Safe as Houses: A question of title

Posted Wednesday, May 18, 2011 in Analysis

Safe as Houses: A question of title

analysis by Gina Hamilton

Over the summer of 2010, banks and other lending institutions took more American homes than in any other quarter since the housing market began to decline in 2006: 288,345 properties. Almost none of them will be able to be sold, for three important reasons.

First, the largest banks (and Fannie Mae and Freddie Mac, too) face allegations that they used so-called "robo-signers" to sign off on foreclosure documents that they had never read. This, despite signing an affidavit that assured the court that they were very familiar with the facts in each particular case.

Second, title-insurance companies and mortgage lenders, knowing that these properties will probably end up in court, are refusing to provide insurance or mortgages for foreclosed properties. Foreclosures are just the tip of a very massive iceberg about to sink the ship of the American housing market.

But third, and potentially most troubling, there is a growing realization that not only did the banks not have all their bits and pieces of all the documentation necessary for a foreclosure – or a sale! – together, the horrifying reality for the banks and their investors is that the documents, in perhaps as many as 65 percent of the existing mortgages in the U.S. market, simply no longer exist at all.

Currently, because of the glut on the market, foreclosure sales amount to about a third of all real estate transactions. Keeping foreclosed properties off the market, because they can’t be mortgaged with a simple quit-claim deed, or because title-insurance companies properly want nothing to do with them, will drag down the market for some time to come. Nearly 600,000 bank-owned properties are not currently on the market.

State attorneys general launch probe

All 50 states and the District of Columbia began an investigation in May 2010 into whether individual mortgage servicers have improperly submitted affidavits or other documents in support of foreclosures in each state. “The facts uncovered in our review will dictate the scope of our inquiry,” said Roy Cooper, president of the National Association of Attorneys General. In a letter to this reporter, he indicated that banks are participating through their regulatory agencies as well as individually. Some of the practices, including using "robo-signers," signing without a notary public present, and failing to confirm the accuracy of the paperwork, "may constitute a deceptive act and/or an unfair practice, or otherwise violate state laws," he wrote.

While in and of itself, the investigation does not prohibit new foreclosures from going through, the goal of the process is to pressure lenders to come to the table to work out as many mortgages as possible.

“This issue affects people's homes, the stability of our families and our local economy and the integrity of our judicial system,” said former Maine Attorney General Janet Mills. “This probe will be thorough, expeditious, and fair to all concerned.”

Mills noted that at least three court decisions in Maine in the last year found serious flaws with documents filed on behalf of mortgage servicers. Maine’s highest court ruled in August that Mortgage Electronic Registration Systems Inc. (MERS) is not a proper party to a foreclosure action. In addition, courts in both Maine and Florida have sanctioned GMAC for inappropriate document-signing practices.

Mills said these recent court rulings highlight the need for a broader investigation into foreclosure practices conducted in Maine by out-of-state servicers.

Maine, like 22 other states, has a judicial foreclosure process for residential mortgages. Last year the Maine Legislature enacted a foreclosure-mediation process that requires proof of ownership of the mortgage and presence of a person with authority to mediate in good faith all aspects of a residential mortgage.

The new multistate group, through an executive committee, will contact a comprehensive list of individual mortgage servicers. The group’s initial objectives include:

•   Put an immediate stop to improper mortgage-foreclosure practices.

•   Review past and present practices by mortgage servicers subject to the inquiry.

•   Evaluate potential remedies for past practices and to deter future improper practices.

•   Establish a mechanism for more effective independent monitoring of future mortgage-foreclosure practices.

The Mortgage Foreclosure Multistate Group will consult with federal regulators and agencies, including the Mortgage Fraud Working Group of the Financial Fraud Enforcement Task Force, which was created in 2009.

By October 2010, all 50 states had signed on to the group.

“This is a cooperative and coordinated effort to address a serious problem,” said Mills. “The group may limit, expand or change its objectives, but it won’t stray from the goal of addressing a situation that has affected hundreds of thousands of homeowners.”

The state's new attorney general, William Schneider, has not made a statement about the group, but neither has he pulled Maine out of the coalition.

The problem of MERS

During the boom years of mortgage lending, securitization and reassignments, keeping track of, in some cases, thousands of assignment notes and other documents became almost impossible. So in 1995 the banks started a new company, Mortgage Electronic Registration Systems Inc., operated out of Reston, Va., to keep electronic records of all these transactions. Although the company claims on its website to be the "mortgagee of record" in something like 60 million mortgages, several states, including Maine, have struck down its supposed interest in the mortgages.

Class-action lawsuits against MERS currently are pending in at least three states: California, Nevada and Arizona. State supreme courts in Maine, Arkansas and Kansas have ruled against MERS' right to file foreclosure actions. In an individual borrower's case in Oregon, a federal judge in September issued an injunction, at least temporarily halting a MERS-filed foreclosure, because of evidence that MERS doesn't own the mortgage loan in question.

