Readers may argue I’m reading more of a bank PR role in a page one Wall Street Journal story than is warranted. However, even the Columbia Journalism Review took notice of the Journal’s scanty reporting on the foreclosure crisis, a mounting series of problems that is deservedly damaging to the banking industry’s image and bottom line. Now we have the Murdoch paper feature a remarkably one sided story on foreclosures. That looks to be no accident.
The story, “Courts Add To Foreclosure Delay” is utterly one sided. Having a judicial process for making foreclosures, as is required in 23 states, is bad for you….because it is preventing the housing market from bottoming. This argument is the polar opposite, by the way, of the Administration’s lame defense of its HAMP mod program.
Readers may recall that HAMP for the most part merely delayed foreclosures of participating homeowners for a few months, allowing banks to extract a few more payments from stressed borrowers and extract some incentive fees. Team Obama contended that was really a good thing, a feature, not a bug. The housing market was weak; better to have foreclosure properties dribble out on the market to prevent overshoot on the downside. So it seems that bank defenders will spin the delay issue whatever way they need at any point in time to flatter the banks.
The author also leads with an exaggerated claim up front:
One comparison widely cited: In California, where judges don’t handle foreclosures, the housing market appears to have hit bottom a year ago and has been bouncing back. In Florida, where foreclosures go through the court system, prices keep falling, and foreclosure inventory continues to rise.
Correlation is not causation, and indeed, the author backpedals, but it’s a full 13 paragraphs later:
The judicial process isn’t the only determining factor. California’s economy is more diverse than Florida’s and real estate, long term, has always been a stronger bet in California, which explains why buyers would pounce once prices declined.
The article attributes differences in foreclosure times solely to the judicial versus non-judicial issue. Yet it has repeatedly been reported that banks themselves are failing to foreclose on severely delinquent borrowers. Indeed, the “deadbeat borrower” reaction comes up repeatedly whenever we talk about people fighting foreclosures. In fact, relatively few people who can’t afford their homes fight; most are beating back a bank motion to break a bankruptcy stay or believe they are the victim of servicing errors; in Florida, some were partway through getting mods, yet the servicer failed to call off the foreclosure mill. The banks aren’t about to release the data, but a fair bit of the lengthening of time to foreclosure is due to the banks’ choice: they keep the borrower in place so that they are liable for the real estate taxes. If a bank has a lot of real estate already in a certain city or area, it’s going to have trouble moving inventory, so it sees delaying foreclosure as a way to save holding costs.
There is also not a single acknowledgment in the article that affidavits submitted were improper. Look how timid the Journal’s formulation is: “alleged irregularities in foreclosure documents submitted by the banks.” The banks have ADMITTED the affidavits were fraudulent, prepared by people who had no direct knowledge. This isn’t an “allegation”; these are admissions by bank employees in multiple depositions.
The article focuses strictly on the same theme of the Axelrod Face the Press remarks on Sunday: delay is bad for the economy, and gives as little mention as possible to the dead body in the room, that the “documentation” problems are severe and not fixable in any simple fashion.
That isn’t to say that some of the issues and data in this article aren’t worth exploring. But this piece was not an inquiry; it’s a badly skewed account, but the framing and the heavy use of data provides effective camouflage.
On another front, we had a pretty lame sighting over the weekend, the president of MERS, Mortgage Electronic Registry System, trying to defend his firm’s activities. We’ve avoided talking much about MERS, simply because it is a secondary problem in the foreclosure mess. The big failing of the securitization industry was not conveying the borrower IOU (the note) correctly to the securitization trust. In 45 of 50 states, it’s no tickie, no laundry: if you don’t own the note, you can’t foreclose. The mortgage (aka a deed of trust) is an “accessory” to the note in those states.
Some statements made in a Q&A released in connection the the president’s remarks are patently untrue, as in they have been repeatedly contradicted by sworn testimony by MERS employees. For instance:
1) MERS holds legal title to a mortgage as an agent for the owner of the loan
2) MERS can become the holder of the promissory note when the owner of the loan chooses to make MERS the holder of the note with the right to enforce if the mortgage loan goes into default.
This is utter baloney. MERS has no legal relationship to the note-holder. The owner of a loan (in the MERS context) will always be a trust. Per Max Gardner, a Federal bankruptcy attorney:
The Trust is NOT a member of MERS by a bi-lateral or tri-lateral agreement. The Trust cannot be a member of MERS per the MERS By-Laws. The Trust has never signed any document or filed any document that appoints MERS to execute any documents for the Trust. You simply cannot have a
silent or unauthorized “agent” or “nominee” for a NY or Delaware Trust without a specific designation and appointment by the Trust…..The mortgage note is never transferred to MERS.
