Saturday, October 09, 2010

More on the ball and chain of title

In Guambat's prior post, he probably overly laid out the current confusion in the mortgage world. It's a complex web of financial, political, housing and legal issues. At its base are the legal issues, at least in the current climate: it could grow into a rather nasty financial and political one.

David Reilly, in the WSJ Heard on the Street column, sums up the legal issues simply enough:

U.S. Banks Get Boxed In on Foreclosures
What is the foreclosure problem?

"Is there a question about who owns things?" said Christopher Peterson, a law professor at the University of Utah who has studied securitization and mortgage-title issues. "If you don't think so, you're kidding yourself."

In some cases, as part of foreclosure proceedings, banks submitted affidavits that were flawed. That could be an administrative issue. However, consider that the affidavits often were submitted in place of promissory notes that cover the actual debt. It is possible the promissory notes, in some cases, actually were mislaid or destroyed as lenders tried to keep pace with the frenzied housing boom.

While that wouldn't in itself negate a mortgage claim, it could mean the bank needs more documentation to proceed with a foreclosure. Given sometimes haphazard record keeping, even that may not be possible in some cases. At the least, such problems give attorneys representing homeowners more chances to contest and lengthen foreclosure proceedings. At worst, they can freeze them altogether.

Meanwhile, legal issues are swirling around the role of a company known as Mortgage Electronic Registration Systems, or MERS. It played a key role in the mortgage boom, helping firms package and sell mortgages without having to record each transaction with county offices.

This was done by showing MERS as the holder of the mortgage, something that confers the right to foreclose and seize the underlying property, even as the promissory note was transferred to third-party investors.

The trouble is that MERS's legal standing has been questioned because it doesn't also own the actual debt; traditionally, the mortgage and note weren't split between different parties. Top courts in four states have said MERS can't foreclose.

Again, that raises the prospect of higher legal fees for banks, or worse. It isn't clear who is on the hook for these extra costs: banks or the investors in mortgage-backed securities they represent through their servicing arms.

Also, is it possible that securitization trusts may find they have provisions to put back more bad loans to the banks because of such problems with the documentation.

Guambat notes another issue: professional legal liability and ethical violations.

California, and perhaps elsewhere, has seen an number of lawyers booted out of the profession in so-called mortgage relief mills. The usual interface between the legal liabilities and legal rights of banks and mortgagors is the legal profession.

Many of the lost documents, fraudulent affidavits and other issues arose inside legal offices. See, for instance, this article, with a surprising (to Guambat) Guam connection:
Ex-employee says foreclosure firm forged signatures
If the law firms and lawyers who are doing some of the flawed things that seem to be happening get drawn into professional negligence claims and professional responsibility actions taken by Bar Associations, there will be a further grinding to a halt as these people are the only ones who should be in a position to know where the bodies lie, and the documentation which may be needed in one action gets tied up in another.

As they defend their own arses, they will have little desire to help out the rest of the players in this drama.

Sorta like Watergate.


FURTHER READING:
Foreclosure Fraud For Dummies, 1: The Chains and the Stakes
Barry Ritholtz writz:
The Rule of Law is Sacrosanct: Our system of private property has developed due to the rule of law. The ability to demonstrate ownership, pass clear title, resolve disputes has worked for 100s of years. The recent frauds we have seen from law firms, process servers, bank legal departments, even drive through RE courts has put the nation at risk of becoming a lawless banana republic.

There is only one solution to this threat: For the rule of law to be in force, those people who violate it — previously known as “criminals” — must suffer the painful consequence of their illegal actions.

If you falsified documents that where used in foreclosures, you must be prosecuted for criminal fraud. If your firm’s primary purpose was this illegal activity, it must be put down. This means loss of professional licenses, corporate death penalties and jail time for offender . There is no deterrent to criminality of there are no significant penalties.

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