The Mortgage Mess

The Bayou Renaissance Man has a lengthy post up about mortgages and possibly why the housing market may go Tango Uniform in a big way.

Go read it before you read the rest of this post. Please.

The issue of "who owns the loan" is worse than most people think. This is why:

Scenario 1: Say that you wanted to buy a house that had been foreclosed upon. It is quite possible that, due to the documentation issues in the foreclosure process, that the bank that did the foreclosure had no right to foreclose. Not knowing whether or not that was true, a title insurance underwriter may refuse to write title on the property or may except any challenges.*

So now you want to take out a mortgage in order to buy the property and you go down to Friendly Neighborhood Bank. They want to see an appraisal and your title report. Which you give them. FNB's loan processors look over the papers, see this big honking exception and deny you the loan.

Scenario 2: Say you have a huge mortgage and you decide to roll the dice on this. You stop paying the loan off.** The banks can't foreclose, because they can't produce the note. On the other hand, you can't sell because the mortgage is on the books. Unless the mortgage qualifies as an "ancient mortgage" and, by law, cannot be foreclosed upon, you have unmarketable title. The only way that you can sell is to find a buyer who is willing to take title subject to that mortgage, which means that it would be a cash deal at a whopping discount. It would have to be a cash deal as no other bank would loan the buyer a penny.

Scenario 3, and this is the scary one: Say that you are going to sell and that you are current on your mortgage. You have a payoff letter*** from your lender. You are getting ready to close the sale, you send a copy of the payoff letter to the buyer's attorney and the title company. Before the mortgage crisis, everything would be cool.

But now suppose the title company or the buyer's lender says: "Not so fast. Prove to us, Seller's Lender, that you are the party that owns this loan and that you have the authority to assign the loan to the buyer's lender (or to execute a satisfaction of mortgage)." The loan, like most others, probably was sold by your lender and "securitized". Your lender remained the "servicing agent"; you made your payments to the lender, but you had no idea that your lender no longer owned the loan. Even if the lender has a duly-executed servicing agreement, that does not prove that the party that the lender sold the loan to still owns it.

Conceivably, in every state where homeowners are the record owner of the property (owner in fee) and where the homeowners have mortgages, those homeowners may be stuck in a situation where they cannot get clear title in order to sell.

This could get very ugly very fast.

Pass the popcorn.

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* "Except" is title-speak for "if this happens, you're on your own."
** This only works if you have record title and the banks have a mortgage. If the banks hold a "deed of trust", you're still screwed, because the banks have title.
*** This letters gives the loan payoff amount as of the projected closing date, a per diem in case the closing date varies, and directions as to how and where the funds are to be transmitted.