Most homeowners, with todays’ mortgage crisis, have felt the ramifications of a declining economy, whether through a pending foreclosure, a cut in credit lines, etc. What is less understood are the tremendous title issues that have been created by all this foreclosure activity throughout the country. Its actual ramifications may take years to truly access.
Mortgages bundled into securities were a favorite investment of speculators at the height of the financial bubble leading up to the crash of 2008. The securities changed hands frequently, and the companies profiting from mortgage payments were often not the same parties that negotiated the loans. At the heart of this disconnect was the Mortgage Electronic Registration System, or MERS, a company that serves as the mortgagee of record for lenders, allowing properties to change hands without the necessity of recording each transfer.
MERS was convenient for the mortgage industry, but courts are now questioning the impact of all of this financial juggling when it comes to mortgage ownership. To foreclose on real property, the foreclosing party must be able to establish the chain of title entitling it to relief. But MERS has acknowledged, and recent cases have held, that MERS is a mere “nominee”—an entity appointed by the true owner simply for the purpose of holding property in order to facilitate transactions. As recently as July, MERS announced that it would no longer foreclose in its own name on behalf of noteholders. Recent court opinions stress that this defect is not just a procedural but is a substantive failure, one that is fatal to the plaintiff’s legal ability to foreclose.
That means hordes of victims of predatory lending could end up owning their homes free and clear—while the financial industry could end up skewered on its own sword.
The Massachusetts Supreme Judicial Court issued a court decision , which made it clear that the banks' foreclosure practices -- and indeed, the standard securitization deal -- violated longstanding basic Massachusetts real estate law, and thus, many completed Massachusetts foreclosures were invalid (US Bank National v. Ibanez) . The foreclosing banks, which had either since sold the properties or still "owned" them, had no right to foreclose, and therefore had never owned those properties. So who owns them now? Well, the fact that it's a question is the very definition of "clouded title."
Many title insurance agents and companies have declared these properties as uninsurable, meaning the owner could not deliver clear, insurable title to a property buyer. This could make the property unsalable. The problem is worst for properties improperly foreclosed on that were still bank-owned. Those properties were truly uninsurable. That's because the bank couldn't make a claim on the title insurance policy it had purchased when making the original loan, since it was the entity that clouded the title. Indeed, honoring that policy would be like letting an arsonist collect on fire insurance. Thus much of the current bank-owned inventory in Massachusetts is largely uninsurable and thus unsellable.
When it comes to the clouded title problem, one group is wholly innocent: the borrowers -- "deadbeat" or not. The title issues have been created by the banks themselves. And since the mortgage industry's robo-signing scandal first broke, people have been aware that banks have been illegally foreclosing on homes.
Here’s the problem, simply: Because of these bad titles, property owners can't prove they own the properties they think they bought, and banks can't prove they had the right to sell them.
Even though it's impossible to know how many properties are affected, estimates range between 60 and 70 million. And now that many foreclosures are being carefully scrutinized, flawed processes and paperwork seems to be the normal, not the exception.
You can't sell real estate when you can't establish that you own it -- banks won't loan money for purchasers to buy the property. That's because the bank wants to be sure that if it forecloses, it will get good title to the property. That, of course, kind of got lost in the frenzy and drive to make as much money as possible. That's why banks won't approve a mortgage for a property if a title insurance company won't insure its title. And title insurance companies won't do that if they know the title is clouded.
While there is plenty of blame to go around include our government regulators and elected officials, the largest share of the blame still must go to banks and their lawyers. Because without them, the clouded title mess wouldn't exist. Here's how all of them created the crisis.
First, banks across the nation have used fraudulent documents to "prove" they have the right to foreclose. This is the classic robo-signing situation.
While the issue is clearest in judicial foreclosure states like New Jersey -- where the documents are getting more scrutiny -- the problem exists everywhere. In nonjudicial foreclosure states, the problem frequently surfaces first in federal bankruptcy courts when banks ask for permission to foreclose on debtors in bankruptcy. The problem also shows up in state courts as homeowners try to fight the foreclosures.
For this title clouding problem, blame should be placed on the mortgage servicers, who generally are the big banks.
Second, as both the Ibanez case and Kemp v. Countrywide Home Loans out of New Jersey illustrate, banks' standard securitization procedures may have failed to properly assign the promised mortgages to the pooled trusts, which means those securities aren't really mortgage-backed after all. It also means that the ownership of those mortgages (and in some states, title to the properties) remains with different banks that were part of the securitization processes -- banks that may or may not still exist today.
For this problem, blame the securitizers, who include the big banks, Wall Street, and their big law firm attorneys.
Third, foreclosure attorneys have processed their filings in illegal ways. For example, in Pennsylvania, the attorneys have done foreclosures with papers no lawyer reviewed, bearing signatures forged with the firms' named partners' permission. Those foreclosures, which were done via the illegal practice of law, appear to be void -- and there are many. Or consider that several Maryland firms have also had underlings forge lawyers' names on foreclosure documents, including on more than 1,000 deeds.
Considering that speed over substance has replaced good lawyering and following of state-mandated procedures, it's impossible to believe that these problems are limited to only a handful of states.
For this problem, blame both the foreclosing banks and their foreclosure lawyers. Blame the banks, because it was their relentless cost cutting that got us the current foreclosure business model. Blame the lawyers, because they knew what they were doing was illegal and let their greed get the better of them.
Fourth, and perhaps most problematic, is the MERS debacle.
MERS mortgages have questionable validity. Whether or not the MERS model is legal seems now to depend on which judge is making the decision. Cases in different states, and even within the same state, are coming out differently. Where the MERS model is illegal, foreclosures done by MERS or by the people it assigns the mortgage to have clouded titles. Even where the MERS model is legal, the system's incredibly sloppy record keeping could leave multiple banks believing they have the right to foreclose on a given property.
For the MERS problem, blame the following, in no particular order: Fannie Mae and Freddy Mac, who were instrumental in creating it; Covington and Burling, the law firm that blessed it; Moody's, for blessing it as well; and the big banks who ran with the flawed system and made it what it is today.
If you are facing mortgage problems and difficulty with your lender, please contact our office for a free consultation. If you would like to learn more about clouded titles, visit www.cloudedtitles.com.
This article was compiled from research and opinions of Mitchell C. Beinhaker, Esq. For comments or more information, email mcb@beinlaw.com.
August 23, 2011
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