Robo-Signings Not the Only Issue Facing Housing Industry

Bank of America (BOA) and GMACrnannounced Tuesday that they were resuming the prosecution of foreclosuresrnfollowing several weeks of a self imposed moratorium. The moratorium in BOA’srncase extended to all 50 states while GMAC at first stopped evictions and ownedrnreal estate sales 23 states primarily those in which judicial foreclosures werernthe primary mechanism for repossession and then also halted foreclosures.  The moratorium was initially provoked by suspectedrnproblems with the way in which foreclosure affidavits had been processed.  Additional questions then arose aboutrnownership of mortgages and the standing of entities to foreclose.  BOA will resume foreclosures on over 100,000rnhomes in two dozen states while GMAC will resume foreclosures, evictions andrnsales as individual documents are reviewed.</p

Despite the assurances from therntwo financial institutions that they feel secure in their right to move forward,rnthe matter will probably not go away any time soon.  Attorneys general in all 50 states havernannounced investigations, affected homeowners have brought suit, and the WhiternHouse announced Tuesday that an interagency task force on mortgage fraud hasrnlaunched an investigation as has the Federal Housing Administration.</p

At the heart of the problem arernthree apparent issues. Robo-signing, the process of generating thousands ofrnaffidavits seeking summary judgment, often by unskilled and unqualifiedrnemployees who have neither read  norrncertified the underlying documents, has been well covered by the press includingrnMND.  Two other issues, however, have notrnreceived much exposure.</p

The first is the involvement ofrnthe Mortgage Electronic Registration System (MERS).  This company, formed in 1998 by Fannie Mae,rnFreddie Mac, and several major lenders, actually is the owner of record ofrnapproximately 60 percent of American mortgages.   Arguments have been made that MERS does notrnhave the right to foreclose on properties where the note is held byrnothers.  However, according to the MERSrnwebsite, at closing a borrower signs a security instrument – the mortgage orrndeed of trust – which names MERS as nominee for the lender and itsrnsuccessors.  The lien is recorded in thernname of MERS and as long as any sale of the note is to a MERS member MERSrnremains the mortgagee of record and continues to act as a nominee for eachrnsubsequent note-holder.</p

The rights of MERS to act onrnbehalf of the note-holder in foreclosures as well as other actions have beenrnupheld in a number of state court decisions. rnThese decisions have variously recognized MERS’ standing to foreclosernand have confirmed the company’s ownership of the security instrument.</p

The existence of MERS appears tornactually correct many of the ownership issues that arose during the savings andrnloan and banking crises of the 1980s. At that time it was very difficult to trackrnthe owners of mortgages loans were sold, servicing rights were transferred, or financialrninstitutions failed.   Whether byrnaccident or design, banks had a pervasive tendency to avoid recordingrnassignments.  This created an enormousrnproblem, not so much with foreclosures as for attorney’s attempting to backtrackrnand obtain discharges for long paid notes. This deficiency in assignments wasrnalso a problem when interest rates dropped precipitously and homeowners were inrnserial refinancing mode – moving to a new loan before the last mortgage or evenrnthe one before that could be recorded.  Havingrna mortgages assigned permanently to MERS with a unique identifying number makesrnit possible to track down a current or previous mortgage quickly andrninexpensively.</p

The third issue in the current foreclosurerncontroversy is transfer of trust.  rnAccording to a research paper produced by BOA, whenrna note is transferred to a trust, it is endorsed “in blank”, meaning that thernowner of the note is not assigned.  Thernnote is only endorsed to the trustee or servicer on behalf of the trust if theyrnneed to institute foreclosure proceedings. rnThe physical documents are typically delivered and held by therndesignated custodian for the trust.  Thernexistence and validity of the notes should be verified by the seller and therncustodian prior to transfer and the loan purchase agreements also requiresrnevidence of ownership of the loans by the trust.  That ownership should also be recorded withrnMERS.  </p

Several of thernlawsuits which upheld the rights of MERS as owner of the security agreementsrnalso addressed the issue of “in blank” endorsements.  In Mortgage Electronic RegistrationrnSystems, Inc. v Ventura for example, the court observed that the currentrnpractice of bundling and servicing mortgages by third-party companies is nowrnthe rule rather than the exception.  Thernnote was endorsed in blank and was therefore bearer paper; MERS could thereforernbring the action.</p

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.</p

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