Monday, October 18, 2010

Cutting Corners

Have you been wondering what the foreclosure fuss is all about?

"A little," says Virginia.  "Fill me in, please."

Two years ago, I reported a series of opinions by Judge Shack, New York, who began to throw foreclosure plaintiffs out of court because they had failed to show their appearance in the chain of title. 

"What's that?" says Virginia.

All right, let's go back to the beginning.  When you take out a home mortgage loan, you sign a stack of paperwork.  Two very important papers to the lender are: (1) a promissory note and (2) a mortgage (a/k/a security instrument, deed to secure debt, security deed, deed of trust).  The promissory note (a/k/a note) is your personal promise to repay the loan.  The mortgage is your pledge of your home to secure your promise to pay; if you don't keep your promise, it gives the lender the right to take your home and sell it to repay what you owe.

When you close your loan and sign the documents, the closing agent (attorney, title company or escrow agent) scurries with your mortgage to the appropriate land records office.  In general, the first to record has priority over later recordings, so your lender wants to be first.

In not so olden times, you paid your lender each month and eventually, after 15-30 years or when you sold your home, you paid off the entire loan and your lender released the mortgage -- at which time you owned your home "free and clear" (if ever so briefly, perhaps). In modern times, the lender wants to recycle its funds and re-lend them, so it sells your loan to someone else.  That helps explain why you make the first few payments to your lender, then for a couple years you pay X and then for several more years you pay Y. 

Also in not so olden times, each time your loan was sold, the buyer recorded an assignment of mortgage in the land records office so everyone knew it now owned your loan.  That cost a few bucks.  In modern times, the lender sold your loan to Fannie Mae or Freddie Mac or some other firm that collected gobs of loans and "securitized" them, breaking the various loans into categories (such as prime or high quality, subprime or low quality) and even separating individual loans into pieces (such as the right to receive principal, the right to receive interest, the right to receive late payments, etc.).  In turn, the securitizer sold the various pieces to investors and, to encourage them to buy, included a few warranties and representations in the governing documents.  Rather than record assignments for each transfer of the various interests (and pay the land records office for each one), Fannie Mae, Freddie Mac and others in the mortgage industry set up a private company to keep track of who owned what and called the company Mortgage Electronic Registration Systems, Inc. or MERS.  Reportedly, MERS hasn't done a stellar job so things have gotten confused.  Besides, some of the land records offices aren't happy about being sidestepped and some of their lawyers (in the form of state attorneys general) are challenging the MERS system.  And other folks messed up outside the MERS system.

If you stop paying your mortgage loan, the current owner or owners won't be happy with you.  Your original lender sold the loan, so it's pretty much out of the picture (although it made some warranties when it sold your loan that could come back to haunt it).  The current owner or owners generally are represented by the servicer to whom you're supposed to send payments, so the servicer or someone it hires eventually will sue you to take possession of your home, relying on the mortgage you signed (it might be able to do this through a nonjudicial process without suing you, but for simplicity's sake we'll limit our discussion to the use of courts).  The challenge for the servicer or the person it hires is to show it has a right to sue you -- by tracing its right back through various documents to the mortgage you signed, that is, a good chain of title.  If MERS or one of the previous owners messed up, that can be tough to do.  Or even if no one messed up, it might be troublesome to gather all the relevant documents and present them to a court in a meaningful way.  As a result, the servicer or its representative might be tempted to skip some of the necessary steps or even forge a document that appears to make some of those steps unnecessary.

That's where we are today -- in one big mess, thanks in part to some of the same folks to whom we generously donated many of our tax dollars a couple years ago.  Oh yeah, they repaid us, hmmm....which has much to do with the big bundle of so-called toxic assets the U.S. Treasury now holds, many of which are gummed up in the foreclosure mess?  Maybe the U.S. Treasury is busy checking out the warranties mentioned above?


  1. Glad we own our home!!! I am wondering if no one really knows who holds the papers will some not have to pay? It is refreshing to know that someone understands what is going on. Do you sleep nights?

  2. we're still donating our tax dollars, forever it appears - to Fannie and Freddie