Purchasing a home in foreclosure always requires extra due diligence, but the recent controversy over the validity of document reviews by loan servicing representatives raises additional concerns for buyers who need to be certain they are getting clear title to the property. Several big banks in September put foreclosures on hold, particularly those in the 23 states that use a judicial process that requires lenders to petition a court for permission to foreclose. The banks admitted to widespread robo-signing, through which overloaded loan servicing representatives authorized tens of thousands of court papers each month without checking the underlying documents.
The District of Columbia is a nonjudicial jurisdiction, so foreclosures there were not affected. In Maryland, foreclosures follow a judicial process, while in Virginia lenders have the option of using either the judicial or nonjudicial form.
Cameron Findlay, chief economist for Lending Tree, said lender-owned properties — also called real estate owned or REO properties — usually sit in a bank’s inventory for a period of time, during which the bank can cleanse the title. He said it is critical for buyers to purchase owner’s title insurance, which protects them should there be any title issues down the road.
Findlay’s company is affiliated with a title insurer, and while he expects title firms will add a risk premium to cover the whole robo-signing problem in the short term, they will continue to issue policies.
Attorney David Shaev, of Shaev & Fleischman LLP in New York, disagreed. “A good title will be too hard to get,” he said, adding that he would not represent a client purchasing a REO. His concern is with the status of the Mortgage Electronic Registration System, or MERS, which is related to robo-signing.
The MERS situation ultimately could affect every state.
Mortgages often are traded like baseball cards, Findlay said. Each transfer in that chain of sale must be accompanied by a parallel chain of assignments. Each time the loan is sold, there must be a perfectly executed assignment of the note and mortgage transferring ownership. This step sometimes is ignored, and that can wreak havoc on attorneys conducting title searches or trying to track down discharges for old mortgages.
Fannie Mae, Freddie Mac and other major lenders attempted to streamline the process by forming MERS in 1998. Mortgages are recorded in the MERS name and it acts as a nominee for the note-holder through any future sales. In most states, however, the mortgage is merely an accessory to the note. When the loan is sold, the note must be assigned and the original copy of the note resides with the new owner of the loan.
Shaev said notes frequently are either not assigned or they are “signed in blank,” not naming a specific buyer. In other instances, notes are never physically transferred to the new owner, so when a lender forecloses, it may not have a valid assignment of or even know the whereabouts of the note.
Lenders are foreclosing in the name of MERS as the nominee even though MERS does not own the loan. Some attorneys maintain, therefore, MERS does not have standing to foreclose. Without an assigned note, it also is not clear whether the lender has the right to foreclose, either. MERS is the nominee for an estimated 60 percent of American mortgages.
This gets even messier when a loan has been sold into a trust underlying a mortgage-backed security. Many trust documents require the trust to own the loan before or shortly after the trust closes, all documents be in the file and all loans be performing when acquired.
Backtracking to obtain assignments on a delinquent loan is of questionable legality, especially as many companies that would need to provide the assignments, such as Countrywide Mortgage, have failed.
Shaev has represented plaintiffs in several suits where MERS was an issue. He said instances of incomplete collateral files and unexecuted or improperly executed documents are rampant.
Findlay said he expects state attorneys general will not allow foreclosures to proceed until assignments are complete.
“This work can be quite extensive,” he said. “The lender must establish a chain, recreate the past. It will not happen overnight.”
The attorneys general have power under the new financial reform law to bring criminal suits against federal banks, said Shaev.
“Hopefully they can force the banks to modify loans down to the property value,” he said. While some homeowners may benefit, Shaev said he expects “it will provoke a major war between the banks and the trusts that own the loans.”
