defendants in this settlement were Bank of America, JP Morgan Chase, Citi, Wells Fargo, and GMAC (now Ally Financial).

Robo-signing has been prosecuted under different types of criminal laws in many states. Of course, forgery is a crime everywhere. Yet, not all robo-signing involves forgery. In Michigan, the president of DocX was found guilty of racketeering. A federal district court in Florida found the same executive guilty of forged signatures, false signatures, and fraudulent notarization on over 1 million documents. So robo-signing is illegal, but it's not well-defined nor is there a uniform law across the nation. What we have is a hodgepodge of court interpretations with little new legislation at the state level.

California Civil Code §2924.17(b) is a rare example of a state legislature trying to deter robo-signing. Most states are not as explicit. In these states, robo-signing or something akin to it could still be happening.

If you have a mortgage that was originated before the 2008-2010 robo-signing scandal, there's a good chance there are robo-signed documents in your chain of title. Much effort has gone into fixing these issues. But it's likely some robo-signed documents still exist. If you're facing foreclosure, it's a good idea to contact a foreclosure defense attorney or a local attorney. You may be able to show the entity trying to foreclose on your home doesn't have the legal right to foreclose.

Let’s Summarize…

Robo-signing is a practice that leads to invalid document transfers between different parties to a mortgage. As a result, many foreclosures were brought against homeowners by parties who didn’t have the right to foreclose. The practice went largely unnoticed until the housing bubble and Great Recession drew attention to increased foreclosures. While some financial institutions were fined and some executives even prosecuted, there are no federal — and very few state — laws banning robo-signing. 

Financial institutions in the mortgage industry such as large banks made a great effort to repair all the robo-signed documents. But, due to the sheer number of robo-signed documents, it's unlikely they were all fixed. For this reason, in states where it can work, it's a good idea to make the company foreclosing on your home prove it has the right to foreclose. You may find the company doesn't have the authority to foreclose because of robo-signing or some other reason. If your home is being foreclosed, it’s wise to discuss the issue with a foreclosure defense attorney. You may be able to stop or at least delay the foreclosure.

Written By:

Attorney John Coble


John Coble has practiced as both a CPA and an Attorney. John's legal specialties were tax law and bankruptcy law. Before starting his own firm, John worked for law offices, accounting firms, and one of America's largest banks. John handled almost 1,500 bankruptcy cases in the eig... read more about Attorney John Coble

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