When will it end? That’s a question commonly associated with toothaches and tax preparation, but increasingly it applies to the foreclosure mess.
So when will it end?
At this moment we don’t have an answer — but we’re beginning to see some light at the end of the tunnel.
MERS — the Mortgage Electronic Registration System — was created to speed the electronic transfer of mortgage notes and reduce the cost of such transfers. The way it works is that a loan is originated, recorded in the local records and then transferred into the MERS system. Once inside MERS proponents argue that loans can be bought and sold by MERS members without having to record each purchase and sale locally. This is not just a convenience, it’s also a money-maker: MERS says that member companies have saved more than $1 billion in recordation fees.
But once inside MERS who owns the mortgage note? Can MERS be the beneficiary of something it doesn’t own? Is MERS an agent of the actual owners? Can MERS foreclose — a practice it stopped about a year ago. Can older foreclosures started by MERS be re-opened? And where, exactly, are the original notes physically located?
Washington state’s Supreme Court has just ruled that MERS does not have a right to foreclose because it does not actually own the mortgage notes in its system. That’s a problem in a number of states because without a note there’s no standing to seek foreclosure.
The Washington case is notable because it enforces the traditional standard of no note, no foreclosure. The Washington case is also notable because courts in other states have come to the opposite conclusion, including decisions in California and Idaho.
It’s important that such cases end because until they do the foreclosure mess is just going to drag on and on.
This brings us to the news — some good, some bad and some just plain awful.
The good news is that as cases wind through the state courts the differing opinions mean the MERS issue is headed to the Supreme Court. What the Supreme Court will ultimately decide is entirely unknown but a decision will at least bring closure.
The bad news is this: The market will remain unsettled and devalued until who-owns-the-note issues are finally resolved.
The worse news is this: Once the note ownership issues are settled it’s possible that a huge backlog of stalled foreclosure actions will be unleashed, creating a massive surge of foreclosures actions that will instantly and at least the short run will hold down home values.
You can see this in Maryland. Since late 2010, foreclosures in the state have been stalled and delayed because of robo-signing questions. Now, with some resolution of the robo-signing issue, there’s a new problem.
“The break in the foreclosure dam resulted in more foreclosures being started in the second quarter of 2012 than in any quarter during the financial crisis,” reported The Washington Post. “Though the glut of new foreclosures in Maryland was anticipated by home loan experts, the sheer number of proceedings filed — at least 20,000 in a three-month span — serves as a reminder that the state’s struggle with foreclosure will continue even as home prices and sales numbers continue to normalize.”
Well, no, home prices in Maryland cannot be “normalizing” until 20,000 discounted properties are bought up. Only when those foreclosures and related short sales are absorbed can we can talk about “normalization,” price stability and perhaps even higher home values.
The Maryland model also holds true for the country. Only after the shadow inventory of short sales, foreclosures and REOs is largely absorbed will the marketplace return to normal — whatever normal might be.