To: All Members of NAILTA

From: Robert B. Holman, Esq.

Chairman, Policy and Legal Affairs Committee

Date: October 14, 2010

Re: The Foreclosure Moratorium Issue

By now you have probably read about – and no doubt have heard about -- the fact that
bank foreclosure processes across the United States are under intense levels of scrutiny
due to the fact that, in some foreclosure cases, banks have allegedly utilized fraudulent
documentation in their foreclosure efforts.

As a service to our members, we wanted to provide you with an update on these

important issues and to give you information that might be helpful in explaining these
issues to your customers.

Background:

On June 7, 2010, during a deposition of a GMAC Mortgage/Ally Bank employee named

Jeffrey Stephan, it was learned that Mr. Stephan signed roughly 10,000 mortgage
assignments and foreclosure affidavits a month for cases across the United States. In
many of those cases, the documents were signed outside the presence of a notary. In
many of those cases, the affidavits were also signed although Mr. Stephan lacked
personal knowledge of the matters contained therein. As a result of Stephan’s testimony,
courts and defense attorneys across the country have begun to scrutinize the actions of
foreclosing lenders.

GMAC Mortgage/Ally Bank later suspended its foreclosure activities. Since doing so, JP
Morgan Chase Bank, PNC Bank, Bank of America and others have instituted mandatory
foreclosure moratoriums in either all fifty states or in those 23 states in which judicial
foreclosures are the norm. Wells Fargo has begun a direct review of all of its foreclosure
matters while still permitting them to proceed. State Attorney Generals in all fifty states
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October 14, 2010

have now asked judges across their jurisdictions to review their foreclosure practices to
ensure that bank documentation is correct. Ohio’s Attorney General, Richard Cordray,
has even filed suit against GMAC Mortgage/Ally Capital. More suits will likely follow.
The conversation has even included talk of a nationwide foreclosure moratorium,
although the federal government has announced that it would not support such a drastic
measure.

What does the problem look like?

During the course of a foreclosure, a bank will file an affidavit to assert the date of
default, to provide the amount owed on the mortgage and to make other fact-specific
allegations concerning the note and mortgage. In order to obtain judgment from the
Court, the lender must file this affidavit and the affiant must have personal knowledge of
the account in order to proceed. Without the affidavit, the bank cannot proceed to
foreclose. If the affiant lacks personal knowledge, the affidavit can be stricken and
unless proven otherwise, can lead to the dismissal of the action.

As reported in some periodicals, banks have used what are called “robo-signers” to sign
thousands of affidavits and assignments without having the affidavits or assignments
properly notarized. In most states, if a document required to be recorded is not properly
notarized it is deemed fraudulent as a matter of law. If fraudulent, it passes no legal title.

The banking industry created the Mortgage Electronic Registration System (MERS) to
allow for the fast transfer of mortgages and notes without the requirement of filing
assignments in county recorder’s offices across the United States. MERS coincided with
the securitization efforts of Wall Street and allowed banks to quickly bundle groups of
MERS mortgages into asset pools and be sold. In some cases, states require “wet ink”
signatures to transfer or assign mortgage interests. MERS does not provide for this type
of transfer. In those cases, a minority of courts have held that MERS lacks standing to
foreclose on behalf of banks that used MERS to quickly trade the mortgages on the open
market. It is estimated that there are 62 million MERS mortgages in the United States. If
this argument gains traction, there could be massive problems for the MERS product.

These are technical problems that can foul up a foreclosure. These are the same
allegations being made in the current crisis.

What is the Risk?

The risk in this situation is that lenders who are foreclosing do not have the legal standing
to foreclose. In addition, the risk is that if they lack legal standing and/or proceed to
foreclose with fraudulent affidavits, the underlying foreclosure process will be reversed
leaving the title insurers in a position where they will have to defend the unsuspecting
new owner through an issued owner’s policy of title insurance or the lender whose
employees may have created the defective condition in the first place. This could amount
to huge claims losses if foreclosure sales across the country are undone.
3 NAILTA Memorandum: The Foreclosure Moratorium Issue
October 14, 2010

Moreover, the risk to title insurers has enough potential to cause some, like Old Republic
Title and Stewart Title, to issue bulletins limiting their insurance and/or avoiding insuring
transactions involving the transactions in which these questionable foreclosure practices
were committed. Without title insurance, many of these foreclosed properties will remain
idle thereby jamming up an already overloaded system.

Though each state is different, the general legal consensus is that if a homeowner
purchases a home for value without knowledge of fraud or a defect in title, it becomes a
bona fide purchaser with rights greater than those possessed by the foreclosed prior
owner. In other words, the court is not likely to take away the home recently purchased
by an owner through an REO sale if they had no knowledge of the fraud committed by
the bank.

Additionally, even if a foreclosure would happen to be overturned by a court, the

resulting damage would, generally speaking, be the responsibility of the lender to repay
to the Court or aggrieved party. This is a concept called equitable rescission and would
require the bank to pay the amount it obtained from an unlawful sale of the property to
the Court or wrongly foreclosed mortgagor.

However, this does not mean that a claim cannot be filed or that attorney’s fees will not
become necessary to defend against the attacks. As a result of the Stephan deposition and
the corresponding moratoriums, class action litigation is inevitable. Title insurers will be
asked to defend these actions. Class litigation is also extremely expensive. Therefore,
there is some risk to title insurers that this issue will result in losses to the industry.

What is the Potential Solution?

Right now, the national title insurance underwriters are working with the banks in
question to arrive at a solution that will allow the foreclosures to continue and provide
title insurers with the assurance that if there is a defect, the banks will indemnify the
insurers for it.

There are a couple of noteworthy concerns with the indemnity concept. First, an
indemnity from a bank is only as good as the solvency of that bank. If the bank does not
survive, the indemnity is no longer valid. Second, as a result of the fraudulent
foreclosure documents, many secondary market investors will be asking banks to take
back the mortgages that were sold as valid liens, but now are subject to scrutiny by the
courts as a result of the alleged fraudulent actions of the bank. These forced repurchases
will cost the banks a considerable amount of money and lead to the first concern – bank
insolvency.

Therefore, in our view, the indemnity concept will provide only a stopgap for the
industry. It is not a perfect solution to the problem. At this point, it is unknown if there
are any other public rescues to properly back up the insolvency issue.
4 NAILTA Memorandum: The Foreclosure Moratorium Issue
October 14, 2010

What Should You Do?

First, remain calm. There is no need to report that the sky is falling.

Second, check with your underwriters for more guidance. Follow their advice. Banks
are attempting to mitigate losses to their bottom lines. You should do the same. The
underwriters may suggest their own due diligence measures that they want you to take
independent of obtaining an indemnity from the bank in question.

Finally, pay close attention to the foreclosure transactions that you are handling. If you
do REO or foreclosure related work, contact the banks and ask them if they will provide
your agency and your underwriter with an indemnity for any foreclosure related defect
that occurs in the process of foreclosing the subject property. Make sure that the
indemnity covers the expense of legal fees in defending those claims.

While we do not believe that there will be a significant number of foreclosures that will
be overturned to the detriment of title insurers, it would be better to remain vigilant to the
possibilities that exist so as to caution your customers between the fact and fiction that
currently guides this crisis.

If you have any questions created by this memo, please feel free to contact me via email
rholman@hfm-law.com or via telephone at (800) 344-7445.

I look forward to seeing all of you in Baltimore, Maryland at the Hyatt Regency Hotel –
Inner Harbor on April 11-12, 2011 for our Annual Conference where this and other
important title insurance related issues are sure to be discussed. Check our website at
www.nailta.org for more information.