There is more from the Q&A that is false:
Claims that MERS disrupts or creates a defect in the mortgage or deed of trust are not supported by fact or legal precedents….MERS does not remove, omit, or otherwise fail to report land ownership information from public records.
Yves here. Ahem. This is misleading. There is no public record of the transfers from the originator to the trust (assuming that was done correctly).
MERS also falsely insists it increases transparency:
MERS was created to provide clarity, transparency and efficiency by tracking the changes in servicing rights and beneficial ownership interests. It was not created to enable faster securitization.
Um, MERS was create to save recording fees. And transparent? Absolutely not. Only MERS members, which are basically banks and servicers, can access the service. And it appears any MERS member can assign a mortgage. Moreover, from what I can infer, MERS is lacking in the sorts of checks you’d expect in a registry of this importance (requirement of approval or confirmation by a second party of a records change; audit trails, etc).
Although the MERS effort at image-burnishing is a side show, it’s still worth noting that they can’t even keep their own story straight. And MERS is hardly alone in that regard.
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Yves,
In your “no tickie, no laundry” summary, I’m curious as to who owns the note if it wasn’t conveyed into trust – presuming some institution does. Would it be the originator? Thus, in cases where the originator is still in business (e.g., not New Century, but Countrywide) wouldn’t the servicer be able to buy the note at par from the owner (even if the owner wasn’t the originator) and then subsequently legally foreclose (again presuming that the borrower is in default).
Thanks
I am by no means an expert. But, it seems that at some point the mortgage lien(not the promissory note)is actually signed over to MERS and then the buyers/sellers of a mortgage backed security record the transfer in MERS database. MERS tracks the chain of title. This process is not physical in the sense the actual lien document is housed by MERS. Rather, the lender, at the time of a house closing, elects MERS to house the lien..in the abstract. Since they are housing in the abstract, but presumably had full rights as if it physically held a lien, MERS begun the process of assigning and tracking the MBS changing hands, and thus the lien too. So for example, a home sale gets closed, the bank gets ready to securitize the loan, MERS is elected to hold the lien, the securitized bonds get sold, and now the buyers of the bonds owns the mortgage, and this is recorderd on MERS as is the fact that the lien is now owned by the bond buyers.
It seems that two things have happened.
1)Judges, in some states, have ruled that MERS can’t actually own anything…which means it can’t assign the mortgage lien to the different buyers/sellers of an MBS. So that means that the chain of title is broken. It means just because the buyers/sellers of an MBS trade record the change in title in MERS database, that the transfer may not actually happened because MERS could never own the lien. It also means in addition to the owners of the mortgage bonds being unable to foreclosure because nothing was assigned to them, that MERS ITSELF can not foreclose on anything cause it never owns the liens. Some states support this, some states don’t.
2)The other issue is the fact that the banks, who set up the trusts to sell the MBS, were supposed to make sure all the documents were in order for each mortgage. Presumably, they did this by just checking the MERS system to make sure everything was in order(chain of title, etc) and also by notating MERS to indicate who was buying what bond. Fair enough, but it now may turn out that merely checking and recording sales on MERS was not sufficient..thereby meaning the banks breached their duty…they may have done all the assignments the wrong way. This would open them up for law suits.
3)The other issue is, where are all the actual loan documents? The original lien? It matters now(before this crisis, the MERS abstract assignment system was working) but now without the original loan documents(lien) which are required for foreclosure, the courts won let one foreclosure. So where are they? It’s a paperwork hunt.
I talk about the lien…but the promissory note could be used interchangably.
Thanks Yves for keeping us all informed. My question is really about the whole housing market. If these kinds of improprieties about notes/paperwork are discovered during foreclosures, can’t they also have arisen during any refinancing or when a bank sliced up and resold its mortgages? How many homeowners who are NOT in default and try to sell their home may find that the note wasn’t handled properly and no one knows who really owns the mortgage? As you said in one post, banks used to know the homeowner and could make allowances when problems occurred. Now with all the repackaging of mortgages by lenders, I wonder just how much other “lost” paperwork there is and whether the whole housing market is in for the same doubts and confusion that you find in foreclosed homes. I’d be interested in your thoughts on this.
m.jed:
The original lender would continue to own the note until it is validly assigned (emphasis on “validly”). Most if not all states have adopted the Uniform Commercial Code, possibly with minor state variations. A note is an instrument under the UCC. The UCC has been interpreted (by at least some courts) to require physical possession of the note in order for the underlying security interest (mortgage)to be perfected. If a securitization trust does not have physical possession of a note, then it does not have a perfected security interest and probably has no standing or authority to foreclose. I don’t see any reason why the trust couldn’t theoretically buy the note, although I have read elsewhere that securitization trusts have closing dates which prohibit bringing anything into the trust after that date.
