The San Francisco Report: “Foreclosure in California—A Crisis of Compliance” A Nationally Significant Statistical Portrait of Problems in the Foreclosure Process

Volume 26 No. 4


James Geoffrey Durham is a professor of law at the University of Dayton School of Law. He is liaison to the ABA Standing Committee on Ethics and Professional Responsibility, the chair of the Real Property Division’s Legal Education and Uniform Laws Group, and a member of the Continuing Legal Education Committee.

“Foreclosure in California—A Crisis of Compliance” is a recent “audit” report commissioned by the City and County of San Francisco to determine the mortgage industry’s compliance with applicable laws, and has national significance with respect to the foreclosure crisis.

In February of this year Phil Ting, the assessor-recorder of the City and County of San Francisco, received an “audit” report dealing with home foreclosures in San Francisco entitled “Foreclosure in California—A Crisis of Compliance.” Aequitas Compliance Solutions, Inc., Foreclosure in California—A Crisis of Compliance (Feb. 2012), available at (SF Report). Ting had commissioned the SF Report from an outside consultant, Aequitas Compliance Solutions, Inc., of Newport Beach, California, “to determine the mortgage industry’s compliance with applicable laws.” SF Report at 1. The SF Report includes statistics that range from troubling to stunning and, although almost all home foreclosures in California are nonjudicial, have national implications for both judicial and nonjudicial foreclosure states. The purpose of this article is to describe the SF Report and to point out particular issues of national significance.

Why the SF Report Has National Significance

The SF Report has national significance beyond nonjudicial foreclosure states because it was produced by a reputable consultant with no agenda, it draws its conclusions from a comprehensive and statistically significant sampling, and to a high degree most of its study areas are analogous to judicial foreclosure areas. In addition, the SF Report has national significance because the home mortgage foreclosure crisis is far from over.

The Consultant

Aequitas, the consultant, focuses on legal compliance in the real estate mortgage business and in mortgage litigation and procedures. Its web site describes the company’s business on its front page as follows:

Aequitas Compliance Solutions, Inc. (“Aequitas”) is a mortgage regulatory compliance consulting firm specializing in complex litigation, investigation and internal audit issues. We work with the mortgage industry, regulators and enforcement agencies, and attorneys for securities-holders, attorneys for distressed homeowners and other industry stakeholders. We provide our clients accurate, thoughtful and customized analysis, which we present in a clear and persuasive manner. Our experts possess a broad range mortgage and regulatory expertise, which enable us to serve large and small companies, law firms and government agencies.

Aequitas Compliance Solutions, Inc., Mortgage Regulatory Compliance Audit Products and Services, (last visited Apr. 29, 2012).

In the first footnote to the SF Report Aequitas states:

Throughout this paper, we are offering no opinion on the merits of various legal arguments put forth by the industry or those representing homeowners. We simply report the exceptions found based on publicly available facts and our understanding of applicable regulations. We explain our understanding of such regulations in the discussions alongside the specific exception rates presented herein. It is our goal to present only objective findings of facts.

SF Report at 1 n.1.

The Scope of the SF Report

The SF Report is impressive in its scope. It covers a 34-month period during which there were 2,405 foreclosure sales, and Aequitas audited 382 (almost 16%) of them. SF Report at 1. The SF Report focuses on six “Subject Areas”: Assignments, Notice of Default, Substitution of Trustee, Notice of Trustee Sale, Suspicious Activities Indicative of Potential Fraud, and Conflicts Relating to MERS.

Why We Need to Consider Statistical Evidence of Problems in the Foreclosure Process

The foreclosure crisis and any problems with the residential foreclosure process are not going away soon. In February 2012, the Mortgage Bankers Association (MBA) stated that, during the fourth quarter of 2011, 7.58% of homeowners had missed at least one monthly payment. See Press Release, Mortg. Bankers Ass’n, Delinquencies and Foreclosures Decline in Latest MBA Mortgage Delinquency Survey (Feb. 10, 2012), available at Center/79827.htm. The MBA survey was based on 44 million homes (88% of the total market), for a total number of 3.335 million homes at risk of foreclosure. Although the percentage of homeowners at risk of foreclosure was down (it was more than 10% in 2010), the MBA noted that the “down” number was skewed by the foreclosure backlog in state courts in Florida, New Jersey, Illinois, and New York and that the MBA expected the number of foreclosures to rise after the early 2012 settlement among 49 state attorneys general and five major lenders.

