Consumers score in foreclosure fights with banks
Has the Massachusetts high court ruling opened the door for mortgage chaos?
This post comes from Marilyn Lewis of MSN Money.
Consumers keeping score in the legal battle between banks and homeowners over banks' foreclosure practices witnessed interesting action in the last few days.
At the end of last week the Massachusetts Supreme Judicial Court slapped down US Bancorp and Wells Fargo in a decision on two foreclosure cases whose lower-court decisions were being appealed.
The court ruled that the banks have to return two homes seized in foreclosure because they couldn't prove they owned the homes when they began the legal actions. (Read the 16-page decision at Scribd.com.)
The banks didn't make the loans. They represent investors who bought the mortgages after they were packaged into securities. In both cases, the banks obtained the deeds to the properties only after starting foreclosure. The banks apparently tried to argue that this was a technicality. Critics see it as a property-rights issue.
Apparently the court agreed. Writes Q-Law Blog:
… two of the concurring judges felt it necessary to include their own written opinions. While they agreed with the majority, they added the following: "(W)hat is surprising about these cases is not the statement of principles articulated by the court regarding title law and the law of foreclosures in Massachusetts, but rather the utter carelessness with which the plaintiff banks document the title to their assets(Q-Law's italics)."
A debate is raging now over what kind of effect this decision will have on the behavior of banks, investors and homeowners in Massachusetts and around the country. Post continues after video.
Q-Law predicts banks will start using more modifications, short sales and deeds-in-lieu instead of foreclosures. That way, a sale is involved so the home's title would be subject to a title search and ownership would then be clearly transferred to a new buyer, leaving a clear, defensible paperwork trail.
The implications could be dire
As you'd expect, bank critics were crowing. Some predict the implications will be enormous.
"Not only does this decision affect individual foreclosures, but it throws into question the entire mortgage securitization process," says reader "Riversider" at StreetEasy, a real estate blog.
A Home Equity Theft Reporter headline calls the decision "a train wreck for f'closure industry," quoting Boston lawyer and foreclosure specialist Gary Klein. The court didn't put a time limit on the decision -- its provisions are effective retroactively. Edward Bloom, president of the Real Estate Bar Association for Massachusetts, told the Reporter that the jurists created a legal traffic jam: "There will be a lot more litigation which could have been avoided."
Felix Salmon, blogging for Reuters, predicts "the legal craziness that this decision sets in motion is going to be huge."
Anybody who was foreclosed on in Massachusetts should now be phoning up their lawyer and trying to find out if the foreclosure was illegal. If it was -- if there was a break in the chain of title somewhere which meant that the bank didn't own the mortgage in question -- then the borrower should be able to get their deed, and their home, back from the bank. This decision is retroactive, and no one has a clue how many thousands of foreclosures it might cover.
Buyers of Massachusetts foreclosures "should be very worried," Salmon says. It could turn out that they really don't own their homes.
Salmon lists other potential consequences, particularly if other state courts reach similar conclusions:
- Defaulting homeowners could demand that the banks servicing their loans show the paperwork proving that they own the mortgages.
- "Chaos" could result if, in non-recourse states like California (where lenders can't sue defaulting borrowers), financially stable homeowners feel encouraged to strategically abandon their underwater mortgages if they suspect their lender can't prove it owns the title.
- Foreclosures could drag on longer as banks focus on dotting i's and crossing t's.
The implications could be no big deal
On the other side of the debate, HousingWire says the consequences will be neither great nor widespread, at least in the short term. The cases involved in the Massachusetts ruling had exceptional problems, sources told reporter Jacob Gaffney.
"Analysts believe the greater impact due to the case will be limited in scope, for now," Gaffney writes, "but larger issues concerning mortgage borrowers in default may bubble to the surface later," including potential for:
- A flood of lawsuits to further choke the pipeline through which foreclosures enter the market.
- Shielding severely delinquent homeowners from the consequences of their defaults, allowing them to remain in their homes indefinitely.
Housing Wire interviewed James Frischling, president of NewOak Capital, who summed up the dilemma:
"No doubt the process of documenting the titles of these assets was careless, and that we need a system that prevents banks from unlawfully foreclosing on homes of borrowers," he said. "What we can't afford is a system that protects severely delinquent borrowers to remain in their homes for free."
Amherst Securities, an analytical firm with widely quoted expertise on housing, also played down the consequences to Gaffney.
The AGs are closing in
The next move in this national standoff is likely to be from the attorneys general for the 50 states, who launched their own investigation last fall into "robo-signing," bank fees and other questionable practices.
Last week, the AGs announced they will soon settle with the five biggest banks that together have 59% of the mortgage-servicing market: Bank of America Corp., Wells Fargo, JPMorgan Chase, Citigroup, and Ally Financial.
Iowa Attorney General Tom Miller told Bloomberg that five separate settlements still are being hammered out.
Richard Cordray, former Ohio attorney general (he was narrowly defeated last fall by Republican Mike DeWine and -- here's a bit of trivia -- he's a former five-time "Jeopardy" champion) told MSNBC's Dylan Ratigan Show that the settlements should make modifications
… more practical and more workable for people, so that when they get someone on the phone it's a meaningful conversation that leads to paperwork being submitted and processed properly, so that the burden isn't on the homeowner to chase and chase and chase to get any kind of conversation going and then to find that the customer service is lacking or nonexistent on the other end of the phone.
Cordray is the enforcement chief at the Federal Reserve's new Bureau of Consumer Financial Protection.
Next up: Later this month an Obama administration task force examining allegations of fraud in the mortgage foreclosure process is due to report its findings.
Readers, how do you think this decision will play out? Do such sloppy bank practices have the potential to really devastate the financial services industry? Will many foreclosed homeowners retrieve lost properties? Or will banks just redo their procedures?
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