Robo-Signings Not the Only Issue Facing Housing Industry
Bank of America (BOA) and GMAC announced Tuesday that they were resuming the prosecution of foreclosures following several weeks of a self imposed moratorium. The moratorium in BOA's case extended to all 50 states while GMAC at first stopped evictions and owned real estate sales 23 states primarily those in which judicial foreclosures were the primary mechanism for repossession and then also halted foreclosures. The moratorium was initially provoked by suspected problems with the way in which foreclosure affidavits had been processed. Additional questions then arose about ownership of mortgages and the standing of entities to foreclose. BOA will resume foreclosures on over 100,000 homes in two dozen states while GMAC will resume foreclosures, evictions and sales as individual documents are reviewed.
Despite the assurances from the two financial institutions that they feel secure in their right to move forward, the matter will probably not go away any time soon. Attorneys general in all 50 states have announced investigations, affected homeowners have brought suit, and the White House announced Tuesday that an interagency task force on mortgage fraud has launched an investigation as has the Federal Housing Administration.
At the heart of the problem are three apparent issues. Robo-signing, the process of generating thousands of affidavits seeking summary judgment, often by unskilled and unqualified employees who have neither read nor certified the underlying documents, has been well covered by the press including MND. Two other issues, however, have not received much exposure.
The first is the involvement of the Mortgage Electronic Registration System (MERS). This company, formed in 1998 by Fannie Mae, Freddie Mac, and several major lenders, actually is the owner of record of approximately 60 percent of American mortgages. Arguments have been made that MERS does not have the right to foreclose on properties where the note is held by others. However, according to the MERS website, at closing a borrower signs a security instrument - the mortgage or deed of trust - which names MERS as nominee for the lender and its successors. The lien is recorded in the name of MERS and as long as any sale of the note is to a MERS member MERS remains the mortgagee of record and continues to act as a nominee for each subsequent note-holder.
The rights of MERS to act on behalf of the note-holder in foreclosures as well as other actions have been upheld in a number of state court decisions. These decisions have variously recognized MERS' standing to foreclose and have confirmed the company's ownership of the security instrument.
The existence of MERS appears to actually correct many of the ownership issues that arose during the savings and loan and banking crises of the 1980s. At that time it was very difficult to track the owners of mortgages loans were sold, servicing rights were transferred, or financial institutions failed. Whether by accident or design, banks had a pervasive tendency to avoid recording assignments. This created an enormous problem, not so much with foreclosures as for attorney's attempting to backtrack and obtain discharges for long paid notes. This deficiency in assignments was also a problem when interest rates dropped precipitously and homeowners were in serial refinancing mode - moving to a new loan before the last mortgage or even the one before that could be recorded. Having a mortgages assigned permanently to MERS with a unique identifying number makes it possible to track down a current or previous mortgage quickly and inexpensively.
The third issue in the current foreclosure controversy is transfer of trust. According to a research paper produced by BOA, when a note is transferred to a trust, it is endorsed "in blank", meaning that the owner of the note is not assigned. The note is only endorsed to the trustee or servicer on behalf of the trust if they need to institute foreclosure proceedings. The physical documents are typically delivered and held by the designated custodian for the trust. The existence and validity of the notes should be verified by the seller and the custodian prior to transfer and the loan purchase agreements also requires evidence of ownership of the loans by the trust. That ownership should also be recorded with MERS.
Several of the lawsuits which upheld the rights of MERS as owner of the security agreements also addressed the issue of "in blank" endorsements. In Mortgage Electronic Registration Systems, Inc. v Ventura for example, the court observed that the current practice of bundling and servicing mortgages by third-party companies is now the rule rather than the exception. The note was endorsed in blank and was therefore bearer paper; MERS could therefore bring the action.
Regardless of the outcome of the various investigations that are now starting up, the banks are going to pay dearly for this controversy. They probably have every right to foreclose, but this is a PR disaster that brings to the forefront - and probably to a number of eager committees in the next Congress, not only foreclosure documentation but the debacle surrounding various loan modification programs. It will certainly also remind a lot of people of the malfeasance of the middle decade that led to the mess in the first place.
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