The SF Report

The SF Report is an “audit” report of residential foreclosures in San Francisco. It includes a series of statistics and conclusions relating to nonjudicial foreclosures carried out in San Francisco over a 34-month period, January 2009 through October 2011. The Introduction includes a stunning statement: “Overall, we identified one or more irregularities in 99% of the subject loans. In 84% of the loans, we identified what appear to be one or more clear violations of law.” SF Report at 1.

The SF Report asserts its own relevance in the area of judicial foreclosure by pointing out that under Cal. Penal Code § 115 any person who “knowingly procures or offers any false or forged instrument to be filed, registered, or recorded in any public office within this state, which instrument, if genuine, might be filed, registered, or recorded under any law of this state or of the United States, is guilty of a felony.” SF Report at 5.

Almost every judicial foreclosure proceeding involves at least one instrument created by the foreclosing lender, or its counsel, that “might be filed, registered, or recorded.”

The SF Report refers to both “irregularities” and “violations of law” as “exceptions” and found a wide range of exceptions in its six areas of focus. A loan could have exceptions in more than one area. Over 50% of the loans potentially or likely had five or more exceptions. Most loans had exceptions in more than one area (13% in two areas, 35% in three areas, 32% in four areas, 10% in five areas, and 1% in six areas). The exception rates for each area were: assignments (75% of the loans audited), notice of default (8% of the loans audited), substitution of trustee (85% of the loans audited), notice of trustee sale (42% of the loans audited), suspicious activities indicative of potential fraud (82% of the loans audited), and conflicts relating to the Mortgage Electronic Registration System (MERS) (58% of the loans audited). (MERS is a private corporation that tracks the ownership interests and servicing rights in mortgage loans. Further discussion of MERS occurs near the end of this article and on page 40 of this issue.) Three of those areas (Assignments, Suspicious Activities Indicative of Potential Fraud, and Conflicts Relating to MERS) relate directly to judicial foreclosures. The other three areas (Notice of Default, Substitution of Trustee, and Notice of Trustee Sale) are indicative of actions by lenders and those acting on their behalf, of sloppiness (at best), or of fraud (at worst), which also informs us of possible problems with judicial foreclosures.

Assignments (SF Report at 6–8)

Issues with assignment from the originating lender to the party seeking foreclosure were involved in 75% of the loans, including two or more conflicting assignments (6%); conflicts with federal filings, usually with the Securities Exchange Commission for mortgages that had been securitized (23%); evidence that the assignment was not signed by the assignor but by an employee of the servicer or trustee (27%) (these are both third parties who would not necessarily have the legal authority to sign the assignment on behalf of the originating lender); evidence that the assignee signed on behalf of the assignor (11%); and filing of the assignment after giving the defaulting borrower a Notice of Default (59%) (under Cal. Civ. Code §§ 2923.5 and 2924(a)(1)(C), the Notice of Default should come from the current holder of the rights under the Deed of Trust, which means the current holder of the Note, to meet the requirements to proceed to a nonjudicial foreclosure sale under the terms of the Deed of Trust). SF Report at 7–8.

Issues with assignment of a Deed of Trust or a mortgage have been frequently raised nationwide in litigation involving judicial foreclosures. The extraordinarily high number of assignment issues documented in the SF Report provides a statistical foundation to assignment issue claims in judicial foreclosures. In dealing with the 27% of the loans in which the assignment was signed by someone other than an agent of the assignor, the SF Report concluded that

it is unlikely that the employee of the current entity claiming to be Beneficiary was, in fact, an agent of a prior owner, as this suggests the prior owner signed an unrecorded document granting authority to assign the Deed of Trust rather than simply signing the Assignment itself. More likely, the chain of title to such loans has been broken and the written transfers from the original owners to the current entities claiming to be Beneficiary do not exist. The possible undocumented or, worse, nonexistent transfers of the loan may explain why the prior, known owner of the loan did not execute the Assignment.

