Buyers of property at foreclosure are looking for a bargain, but that risk now must include the possibility that the title will be defective. One unsuspecting family purchased a home at foreclosure, intending to sell it to their daughter, only to have a title company question whether they acquired good title after they'd already invested $100,000 in renovations. (Nightmare in Land Court, Mass. L.J.) In the wacky world of securitized mortgages, who owns the mortgage is a 'shell game' worthy of the most accomplished back-street hustler. How securitized mortgages caused the collapse of the American economy is an oft-told tale that needn't be repeated here. Suffice it to say that during the housing bubble lenders packaged thousands of mortgages together into each securitized trust, selling shares off to Wall Street investors much like selling shares of stock. Since banks no longer intended to hold their own mortgages, the incentive to avoid 'bad mortgages' gave way to greed because these now would be someone else's problem. The days when your local bank owned your mortgage and had an incentive to work with you to save you both from a foreclosure are, by and large, over. Given the preference of lenders for foreclosures instead of loan modifications, one can only assume that lenders view a foreclosure as a cleansing process that purges a bad mortgage from the books and provides some sort of closure. The recent case of US Bank National Association v. Ibanez demonstrates that foreclosures aren't the end of a bad loan, and that securitized mortgages can be as hard to kill as cockroaches in a rundown apartment.
In Ibanez, Massachusetts' highest court voided a foreclosure sale, finding that US Bank never owned the note and mortgage at the time it conducted the foreclosure sale, and, therefore, never acquired good title. The mortgage industry was so concerned about this type of problem that in the Fall of 2010 it took the extraordinary step of trying to ram through Congress a bill that would have validated foreclosures by 'rubber stamping' the shoddy documentation behind securitized mortgages. President Obama vetoed that legislation. US Bank was supposed to have been assigned the Ibanez mortgage years earlier as trustee of a securitized trust, but amidst the thousands of mortgages changing hands every day, that little detail was overlooked. Realizing its chain of title was flawed, US Bank attempted to 'paper over' the problem by executing an assignment of the mortgage 14 months after the foreclosure sale. The Massachusetts Real Estate bar association filed an amicus brief, declaring the corrective assignment met local title standards, admitting this problem was in fact very common. While obviously intended to be helpful, one can only wonder at the arrogance of a position that attempts to justify an error by pointing out how often it occurs. The court remained unpersuaded, and the rejection of this title standard calls into question the legitimacy of innumerable other foreclosure sales. The Ibanez holding has left banks wondering whether it's even possible to correct this type of problem, particularly if one of the assignors has filed bankruptcy. In my bankruptcy practice, it is not at all unusual to see lenders file a corrective assignment prior to commencing a foreclosure action trying to 'paper over' the problem. Indeed, the New Hampshire Bankruptcy Court now requires mortgage holders to include written proof of assignment as part of a lender's request to foreclose.
A big culprit in this convoluted mess is MERS, an organization created by various lenders, and one of the foundational blocks of the securitized mortgage market. MERS operates a private recording system where lenders can assign a mortgage outside of the chain of title in county land records, thus, avoiding recording fees. By avoiding the transparency of the public recording system, MERS makes it difficult to follow the chain of title of who has acquired your note or mortgage. Since the typical securitized transaction involves the transfer of a mortgage several times to insulate the trust from liability, MERS lawsuits nationwide have challenged its legitimacy, particularly the intentional avoidance of local recording fees. MERS claims to register more than 60 percent of the mortgages in the United States within its system. The Ibanez problem may be just the tip of the iceberg. The FDIC Chairman recently warned mortgage servicers not to let MERS conduct foreclosures, a common practice in years past. He also advised mortgage servicers to disclose the full chain of mortgage assignments in any Notice of Default sent to a homeowner prior to a foreclosure.
If you have a MERS mortgage and are looking for information, you can find it at the MERS Servicer Identification website. If you no longer know who owns your mortgage because your mortgage has been transferred several times, your servicer is required to provide you that information upon written request under the Truth in Lending Act. Send a request for this information to your mortgage servicer pursuant to Section 131(f) of the Truth in Lending Act, 15 USC 1641(f), requesting the name, address and telephone number of the owner of the promissory note signed by you and secured by your mortgage loan. Finally, for the overly ambitious who have a securitized mortgage and want to view the legal requirements for transfer of the note and mortgage to the trust, you can generally find that information in Section 2.01 of the Pooling and Servicing Agreement ("PSA") at the SEC's Edgar database. Be forewarned that the length of the typical PSA caused one judge to jokingly warn me that if I made him wade through the hundreds of pages of fine-printed legalese, I might regret it someday.
The above is not intended as legal advice for your particular situation. Questions should be addressed to attorneys admitted to practice within your state. Richard Gaudreau is a consumer bankruptcy lawyer admitted to practice in New Hampshire (NH) and Massachusetts (Ma) and may be reached through his website at attorneygaudreau.com, by email at Richard@attorneygaudreau.com, or by calling 603-893-4300.
1. It was in a state where all foreclosures are judicial
2. I had the title searched back for 60 years by an experienced title abstractor
3. The closing was performed by an attorney who represented me rather than the seller or lender and certified title.
4. I purchased owner's title insurance at closing.
Any possible errors could be caught at any step from #1 to #4, and I would be thoroughly protected..
Bottom line - buyer beware is applicable to all 50 states irregardless of whether it is a judicial or non-judicial foreclosure state. The documents transferring the mortgages into the securitized trusts are flawed and/or deficient. In many cases, the notes were never actually negotiated into the trusts pursuant to the PSAs, therefore, the trusts cannot claim ownership.
#3 closings must be performed (in an attorney state) by a neutral attorney, from the title company. You can hire an attorney to represent you and review the documents, but an attorney who represents you personally can not conduct the closing
Individual state laws govern who must represent whom in any real estate closing--sale or refinance. In every state, you have the right to be represented by an attorney of your choice, however, that attorney may not be permitted to do the closing in many cases.
State law in South Carolina mandates that in any real estate closing involving a mortgage the closing attorney MUST represent the borrower absent a signed wavier where the borrower allows the attorney to also represent the seller if the closing is a full purchase.
Under no circumstances in South Carolina can the closing attorney represent the lender, mortgage broker, mobile home dealer or Realtor.
This is why South Carolina is not seeing the kinds of problems arising from foreclosures as are other states.
If two people are on the mortgage, I wonder if the bank can foreclose if one person goes bankrupt.
We document every fax, letter and phone conversation. It also doesn't hurt to have a reputation like mine in the foreclosure defense industry and fact that I work with some of the best foreclosure defense attorneys in the country which scares the crap out of the banks. When I'm done doing my job, the homeowner's attorney knows more about the file than the mortgage servicer.
Our Georgia Department of Banking and Finance is useless as they seem to be simply wanting information to forewarn the foxes in the hen house.
Thank you very much for this information. I'm going to be busy.