You can think of it as a financial mulligan, a re-casting of foreclosures which were thought to be over and done but now, er, maybe not.
Since at least 2007, foreclosure defense lawyers and a growing number of judges have pointed out that when it comes to taking a home everyone must play by the rules. At the very least those rules include clear ownership of the loan by the lender and a documented failure to make payments by the borrower.
The foreclosure process in many states has now been slowed by the dawning realization that sworn affidavits used by lenders to support claims of non-payment have been improperly prepared, meaning they could be wrong. This is hardly a surprise given the revelation that in some cases individuals were signing hundreds of affidavits per day, a pace which leaves little time for fact checking.
No less important, the question of who actually owns the note has become increasingly uncertain. In a recent case, a New York state court ruled against a lender seeking to foreclose. Why? The lender could not show that it actually owned the loan. The New York case is similar to a number of decisions in other states.
A Bank Foreclosure With A Twist
To date perhaps the poster child for the foreclosure whoopsie movement concerns the case of Warren and Maureen Nyerges. The Florida residents were the targets of a foreclosure effort by the Bank of America, an interesting event given that; first, the couple had not borrowed money from BOA and; second, they bought for cash and owned their home free and clear. There was no mortgage to foreclose.
After their day in court, the Nyerges turned around and sued BOA for legal expenses — and won. According to WINK-TV in Fort Myers, the bank failed to pay so the attorney representing the Nyerges foreclosed on a local BOA branch. The branch was shut down until the manager paid off the debt.
“The matter of precision with foreclosures is extremely important because most of us want what’s right for both borrower and lender,” said James J. Saccacio, the chief executive officer with RealtyTrac, the leading supplier of foreclosure data and listings. “While there’s little doubt that the overwhelming majority of foreclosures are factually correct in the sense of missed payments, it’s also true that some foreclosures have been made in error and that should be a concern for everyone.”
Here’s an example: The Bank of America and Saxon Mortgage Services, a subsidiary of Morgan Stanley, have agreed to pay $22 million to resolve allegations of improper foreclosures involving roughly 175 VA borrowers.
This may not sound like a big deal in the context of millions of mortgages, but the possibility of an incorrect foreclosure raises an assortment of much larger concerns.
One worry involves real estate mortgage investment conduits, so-called REMICs. Such investment vehicles have important tax and accounting preferences — but only if they closely adhere to complex requirements. Mess up loan ownership and the tax status of a REMIC can be in danger.
A second worry is that a loan transfer goof may mean ownership of a mortgage held by a REMIC is unclear. If that’s the situation then it may be difficult or perhaps impossible to foreclose.
“Increasingly,” explain Adam J. Levitin and Tara Twomey in a recent study, “there are concerns that in many cases the loan documents have not been properly transferred to the trust, which raises issues about whether the trust has title to the loans and hence standing to bring foreclosure actions on defaulted loans.”
Just Change The Rules
Title companies, servicers and lenders have seen the problem and are working hard to find a solution — at least one that works for them.
The best evidence of this has been reported by the Portland Oregonian, which tells us that “the Oregon House Judiciary Committee voted today to approve Senate Bill 519 without an amendment sought last week by loan servicers, title companies and credit unions. The amendment would have relieved lenders of ensuring a property’s ownership history is properly recorded in public records before foreclosing outside a courtroom.” (See, MERS foreclosure amendment dies in Oregon House committee, June 1, 2011).
Had the amendment passed, if you got bad title to an Oregon property because a lender improperly foreclosed on a prior owner, that would be your problem — even if you had paid for title insurance.
The problem raised by title questions involves not just foreclosures to be made now and in the future, there’s also the very real possibility that past foreclosures will need to be reviewed. Where past paperwork is uncertain it may actually be necessary to “re-foreclose” to get it right.
For instance, Citibank and Citi Residential Lending found that in New Jersey 210 foreclosure affidavits required correction and, of these, “a significant percentage contained errors that were actually in the borrowers’ favor.”
What is Citi doing to resolve the problem? It intends to dismiss all 210 foreclosure actions and then re-file individual cases as appropriate.
“Flawed mortgage banking processes have potentially infected millions of foreclosures, and the damages to be assessed against these operations could be significant and take years to materialize,” said Sheila Bair, outgoing FDIC Chairman.
And the reason why the ownership of so many homes and mortgages may now be in question? Fundamentally it was to save a few dollars so that mortgages could be electronically bought and sold on Wall Street without having to document each transaction in local property offices. Somehow you get the sense that it would have been easier and a lot cheaper to just pay the fees.
Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.