SF Report at 7.

Notice of Default (SF Report at 8)

Cal. Civil Code § 2923.5 requires a lender, before recording a Notice of Default, to contact the borrower to “assess the borrower’s financial situation and explore options for the borrower to avoid foreclosure.” Id. In 6% of the foreclosures the required affidavit was not filed. Although the filing of the affidavit is not a requirement under most states’ laws, the lack of the document is evidence of lenders’ failure to comply with a clear statutorily mandated procedure.

Substitution of Trustee (SF Report at 8–10)

“In most instances, the original Beneficiary will substitute another trustee to handle the foreclosure under a Substitution of Trustee. Substitute trustees are typically firms that specialize in default servicing needs and foreclosure processing.” SF Report at 8. The SF Report noted several issues, including invalid substitutions after Notice of Default (18%) and the substitutions’ being recorded after the filing of the notice of the foreclosure sale (3%). SF Report at 9. Two issues involve potential fraud, however, and are analogous to problems in judicial foreclosures nationwide: (1) the inability to determine who holds the note and has the right to foreclose and (2) robo-signing. The SF Report found that in an amazing 85% of the foreclosures the substitution of the trustee was executed by an entity other than the beneficiary under the deed of trust. SF Report at 9–10. In addition, in 28% of the foreclosures the substitutions of trustees were signed by persons who were not employees or agents of the beneficiaries that had the legal right to make the substitutions: “In these cases, the individuals signing the Substitutions of Trustee were not actual employees of the companies purporting to execute the Substitution. This information was verified through a database with the names of employees of several Trustee companies that frequently sign foreclosure documents.” SF Report at 10. These stunning percentages provide a sound basis for questioning whether the necessary documents in judicial foreclosures are subject to the same issues (inability to identify the party entitled to foreclose and signing of documents by persons not entitled to sign).

Notice of Trustee Sale (SF Report at 10–11)

In 34% of the foreclosures the Notice of Trustee’s Sale was not executed by the current trustee. “The Deed of Trust and California foreclosure statutes give exclusive power to the original Trustee or a properly substituted Trustee to file a Notice of Trustee’s sale and sell the property at a Trustee’s sale.” SF Report at 11. The failure to have the current trustee’s signature on the Notice of Trustee’s Sale renders the notice invalid and, as a result, “the Trustee’s sale may be void.” Id. Again, this is not an issue in judicial foreclosure, but it shows lenders’ sloppiness (at best) or fraud (at worst) as to a critical detail in a significant number of the reviewed foreclosures.

Suspicious Activity and Other Issues (SF Report at 11–12)

This generically titled subsection contains the SF Report’s most damning conclusions and begins with the following statements:

Charges that some of the largest mortgage servicers are engaged in fraudulent practices continue [to] be made. These practices include: fabricating documents that should have been signed years ago and submitting them as evidence to foreclose on homeowners, back-dating documents and robo-signing (using fake signatures to power through foreclosure documents).
It is sometimes difficult to prove fraudulent practices with certainty. However, by reviewing documents and signatures against public and proprietary databases, we were able to identify numerous specific instances [of] potential abusive practices. We refer to these instances as “Suspicious Activity.”

SF Report at 11.

There was evidence of Suspicious Activity in 82% of the reviewed foreclosures. In 45% of the foreclosures the winning bidder at the trustee’s sale did so by making a credit bid as the current holder of the beneficiary’s interest, but

(1) no Assignment of the Deed of Trust was ever recorded granting a beneficial interest to that entity or (2) such assignment was recorded after such sale. . . . Without proof of the ownership of the beneficial interests in the Deed of Trust, the entity that was granted ownership of the subject property may not have good title to the property and the Trustee’s Sale to this unauthorized “stranger” may be invalid. The fact that an Assignment of the Deed of Trust was never recorded could indicate that the chain of title for such loans cannot be established. Further, only foreclosing beneficiaries have the right to be exempt from the payment of transfer taxes charged by government agencies. If the foreclosing party was not, in fact, the foreclosing beneficiary then the transaction may involve the unlawful evasion of taxes.

