As the shock waves from robo-signed and otherwise flawed foreclosures intensify, it is becoming clear that the collateral damage may spread to the paperless mortgage system that has taken root and flourished over the past decade.
That system is embodied in MERS -- the Mortgage Electronic Registration System-- created to track and hold mortgages that are originated electronically. MERS holds title to mortgages filed on its system as agent for the owners of those loans, retaining that position, including the right to foreclose, as long as the loan is owned by a MERS member. MERS members include Fannie Mae, Freddie Mac, and most of the major loan originators and syndicators in the country. According to press reports, about 60 percent of newly originated loans are recorded through MERS rather than the old-fashioned way, by filing documents in the government recording office in the county in which the purchased property is located.
The MERS process has proven to be faster and less expensive than the paper-based alternative, but it also seems to have created a serious disruption in the chain of title necessary to establish the ownership of loans and the authority to foreclose on delinquent borrowers. That problem has surfaced in foreclosure proceedings, when attorneys representing MERS have been unable to produce the original note or other documentation proving ownership of the loan.
The Kansas Supreme Court has disqualified MERS as a foreclosure agent, finding that its structure makes it impossible for borrowers facing foreclosure to identify and confront the entity that owns the loan. Courts in Arkansas and Maine have similarly ruled that MERS has no legal standing in foreclosure actions. New York trial court judge Arthur Schack, who has attracted national attention for his angry dismissal of foreclosure actions, also has found the assignment of loans to MERS to be “defective.”
Other courts have been troubled by the fact that MERS itself has no employees; the attorneys foreclosing on its behalf also typically represent the owner of the loan or the trustees of investor groups that own the securities in which the loan was packaged – leading more than one judge to question how MERS can be both the owner of the loan and the agent for the owner.
Some courts have ruled otherwise, finding no problems with MERS’ legal structure or its standing to bring foreclosure actions, so the legal questions are far from resolved. And other questions loom. A class action suit filed in California claims the company owes the state between $60 billion and $120 billion in land recording fees that the electronic registry process illegally circumvented. Other states will almost certainly file similar claims if California prevails in this one. If the MERS structure is invalidated, the foreclosures the company has initiated in the past three years could, similarly, be overturned. And further movement toward a completely paperless mortgage system could be stalled indefinitely.
Some analysts think the foreclosure mess, and MERS’ role in it, have raised even more fundamental questions about property ownership that may be even more difficult to resolve. The ability to convey property-- a cornerstone of the American real estate market and, some say, of capitalism itself-- requires confidence the seller has clear title to the property that is conveyed to the buyer. The foreclosure mess, some believe, has shaken that essential trust.
Ownership disputes that once could have been resolved easily by paper documents on file with county recorders, now can’t be resolved very easily at all, Christopher Peterson, an associate dean and law professor at the University of Utah, told the New York Times. “For the first time, there is no longer an authoritative, public record of who owns land in each county,” he said.
Peter Coy, a columnist for Business Week, sees a disturbing link between the crisis of confidence that froze the financial markets in 2008 “when banks and other financial players couldn’t tell whose balance sheets were stuffed with toxic subprime mortgage debt and whose weren’t” and the chain-of-title questions that are surfacing in foreclosure actions today.
“Lenders can’t say for sure who holds a mortgage,” Coy wrote, “which means that sales can’t go through. Buyers won’t put down good money for a property if they aren’t sure they’ll get clear title to it, nor will lenders extend loans. And buyers of hundreds of billions of dollars’ worth of mortgage-backed securities may have grounds to sue.”
The legal challenges to MERS’ structure and standing may ultimately be resolved in MERS’ favor, Coy suggests. But the more fundamental questions about trust in the system for buying and financing real property may continue to cloud the real estate market and impede it recovery for years to come.
SPLIT PERCEPTIONS
Money may not by happiness, but it appears to be buying at least some peace of mind for some consumers, reflected in the contrasts between two recent polls. Consumers with assets of more so than $250,000 are feeling a lot better about their economic condition today, largely because the stock market recovery has convinced them that the recession, or at least, the worst of it, is over. But less affluent Americans – that would be the majority of them – are still reporting high anxiety not just about the economy, but about their ability to hang on to their homes or pay their rents.
The less optimistic reading comes from a new Washington Post poll in which 53 percent of respondents said they are “very concerned” or “somewhat concerned” about having enough money to make their monthly housing payments. Two years ago, only 37 percent of respondents expressed those concerns. Although the economy has improved moderately since then, the perception that the recession lingers and the recovery lags has not altered much. “Effectively, what the consumer is saying is ‘we don’t care what the eggheads say; this still feels like a recession,’” Ken Goldstein, an economist with the Conference Board, told the Post.
The world looks considerably brighter, or at least, less dismal, for affluent Americans responding to the Merrill Lynch Affluent Insights Quarterly, 41 percent of whom said they are better off this year than they were least year; only 39 said they remain skittish about investing, down from 50 percent who were wary of the stock market in last year’s survey, and nearly 80 percent of the respondents said they are confident their personal financial circumstances will improve next year.
“The headline is people are feeling better,” Sallie Krawcheck, president of Bank of America’s Global Wealth & Investing Management unit, told Bloomberg TV.
The headline for the Washington Post survey would have been “no, they’re not,” but the Post poll also revealed an internal split along economic lines. Although worry prevailed at all levels, anxiety was twice as high for households with incomes of $30,000 or less than for those with incomes of $75,000 or more.
The WP survey also found a somewhat odd disconnect between the widespread concern about making home mortgage and rent payments, and the view, expressed by 61 percent of respondents, that this is “a good time” to buy a home.
