Diana Olick, writing for CNBC, has an article entitled Foreclosure Fraud: It’s Worse Than You Think. I’ve touched on this a little bit before, but the problem faced by big time mortgage holders is that they cut corners and didn’t get their paperwork right.
The issues are securitization, modernization and a whole lot of cut corners. Real estate law requires real paper transfer of documents and titles, and a lot of the system went electronic without much regard to that persnickety rule. Mortgages and property titles are transferred several times in the process of a home purchase from originators to securitization sponsors to depositors to trusts. Trustees hold the note (which is the IOU on the mortgage), the mortgage (the security that says the house is collateral) and the assignment of the note and security instrument.
As a creditor’s rights attorney, I’m not terribly excited by the prospect of debtors skipping out on their obligations; but creditors have to realize that, if they can’t prove that they, in fact, own the debt in question, they’re in a whole lot of trouble.
I’m not a scholar of legal history, but what reading I’ve done suggests that real estate law is really the fountainhead of the common law. The crown needed a system to resolve land disputes between his nobles (or, at times, a fig leaf for taking that land). The result has been something like 800 years of real estate law. My sense is this means that real estate jurisprudence tends not to be as forgiving when your “i”s aren’t dotted and your “t”s aren’t crossed. Clouding the chain of title by zipping electronic assertions of ownership here and there is going to come back to bite mortgage holders.
This is an interesting issue. But I am going to consider this issue from what I remember about property law and real estate financing law. I suspect, but have not fully considered, that the burden on the mortgagee to prove the enforceability of the mortgage agains the mortgagor is pretty low, and the ability of the lender as holders in due course of the notes is fairly low. I want to think on this for awhile and would welcome any input or comments from other lawyers or real estate professionals.
Todd (just a nome de moronity) Ianuzzi
I think the lender would not be a holder in due course because they’re party to the title. If the lender sold the note, the purchaser might be a HDC, but it would depend on if they had notice of a problem with the note. Does an electronic document transfer count as a writing? Because if not the note isn’t a negotiable instrument in the first place.
Seems to be lacking in common sense to me. Why wouldn’t this happen?
Judge: It says here that you have paid this bank $1000/mo for 2 years, and put in the memo line “Mortgage”. Correct?
Defendant: Yes
Judge: And now you are claiming that you didn’t actually owe that money?
Defendant: Yes.
Judge: …why are we here, again?
The issue is that the defendants are almost certainly behind on the payments to someone. The problem is establishing, as a matter of law, to whom those payments are owed. Probably the “this bank” in the scenario you describe is a mortgage servicer, not necessarily the person who owns both the note describing the money owed and the mortgage securing the note.
I took a brief look at UCC 3-302 and it appears that subsequent purchasers of notes in the secondary market would be holders in due course. So the promissory notes should be enforceable.
As far as the mortgate enforceability goes, the mortgage would always be enforeacble by the subsequent mortgagees. And other parties would have constructive notice of the mortgage.
It would seem to me that all the foreclosing morgagee would have to prove is the series of assignments of the underlying instruments.
I am not unsympathetic to the home owners. And I have little sympathy for a mortgage industry that ignores good banking and lending practices. But it may be far less serious than it appears.
I think one of the big problems is that these institutions weren’t properly documenting the assignments. One thing they’ll really have to look out for – and I’m not sure this helps the debtor – is third parties getting priority security interests when transfers aren’t properly recorded.
I sense that the assignment documentation problem is a major one.
I would bet that the mortgage assignments were not recorded. Good practice would be to record the assignment. But parties claiming a subsequent interest in the propery would have constructive notice of a purchase money mortgage and take subject to that interest.
And you are correct, even subsequent interests adverse to the morgagee would not be much help to the mortgagor.
I have not thought about this stuff since propery law, Secured Transactions and Commercial Paper in law school. This stuff would make some particle vomit through their nostrils.
Certainly some … too many, but not all … mortgage lenders cut some serious corners, and “electronic registration” and transfers of mortgages via an entity known as MERS has been challenged in several courts.
But GREED among some lenders, and traders in derivatives, has had a huge cascade effect in the economy. While we have seen the worst of the first wave that started in 2007 and 2008, more is yet on the horizon. Lenders which did not cut corners and which are not heavily invested in shady derivatives will do fine, others will suffer. This is sad, and bad for the country generally, and in my opinion, mostly the result of deregulation of the financial industry, which let these folks run amok with trillions of dollars. For more in this vein, see my own blog posting which I put up a few months ago, http://hamiltoncopolitics.blogspot.com/2010/07/note-on-causes-of-current-financial.html.
The looting starts:
http://www.indystar.com/article/20101021/BUSINESS/10210421/1003/BUSINESS/Indiana-foreclosure-suit-seeks-class-action