On September 20, 2010, GMAC Mortgage, a mortgage servicer affiliate of Ally Bank (formerly GMAC Bank) formally announced "a potential issue that was raised in a number of existing foreclosures challenging the internal procedure we used for executing one or more judicially required forms." As a result, "[t]he company temporarily suspended evictions and post-foreclosure closing in the 23 states while [Ally Bank] conduct[s] a review" of the procedure. The "internal procedure" problems that GMAC Mortgage referenced have become popularly characterized as "robo-signing"—the practice of having a small number of individuals sign a large number of affidavits and other legal documents submitted to courts and other public authorities by mortgage companies to execute foreclosures. Several employees and individuals with power-of-attorney signing authority for major servicers, including GMAC Mortgage, J.P. Morgan Chase, and Wells Fargo, have been deposed as part of foreclosure contests. Some of these depositions raised concerns as to whether individuals who claimed in sworn affidavits to have personal knowledge of facts necessary to legally foreclose on a property actually had that knowledge; assignments and sales of interests in mortgages were properly executed; legal documents were properly notarized in accordance with state law; and, as a result, mortgage companies had met the necessary requisites to foreclose on certain properties. Following GMAC Mortgage's lead, three other major mortgage servicers owned by J.P. Morgan Chase & Co., Bank of America Corp., and PNC Financial Services Group Inc. temporarily halted foreclosure sales of their own in the same 23 states. The states affected by these voluntary stays on foreclosure sales and evictions are referred to as "judicial foreclosure states" because their laws either require the use of the courts to complete a foreclosure, or if not absolutely required, a significant portion of foreclosures in the states utilize the court systems in practice. Just a few days later, on October 8, 2010, Bank of America Home Loans announced an expansion of the temporary foreclosure sale freeze to all 50 states, including the so-called nonjudicial foreclosure states which have state laws that allow for foreclosures to be completed without the use of the courts. The Bank of America freeze is to last until its "assessment [of foreclosure documents] has been satisfactorily completed." Additionally, Fannie Mae and Freddie Mac have directed all servicers of mortgages held or guaranteed by the government sponsored enterprises (GSEs) to review their procedures for handling mortgage defaults, but the GSEs did not require servicers to halt foreclosure sales or evictions. On October 18, 2010, Bank of America announced that it would be resuming all foreclosures in the 23 judicial foreclosure states, and "will continue to delay foreclosure sales in the remaining 27 states until our review is complete on a state by state basis." A GMAC Mortgage spokeswoman announced that it would resume foreclosures as files are reviewed and remediated on an individual basis. The regulatory response to these alleged problems has begun, and likely will continue for some time. The Ohio Attorney General filed suit against GMAC Mortgage, Ally Financial, Inc., and one of its employees, alleging violations of the state Consumer Sales Practices Act and common law fraud. The Attorney General of Florida is conducting investigations of several law firms allegedly involved in submitting inaccurate or incomplete documentation to Florida courts in foreclosure cases. The Attorneys General of all 50 states are conducting investigations into the matter, and the Obama Administration's Financial Fraud Enforcement Task Force also is investigating whether federal laws were violated. At least two states' courts, Florida and New York, have augmented their evidentiary standards for residential foreclosure actions in response to deficiencies in foreclosure proceedings. Each of the servicers that voluntarily stayed foreclosure sales and evictions seem to stress that any problems that have come to their attention have been problems of process, not of substance. In other words, they do not believe anyone has been wrongfully foreclosed upon or evicted, but that some of the paperwork that must be filed to complete a foreclosure in certain states may not have been properly reviewed or notarized by their employees. In actuality, these procedural defects have the potential to undermine the legitimacy of the foreclosure process in both judicial and nonjudicial states and create a cloud over the legal title of homes and, depending on the facts and circumstances of each case, could result in judicial sanctions, civil penalties, and even criminal prosecutions. It is unclear whether or not the procedural problems masked substantive problems, such as a failure to transfer interests in a mortgage properly, thus calling into question true ownership of mortgages, in certain instances. Even if substantive problems do exist, it may be possible to rectify deficiencies in many, if not the vast majority, of cases to allow for the completion of a foreclosure. Correcting these problems would come at a cost by potentially causing significant delays in the completion of the foreclosure process, even for properties in which foreclosure is inevitable. There is a great deal of uncertainty in exactly what transpired in the run-up to the housing market crash and