MERS earlier, however, won court rulings in several states upholding its right to foreclose. In most of those cases the issue raised wasn't whether MERS owned the mortgage loans, but whether it could proceed even though it wasn't able to locate and produce documents such as loan assignments.

If court rulings against MERS' authority to foreclose proliferate, many foreclosure cases may be halted indefinitely, and some homeowners in default may end up with clear title to their homes. Halts to MERS foreclosures would have a big impact on lenders and loan processors who rely on MERS to file foreclosure actions.

In addition to the legal quandary that is posed by MERS in terms of filing foreclosures in the first place, MERS’ original function – to track the documents of a mortgage – are also in question.

In 2008, JP Morgan Chase stopped filing its documents with MERS. On the MERS website, Bank of America and BAC Home Loans are listed with a contact website of, which had been acquired by Bank of America in January 2008, suggesting strongly that their records aren’t up to date with MERS, either. And MERS, by its own admission, is not keeping track of the assignments that occur after a mortgage is initially filed with it.

“MERS acts as nominee in the county land records for the lender and servicer. Any loan registered on the MERS System is inoculated against future assignments because MERS remains the nominal mortgagee no matter how many times servicing is traded. MERS as original mortgagee (MOM) is approved by Fannie Mae, Freddie Mac, Ginnie Mae, FHA and VA, California and Utah Housing Finance Agencies, as well as all of the major Wall Street rating agencies.”

However, in several states, the high courts have decided MERS is not the "nominal mortgagee" and has no standing to foreclose, which means that the actual mortgagees will have to find the paperwork, which possibly hasn’t been kept for many years. In Maine, the Supreme Court categorically stated in August 2010 that "MERS’ only right is the right to record the mortgage." That is a far cry from being the "mortgagee of record" or the mortgagee’s "nominee" in court.

The serious trouble with MERS reached national attention in November 2009, involving Landmark National Bank of Kansas, and its use of MERS. MERS, with about 3,000 bank participants, also says it acts as “nominee” for the lender in county land records and as servicer no matter how often servicing is traded.

But there is no technical or legal definition for “nominee.” That's why the case raises questions about the ability of a non-lender – including bank servicers and MERS – to enforce its rights in foreclosure or bankruptcy proceedings, according to bankruptcy attorney Tim Nixon.

“The system still requires the last lender in the chain to endorse the note over to MERS before the foreclosure can begin,” he said. This, too often, has not happened.

The real culprit is securitization, which has led to multiple mortgage transfers and left "imperfect" mortgage documentation, Nixon explains. In mortgage foreclosure and bankruptcy, there must be a party that can assert rights to payment. But electronic pooling and securitization has made this harder, he said.

“I can agree with you that [the company] that made the loan is generally no longer the company that owns the loan,” said R.K. Arnold, CEO of MERS. “But the whole reason MERS was created was because the industry needed to do a better job of keeping track of assignments.” MERS has been criticized inaccurately, he says, for leading to sloppy paper mortgage filings in local real estate recordation offices. Arnold says that notes have always been freely transferable, and are not always recorded in county records.

Regardless of the process, “It may not be clear who exactly currently holds the note and the mortgage,” Nixon said. “What we have here is a conflict between modern technology and the law. Through technology, we've turned residential mortgage lending into a commodity business. But what made perfect sense for the financial industry doesn't comport with the law.”

The problem: As a matter of law, if the note goes away, the mortgage goes away, too. “Part of the reason for the court's conclusion was that you can't separate a mortgage from the note it secures. The mortgage doesn't stand by itself,” he said. As a result, poor documentation on a mortgage that is sold and resold could leave a lender and servicer without proof they are tied to the note. If such a mortgage goes through foreclosure or bankruptcy, a court could discharge the debt and give the house to the debtor – free.

In the Landmark case, Landmark held a $50,000 first mortgage, and the borrower later took out a $93,100 second mortgage with Millennia Mortgage Corp., which filed the mortgage with MERS. Millennia later assigned the mortgage to Sovereign Bank but did not record the assignment. The borrower defaulted and Landmark foreclosed, giving notice to Millennia – but not MERS or Sovereign, which also failed to record the assignment.

The property was sold at auction, and MERS, claiming lack of notice, tried to block Landmark from collecting. This moved through the courts until MERS was denied standing by the Kansas Supreme Court, which noted that Millennia did receive notice and that MERS was solely the nominee, not a lender and not a necessary party to the foreclosure. The remainder of the sale went to the borrower.

MERS took the case to the Kansas Supreme Court, and lost. Arnold said that MERS would fight other rulings in Kansas and elsewhere, including Maine, which has also barred MERS from any legal standing in a foreclosure.

In the worst case scenario, not knowing who owns one’s note can make not only foreclosure impossible for banks, it can make a sale between willing people impossible.

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