Bob,
Thanks for your reply. Stipulating failed conveyance at origination, I understand the Trust has no standing to foreclose. I also understand that the Trust cannot buy the note *today* because it is prohibited from purchasing a non-performing loan – in addition to the closing date issue you cite.
That implies that the original lender still owns the note, but likely not the mortgage. I’m trying to understand – is this correct? – the borrower’s failure to perform under the mortgage, triggers seizing the collateral backing that mortgage, which in this case would be the note – thus by separating the two, failure to perform under the mortgage is to the Trust, and since the original lender as the owner of the note has not been injured (financially) they would have no claim to foreclose?
m.jed and bob…, very, VERY good.
In property law, all property is a “bundle of sticks”. What they did was break one, or more, of The Sticks. And a few laws while they were doing it.
Since they may not be able to fix the broken “Stick”, and since title insurance does NOT repair a broken title, the ONLY solution under property law might be a Quite Title action. That is available for everyone who bought a defective foreclosed property. And, for the entity that has foreclosed but not re-sold. What you might, and they most certainly will not, find funny is that there is NO guarantee that they will win the lawsuit.
An innocent good faith purchaser for value probably would win. But, the bad faith foreclosers probably would not. Now that is “raw” land, wild west, justice, is it not?
I have a question about this. I get that the owner who bought the foreclosure could try for the quiet title.
What about those of us whose mortgages have been “sold” multiple times in the last few years? If our notes are still with the originators… even if we pay off our mortgages… won’t the title still be clouded? It seems possible to spend years and hundreds of thousands of dollars paying off a loan only to find out you paid the wrong party.
What action could we bring to get this resolved? We’re not looking to get out of a mortgage, but we do want and deserve to have clear title to sell this house whenever we want to sell it. None of this crapstorm is our fault, as we had no control over the faulty transfers (or lack thereof).
First, Mia, take a deep breath, and relax.
Second, while technically this problem does apply to whomever currently holds the mortgage, it probably does NOT technically apply to you. Permit me to explain, briefly. YOU were/are one of the original parties. You can show that you made ALL of the payments. Their behind the scenes, and probably unknown to you, machinations/skulduggery are irrelevant. IF you and/or your bank have the records that show that you have paid off your RE loan, they have to sign off on your mortgage. You can get damages if they wrongfully do not do it.
Third, there is a very simple way for you to avoid probably ALL of your potential problems – use the SAME title co when you refi, sell, or give to your heirs. There is NO legal way that they can refuse to insure that transaction – they were paid to help get you into it and they still “cover” you; so, they have to assist & insure you to get out of it.
Sleep tight, and don’t let the BEDdouins bug or bite.
That helps – thanks! Hopefully the title ins. co. will still be in business when we need it. We really don’t want to sell for a decade.
What will be interesting is whether the local governments will be able to collect myriad recording fees and transfer taxes that MERS was created to bypass.
Local governments have a strong financial incentive to require that each transfer be properly recorded and taxed in accordance with state and local law.
What will be interesting is whether local governments will be able to collect the myriad recording fees and transfer taxes that MERS was created to bypass.
Local governments have a strong financial incentive to require that each transfer be properly recorded and taxed in accordance with state and local law.
Witness, for example, the Ohio secretary of state complaining how the notarization bill would bypass her state’s notaries (and, coincidentally, deprive her state of the fees it collects for licensing them.)
(Sorry about the double post, the post went through while I was editing it.)
If the practice of not transferring the note is widely spread, while the solution to the note mix up seems extremely difficult. As some commenters alluded to the problem may cover many well performing homes. In other words, many thousands of houses are in limbo.
Congress already demonstrated its willingness to sweep the problem under the carpet, although only lawyers can evaluate whether this solution solves anything. My limited knowledge brings me to think that universally accepted affidavits, including fraudulent ones, doesn’t solve the ownership problem that may still arise in courts.
I wonder how this big mess can be resolved. The collapse of the servicer will not be acceptable to congress or the administration. Regular people, though, may be delighted in the plight of the Godly bonuses class.