SF Report at 12.

In 59% of the foreclosures there was evidence

that one or more of the foreclosure documents recorded against the subject property were back-dated (i.e. there is a time discrepancy between the document date and the notary’s date or the recording date). Creating a false date of signature is a potentially serious issue as many of these documents carry penalties for perjury or other violations of California’s Penal Code. It should be noted that there may have been a legitimate reason for the discrepancy between the document date and the recording date, such as the document was properly executed but mishandled prior to recordation.


Even accepting the disclaimer in the last sentence, the incidence of possible back-dating (59%) includes clear back-dating (difference between the document date and notary date) and possible back-dating (difference between document date and recording date), and it would seem highly unlikely that the latter can be explained in all cases by finding that the document was “mishandled.”

The analogy to judicial foreclosure is clear: lenders are ignoring necessary formalities (making sure that the foreclosing party is legally entitled to do so) or covering their missteps with nonchronological or back-dated documents. These are exactly the types of allegations that are being made in judicial foreclosures nationwide. The incidence in the SF Report (82%) provides a sound basis for believing that there is a great deal of “suspicious activity” occurring in judicial foreclosure actions.

MERS Conflicts and Results (SF Report at 12–14)

The SF Report begins this section by describing what MERS is:

The Mortgage Electronic Registration System (MERS) is a private corporation that tracks the ownership interests and servicing rights in mortgage loans . . . .
. . . created by Fannie Mae, Freddie Mac, Ginnie Mae, the Mortgage Bankers Association of America and large mortgage banks to provide an electronic registry for tracking ownership interests and servicing of mortgage loans.
MERS members can sell mortgage loans without having to record each transfer in county offices thus eliminating the need for frequent recorded assignments of mortgages and deeds of trust. MERS asserts to be the owner (and the owner[’]s agent) of the security interest indicated by trust deed and registers assignments of beneficial interests through its system.
MERS maintains that by eliminating the need to file assignments in the County Records it lowers costs for lenders and consumers by reducing county recording fee expenses resulting from real estate transfers. MERS further maintains that it provides a central source of information and tracking for mortgage loans, although a transfer between two MERS members is effectively unknown to those outside the MERS system.

SF Report at 12–13.

There was data in the MERS database for 192 of the 382 reviewed foreclosures. SF Report at 13. “The investigation resulted in 112 loans whereby the beneficiary as entered on the Trustee’s Deed upon Sale conflicted with the investor information present on the MERS database. This is a 58% failure rate.” Id.

Throughout the country, in both judicial and nonjudicial foreclosures, millions of mortgages involve MERS registration. The SF Report provides a basis for saying that MERS registration is a highly questionable basis for proving ownership of a mortgage in a foreclosure action. If a judge in a judicial foreclosure is unwilling to accept MERS registration as proof of current ownership, many judicial foreclosures will be stopped abruptly, and the foreclosing party will be forced to establish ownership of the note and mortgage through conventional methods.


The SF Report gives substantial statistical support for those who contend that many foreclosures, judicial and nonjudicial, are being carried out in ways that make them defective. It provides substantiation for allegations of robo-signing, failure to show that the foreclosing party is one entitled to foreclose, and fraud in the creation of documents used in a foreclosure. The SF Report should stand as a warning to foreclosing creditors, and their lawyers, that allegations about defects in the foreclosure process are not mere conjecture about what might be the case, but that those allegations have a foundation of substantial statistical evidence.

Having said that, however, and to state the obvious, the SF Report is not proof of problems or wrongdoing in any particular mortgage foreclosure. Judges, whether in supervising judicial foreclosures or in reviewing court challenges to nonjudicial foreclosures, must consider the statements and documents before them in reaching decisions. Outside of the courtroom, the SF Report allows some broad generalizations to be asserted about the foreclosure process that may inform legislative bodies considering action to deal with the foreclosure crisis. In addition, the SF Report may provide direction for lawyers of debtors facing foreclosure. Finally, the SF Report may provide a warning to foreclosing creditors and their lawyers to pursue only those foreclosures that have legal merit.


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