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Mortgage assignment gap controversy is blowing up
by Dave Pelligrinelli
| 2010/04/07 |
In February 2009, I first began writing about the looming issue of mortgage assignment gaps as a title defect, particularly on foreclosed properties. I have updated the subject a few times since then as there were developments. In the United States, the open, public and discoverable nature of title records is a critical feature of secure property ownership. Recently, the issue has hit the mainstream. Attorneys and lenders are in crisis mode as even Realtors are now aware of the issue, and scrambling to figure out how to disclose the risk to foreclosure buyers.
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One broker sees "an explosion of litigation in this area" as the serious title defects are discovered. From the article:
"In the case of maintaining a public chain of title to real property, it was thought to be essential and generally required by the law. (Lenders) stopped recording the assignments in public and track them instead in an electronic data base that the major lenders would operate through a cooperative entity. Say hello to Mortgage Electronic Registration Systems, affectionately known as MERS. Not only did it save them a fortune in county fees and manpower, it turned out to be a cash cow. Never mind that the cost of maintaining a county recording system is paid, in part, by the recording revenue. They still have to maintain the apparatus, but now they aren't receiving the revenue intended to maintain the system. Many homes have been unlawfully foreclosed by entities not entitled to anything. The former owners of these homes have rights that will need to be addressed. Many people bought these homes and have potential future claims. If there is a cloud on title, the new owner is at risk of being unable to sell or encumber the property. If the foreclosure were unlawful, the borrower is entitled to their property.
The Bellistri v Ocwen case in Missouri, and the US Bank v Ibanez case in Massachusetts are the most often quoted examples of this potential issue. In these cases lenders foreclosure rights were challenged because of undocumented and unrecorded assignments of the notes underlying the mortgage.
There is an alternate point of view. In Connecticut, the appellate court ruled in favor of a lender and upheld the validity of an unrecorded assignment, even a blank assignment. The premise was that a mortgage note is a bearer instrument.
"General Statutes § 49-17[ 6 ] permits the holder of a negotiable instrument that is secured by a mortgage to foreclose on the mortgage even when the mortgage has not yet been assigned to him.The "holder" is the person or entity in possession of the instrument if the instrument is payable to bearer. General Statutes § 42a-1-201 (b) (21) (A). When an instrument is endorsed in blank, it "becomes payable to bearer and may be negotiated by transfer of possession alone . . . ." General Statutes § 42a-32-05 (b).As stated previously, the subject promissory note was endorsed in blank by BNC Mortgage, Inc., and, therefore, is payable to bearer. The plaintiff, by way of its possession of an instrument payable to bearer, is a valid holder of the instrument and, therefore, is entitled to enforce it."
This contradicts the language used by the court in the Massachusetts ruling: ""The blank mortgage assignments they possessed transferred nothing.in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form."
Part of the what makes the cases different is the venue. Each state has different statutory requirements for the validity security instruments.
Regardless, foreclosure defense is latching on to the potential weaknesses of unrecorded assignments as a strategy. The success of these claims is a combination of the specific strategy used by the attorney, and the laws in the state where the case is located. Some lenders attempt to correct this potential defect by creating assignments after the fact. Where it is done correctly, it sometimes works. When the execution is sloppy, it borders on fraud.
These Specially-Made Assignments have created havoc in the courts. In many cases, the Specially-made Assignments are dated AFTER the foreclosure action has been initiated, making it appear that the Trust somehow magically knew prior to the assignment that it would acquire the defaulting property several months after the foreclosure action was initiated. Repeatedly, courts have asked Trustees to explain why they were acquiring nonperforming loans and whether such acquisition was a violation of the trustee's fiduciary duty to the Trust.
In lieu of valid Assignments, Trusts continue to rely on Assignments specially made by their own law firms and mortgage default service companies. Eventually, these fraudulent Assignments are being discovered by Courts, and the foreclosing trusts required to prove that they own the Mortgage and Note in the foreclosure action without reliance on Assignments that misrepresent the date of the actual transfer to the Trust the authority of the signers of the bankrupt original lenders.
The problem is complicated by the bankruptcy of the major loan originators, including Option One Mortgage, and Countrywide Home Loans. When these big mortgage companies filed for bankruptcy, they did not disclose the mortgages already sold to the trusts as assets, because the transfers occurred months and years prior to the bankruptcy filing. Years later, when the Assignments were required for foreclosures, a bankruptcy court's permission was needed to Assign billions of dollars in mortgages. Most likely in fear that a Bankruptcy Judge would not rubber stamp such a request, no such permission has ever been sought.
If that isn't enough to worry about, some mortgage servicers were in a position to benefit from increased default rates, which they had control over.
The financial intermediary who had no actual loss also bought credit default swaps for themselves at multiple times the loan amount. There is an inherent conflict of interest in this scenario. The financial intermediaries, who actually have no risk, stand to gain enormously by collecting on the default swaps. As if debt securitization and betting on failure weren't lucrative enough, part of the plan included gaining every possible means of getting more of the borrower's money in fees. But even more important, by controlling servicing, they have the ability to actually control the exact number of defaults within specific pools by simply pushing people into default. The terms of the default swaps were dictated by the financial intermediaries. However, if they could control the performance of the underlying loans, they could manipulate the defaults in the pool. The best way to do that is to service the loan. They comb credit reports looking for changes in the patterns of payments. If they see more use of credit cards, late payments, grocery charges, types of stores and purchases; there antennas go up and they smell a victim in the making. If they suspect you might be running low on cash, they know that you can't put up much of a fight, particularly in a non judicial foreclosure state.
Attorneys I speak with are overwhelmed with cases, on both sides of the argument. Foreclosure defense firms are taking on more clients than they can handle. At the same time, firms representing lenders are inundated with foreclosure cases which are no longer a rubber stamp to completion.
I receive a dozen calls per day from attorneys, lenders, and investors looking for documentation on these types of issues. If you are involved with this process, let me know if you have anything to add to this subject.
Dave Pelligrinelli
TitleSearchBlog.com
daveafx@gmail.com
561-228-1397
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