I recommend that homeowners who “can’t afford” their mortgages fight with each new tool at their disposal. I wish it weren’t “relatively few” who were fighting. These poor rubes could take the following attitude: “I don’t have enough money, I’ve been told I’m poor and I can’t get the hours I need to boost my pay. It’s better that I live in my car, or ask the Government for help..sigh”
This lack of affordability argument, calling victims deadbeats, is another perversion of rationality. Even the HAMP program had this traditional cudgle of royalty within the boilerplate: We will only help those who’s troubles are “No fault of their own”
A clinical diagnosis of Bank behavior is badly needed at this point, and Joe Blow desperately needs to go on the offensive to save his shack.
We shouldn’t forget the investor (Yves has discussed this in an earlier post).
Virtually all investors were Funds (Pension, Hedge, etc.) that now have a fiduciary obligation (how could they not?) to investigate if the contracts with these Trusts were valid. Investors could potentially recoup hundreds of billions of dollars by unwinding ‘fraudulent’ transactions.
I’m not sure what is meant by “access the service” (a full detailed history isn’t available), but there is a resource online that is available to the public where with just a street address and a zip code, you can locate the servicer of record for a mortgage where MERS is the mortgagee. It can be found at https://www.mers-servicerid.org/sis/.
As for the purpose of MERS, I’d agree that it is to avoid recording fees. But I don’t consider that a faulty mission. The inconsistencies of recording requirements and practices from one county to another are legion. As for the execution by MERS in fulfilling it’s purpose, well, not so hot obviously.
Yves, a few points with regard to the differences between Fla and Cal home prices.
FIRST, the differences between “Judicial foreclosure” and non-judicial trustees sales is illusory, the same question: “Do you have the legal right to foreclose on THIS property?” remains. While non-judicials are using the “Don’t ask, U.S.; and we won’t tell you, on them?” approach, that does NOT solve the title problem. You cannot, at law, regain or re-sell what you do NOT own.
Also, please note that there is the “recourse” VS “non-recourse” argument – that if the lender has recourse, they are less likely to let the borrower “escape”. IF that is true, then walkaways and strategic defaults would be MUCH higher in AZ, a non-recourse state (as not amended, but they tried), than in Cal, a recourse state (as amended, slightly).
Also, please note that the same lender/servicer banks ALSO often hold 2nd home equity mortgages on the same properties. So, when they foreclose on the 1st it wipes out the title encumbrance of the 2nd. The 2nd is NOT eliminated, only it’s connection to the RE title.
SECOND, trying to compare only two of the sand states is VERY difficult to do in a vacuum. Remember: between 03 & 07 US$ 3.5 trillion non-agency RE securitized loans were made in the sand states and US$ 2.5 trillion of that was in ARMs and subprime RE loans. By one report more than 85% of those bad RE loans are now in trouble – seriously delinquent, in or finished with foreclosure, seriously underwater, in short sale or strategic default status.
Note, more than half of ALL foreclosures last & this year in the U.S. have been in the sand states, and almost ALL of the underwater property is too. MORE than half of all those foreclosures in the sand state were on ARMs and subprime RE loans.
Note, the companies who originated almost all of those ARMs & subprime RE loans are now owned by JPMorgan-Chase/WAMU, BkOAmer/Countrywide and Wells/Wichovia. Those are the same companies that service most of the RE loans for U.S. and are the ones doing the least “modifications” for U.S. and are the ones doing the most foreclosures on U.S.
THIRD, while prices in Cal may have gone up slightly due to both the Fed and state of Cal home buyers tax credits, the prices in Nev continued to fall much like Fla. And prices in AZ are now falling again too. What is NOT being reported to U.S. is that jumbo and above RE prices are now collapsing – in all 4 sand states, Cal included. Which may explain why the big bailed out banks are only now starting to approve short sales for those higher priced properties – to minimize their losses.
Now, Yves, given that MOST of those foreclosures are based upon ARM and subprime RE loans that were created using “fraud in the inducement”, it is disingenuous in the extreme for those/your commenters to argue that it was primarily, or especially ALL, the borrower’s fault. And, now irrelevant.
For Chase, BoA or Wells to argue that THEY did not do anything wrong is also disingenuous – they bought, or for WAMU were handed, a defective product that they KNEW was defective. For them to ADD to that criminal & tortuous conduct by the means you document, means that they have abetted, after the fact, a RICO crime – for which there are treble damages available. MOG, but this IS getting interesting.
http://www.ritholtz.com/blog/2010/10/why-foreclosure-fraud-is-so-dangerous-to-property-rights/
This guy did a much better job of getting across what I had said in another post
Was about to leave this link here, but I see RichFam has already done so. This is so important, and people seem to be missing it. I’ll include the link anyway.
http://www.ritholtz.com/blog/2010/10/why-foreclosure-fraud-is-so-dangerous-to-property-rights/