NO INDEMNITY
Title insurance companies are backing away from their demands that mortgage lenders essentially indemnify them from claims related to foreclosure errors.
Several large title companies, unnerved by what some have termed the “foreclosuregate” crisis, balked at writing coverage for properties purchased after foreclosures. The companies wanted lenders to guarantee that the insurers would not be responsible for errors lenders made in the foreclosure process. But negotiations to craft acceptable warranty language broke down when lenders flatly refused to accept the blanket indemnification insurers wanted, and the title companies blinked.
First American Financial Corp. issued a statement saying the company had decided indemnification wasn’t needed after all, “given the actions taken by lenders to remediate deficiencies and to improve their processes going forward,” and given the relatively “low probability” that courts would rescind foreclosure sales and order the return of the property to the delinquent owner.
Fidelity National Financial Inc., which had been the first to begin demanding foreclosure guarantees, has now dumped that requirement, citing its confidence in the “heightened review” procedures lenders have implemented for their foreclosures. The failure of other title companies to demand indemnification also contributed to Fidelity’s decision, Peter Sadowski, the company’s chief legal officer, acknowledged. “There was not enough consensus both within the lender community and the title-insurer community, to go [the indemnification] route,” he told Bloomberg News.
Kurt Pfotenhauer, chief executive of the American Land Title Association, who had said lenders and title companies were close to an agreement on acceptable language, told Bloomberg recently that, “as all the players got a better feel for the varying risks, everyone became a little more comfortable with continuing to use traditional underwriting methods.” But that assessment could change, he added, “if there were further dramatic revelations of systemic problems.”
SELLING SHORT
Short sales, in which lenders agree to accept less than the amount owed on a mortgage when a borrower sells the home, are generally recognized as a less detrimental alternative to foreclosure for struggling borrowers and often for lenders, as well. But short sales are also increasingly vulnerable to fraud, according to a recent study, which estimates that financial institutions are booking $310 million annually in unnecessary losses as a result.
The study, by CoreLogic, found fraud risks in 1 of every 53 short sale transactions, with resulting losses averaging $41,500 per sale. Approximately 4 percent of properties sold in short sales are resold within 18 months – a red flag suggesting a high likelihood of fraud, according to the study.
Risk concerns are growing with the volume of short sales, which has tripled since 2008, the study noted, with more than half of the sales (55.8) concentrated in four states – California, Florida, Texas and Arizona. Revisions in the federal government’s Home Affordable Mortgage Program (HAMP) provide incentives to encourage buyers to pursue short sales and lenders to accept them. The resulting increase in short sales, and the pressure on lenders to process them quickly to help borrowers avoid foreclosure, is increasing the fraud risks, industry executives say.
“As the government has pressured us to do short sales faster, we don’t have time to check them out,” Anthony DiMarco, executive vice president for government affairs at the Florida Bankers Association, told the Palm Beach Post. The “bad guys” exploit the resulting vulnerabilities, DiMarco noted. “They know how to defraud the system and will rush in to do it.”
Short sales “will continue to be a necessary part of the mortgage industry as it seeks stabilization,” Tim Grace, senior vice president of Fraud Analytics at CoreLogic, said in a press statement, and those sales “by definition” will result in losses for lenders. The goal, Grace said, is not to eliminate short sales, but to reduce the risk of “unnecessary losses,” and the best way to do that, he said, “is through a collaborative effort where lenders collectively share pre-closing and post-closing information [on short sale transactions] in real time.”
A RACIAL TINGE
While the subprime lending crisis and foreclosure disaster it spawned have damaged borrowers and lenders across-the-board, the problems also have a noticeable and disturbing racial component, a recent study has found. The study, by researchers at the Woodrow Wilson School, suggests that the residential segregation of Blacks and Hispanics played a key role in the crisis.
“While policy makers understand that the housing crisis affected minorities much more than others, they are quick to attribute this outcome to the personal failures of those losing their homes-- [their] poor credit and weaker economic position,” Douglas Massey, a professor of Sociology and Public Affairs at the school and a co-author of the study, explained. “In fact,” Massey asserted, “something more profound was taking place; institutional racism played a big part in this crisis.”
Massey and his co-author, Ph.D. candidate Jacob Rugh, contend that residential segregation “created a unique niche of minority clients, who were differentially marketed risky subprime loans,” to feed the growing demand for mortgage-backed securities that could be sold on the secondary market. .Their analysis of loan data in the 100 largest U.S. metropolitan area found that even after adjusting for other variables, including credit-worthiness and the overall rate of subprime lending, “”black segregation and, to a lesser extent, Hispanic segregation, are powerful predictors of the number and rate of foreclosures in the United States.”
The study identified two separate but converging trends:
- The securitization of mortgages allowed lenders to reduce their risks by pooling and selling loans and increased the need for them to expand their borrower pool, leading them increasingly to target minorities.
- Minorities, living in largely segregated communities, are “unaware of alternative, less expensive credit…and more vulnerable to lenders willing to sell them subprime mortgages…The result was a tremendous increase in lending of subprime mortgages…to minorities.”
When the housing bubble eventually burst, the study explains, “the economic effects were experienced most harshly by minorities living in segregated neighborhoods.”
“Ultimately, the racialization of America’s foreclosure crisis occurred because of systematic failure to enforce basic civil rights laws in the United States,” Massy and Rugh contend, and enforcement of those laws, they suggest, must play a role in repairing the damage to the housing and financial markets. “It is in the nation’s interest for federal authorities to take stronger and more energetic steps to rid U.S. real estate and lending markets of discrimination,” they say, “not simply to promote a more integrated and just society, but to avoid future catastrophic financial losses.”