what continues to occur as financial institutions and homeowners deal with the crash's aftermath. What is clear is that there will be legal disputes arising in virtually every corner of the market, and it likely will take many years for these disputes to be settled by the parties and the courts. This report seeks to shed light on some of these uncertainties by explaining the mortgage market process and some of the legal agreements entered into between market participants; explaining the legal procedures of typical judicial and nonjudicial foreclosure statutes; explaining some of the procedural problems that have surfaced during the implementation of foreclosure proceedings that drove some mortgage servicers to pause foreclosure sales and evictions; analyzing how the increasing complexity of the secondary mortgage market over the last 10 to 15 years may have led to or exacerbated these procedural problems; and addressing some of the potential substantive errors that could have been hidden by the procedural problems and the legal effect these problems could have on homeowners, lenders, and other mortgage market participants. This report primarily focuses on sections of the mortgage market that directly affect homeowners. Of course, there are many agreements and legal relationships that are linked to mortgages that do not directly involve homeowners. Many of the same documentation and proper transfer of ownership problems that may affect homeowners directly through the foreclosure process have the potential to cause even more significant legal and economic problems for the financial institutions involved. These problems include violations of securities laws for failing to accurately describe the mortgages underlying mortgage-backed securities (MBS) and violations of representations and warranties (e.g., regarding the quality of underwriting standards and other mortgage characteristics) provided for in the contracts that executed the sale of mortgage interests in the secondary market. These problems have the potential to cost financial institutions billions of dollars in legal claims while also increasing market uncertainty, which comes with its own costs. Another interesting wrinkle is that the federal government is an active participant in multiple, and sometimes conflicting aspects, of the mortgage market. For instance, the Department of the Treasury (Treasury) has used Troubled Asset Relief Program (TARP) funds to acquire stock and warrants to purchase stock in banks with significant mortgage-related assets (e.g., CitiGroup) and to implement the Making Home Affordable Program; the Treasury also has used funds from the Housing and Economic Recovery Act (HERA, P.L. 110-343 ) to purchase millions of dollars' worth of mortgage-backed securities from Fannie Mae and Freddie Mac; the Federal Housing Finance Agency (FHFA) is acting as conservator of Fannie Mae and Freddie Mac; and the Federal Deposit Insurance Corporation (FDIC) holds interests in mortgage assets as conservator and receiver over failed commercial banks and thrifts. As a result, the government will be directly impacted by, and at times, will be actively involved in, mortgage-related legal disputes. Many of these problems are outside of the scope of this particular report, but at times they are alluded to here. When individuals purchase residential real property with borrowed funds, they usually enter a contractual agreement, typically called a promissory note, to, among other things, make principal and interest payments to the originating lender for a period of time. Lenders obtain a security interest in the underlying property as security against borrower default. In other words, what is commonly referred to as a "mortgage" consists of both a promissory note evidencing the debt to be paid by borrower and the security interest in the underlying property, which generally is provided for in a deed of trust or a mortgage. (To avoid confusion, this report refers to a note as the evidence of a borrower's obligation, a deed of trust as evidence of a security interest in the real property, and a mortgage as the interest in the note and the deed combined.) Every state has a land recordation and title system with laws governing how security interests in real property (i.e., land) should be recorded to establish the priority of secured lien holders in the same property. These land recordation systems put subsequent purchasers on notice of existing interests in the property and can protect subsequent purchasers from mortgagees (and their successors or assigns) that fail to properly record their interest in the property. These systems date back to colonial times. They generally require that each time a company acquires a security interest in a piece of real property—either through the assignment or sale of an existing interest or the creation of a new one, such as through a home equity line of credit—it physically records the existence of that interest with the register of the deeds office in the county in which the property is located, while also paying recordation fees. Failure to record an interest in property properly does not invalidate the homeowner's obligations under the mortgage. Sometimes the originating lender retains its interest in the mortgage for the life of the loan. In recent years, however, it has become far more common for the originating lender to sell or assign its interest in both the note and the deed to another financial institution.