Words of Advice:

"If Something Seems To Be Too Good To Be True, It's Best To Shoot It, Just In Case." -- Fiona Glenanne

"Flying the Airplane is More Important than Radioing Your Plight to a Person on the Ground
Who is Incapable of Understanding or Doing Anything About It." -- Unknown

“Never argue with stupid people, they will drag you down to their level
and then beat you with experience.” -- Mark Twain

"Everything is easy if somebody else is the one doing it." -- Me

"Eck!" -- George the Cat

Sunday, October 17, 2010

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.

* "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.


Eck! said...

Case #3 is that not fraud? They send letter saying paid in full and they haven't done their part to close the books. So the security value of the mortgage is "fictional". It would seem both "banks" have not performed to contract and are in trouble big.

Sounds like mortgage providers "banks"
are trying to claim, deal and sell fiction. Isn't this how we got into the Major Event of 1929?


BadTux said...

Eck, fraud is all over the system. But EBM missed scary scenario #4: You bought a house a year ago that was a short sale. The bank *said* that your payment satisfied the mortgage lien against the house. Until one day you come home to find a foreclosure notice stapled to your front door -- from some other party altogether. Seems like the bank only *claimed* to have discharged the mortgage lien, because they didn't own the mortgage at all, some other party did... and now that other party has recorded their lien and is taking advantage of a state law in your state that allows foreclosing upon a home if you have an unsatisfied lien against that home which is greater than 50% of its market value.

Anybody who has bought a short sale or foreclosure in the past two years has to be pretty damned nervous right now, because their titles now have a big scarlet "A" on them. We're a bit better off out west in deed-in-trust land because our titles are unclouded (the titles are held in trust by title companies when there's a mortgage against them, and once the title company releases the title to a new owner, the mortgage-owner's only recourse is against the title company), but on the other hand if the whole civil deed-in-trust system collapses because suddenly the real mortgage owners swarm out of the shadows and demand their money of the title companies, money the title companies paid to the bank fraudsters because the bank fraudsters claimed to be the legit mortgage owners... well, our entire real estate market grinds to a screeching halt, because we just aren't set up for the sort of lien and judicial foreclosure system that you folks back east use.

In short, it's a mess, and it's one that no amount of shoving things under the carpet is going to fix. This mess is going to keep lawyers in business for years litigating the various claims in court... hmm, EBM, sounds like you need to move into foreclosure law ;).

- Badtux the Legal Penguin