Main Street Bank would then take BMG Smith’s mortgage and sell it to a bigger bank, Gigantic Bank. Gigantic Bank would then take a whole bunch of these mortgages and sell them off to their own investment house, where they’d be split up and sold off as securities. That’s the basic promise of how the mortgage market worked over the past decade.
Here’s the interesting part. In Massachusetts, a sale or transfer of a mortgage is not valid unless the sale document includes the name and address of the purchasing bank. And, every time a Massachusetts-originated mortgage transfers hands, that transfer is supposed to be recorded in the local Registry of Deeds.
What the Land Court judge determined is that neither of these two requirements were fulfilled.
When Main Street Bank would sell its mortgages, it would simply endorse the mortgage, but leave the line identifying the buying entity blank. Doing so means that these mortgages were not much different than a generic gift certificates that reads: “This certificate entitles the bearer to one free sundae.”
Then Gigantic Bank would do the same thing. They’d endorse the mortgage, leave the purchaser’s name blank, and pass it along.
And nowhere in this process were any of these transactions recorded at the Registry of Deeds.
Now let’s say BMG Smith goes into foreclosure, which is almost guaranteed to happen from the start. Super-Gigantic Bank Mortgage Loan Servicing Company files for foreclosure and auctions off the house.
This is what the Land Court decision means: It means according to Mass. state law, Main Street Bank is still the owner of BMG Smith’s mortgage since no sale or transfer of the mortgage was ever recorded.
And because the puchaser’s name was left off all the subsequent transactions, they are all invalid, again, leaving Main Street Bank as the proper owner of BMG Smith’s mortgage.
This means that Super-Gigantic Bank Mortgage Loan Servicing Company has ABSOLUTELY NO RIGHT to foreclose on the property, kick BMG Smith out of his house, and auction it off.
Here’s where it gets even more interesting: Let’s say in the five years since Main Street Bank wrote the mortgage, and the time the property goes into foreclosure, Main Street Bank goes out of business. It sells off what it thinks is its assets, but not all these mortgages they originated, and technically still own.
Which leads us to the $25,000 question: Who owns BMG Smith’s house?
Let’s say we’re talking about $400,000 in distressed property. Could SGBMLSC hire forensic folks to back-track and take care of all the deed-registration stuff now, even though it happened over the span of the last five years?
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p>Sure, it might take a few months, and in some cases (like an intermediate no longer existing) it might be a mega-fail… but for many of them the timeline of custody is clear, all agencies still exist, and it might only take weeks or months to get everyone to sign off where necessary to make everything legal. Is that still a permissible route to take? If so, is it possible that instead of sending an eviction notice in October 2009, it will take until January 2010 or somesuch?
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p>Essentially, I’m skeptical of this line:
This is what the Land Court decision means: It means according to Mass. state law, Main Street Bank is still the owner of BMG Smith’s mortgage since no sale or transfer of the mortgage was ever recorded.
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p>Main Street Bank is still the owner of record, so to speak. But, if both MSB and GB agree that MSB sold the property to GB, surely it’s not good law or policy to say “ha! didn’t sign on the line… the house is owned by MSB!… And, fair is fair, this means that MSB has to give GB back their money!”
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p>That just doesn’t add up.
That is in part what’s going on now.
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p>But keep in mind that despite going through the foreclosure process, despite suing the old homeowners, and despite appealing the original Land Court decision, the bank involved STILL hasn’t untangled the entire web of ownership.
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p>The judge points this out in his decision, that the bank spent 2 MONTHS after the original decision trying to gather all the required documentation needed to fight a landmark court case — AND THEY STILL COULDN’T PULL IT ALL TOGETHER!
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p>Not only was the original bank out of business, but so was Lehman Brothers, who had also been involved in the purchase of these specific mortgages. Not sure how you get them to produce the needed documentation and post-date mortgage transfers, and file documents at the local Registry of Deeds.
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p>If the banks can’t do it for a landmark court case, how are they going to be able to do it in a reasonable amount of time to attract buyers for the tens of thousands of other foreclosed properties they own around the state?
there are enough “out of business” conglomerates (Lehman, etc) that it may be the case that a large percent of mortgages went through an organization which, ostensibly, no longer exists.
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p>Rut row.
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p>Caveat emptor. Isn’t there an onus on a purchasor to have some sort of inkling what he/she can afford—-not afford.
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p>Are we about to follow the same logic pattern with automobiles—-we are now about to stop all repo’s? Where will it end?
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p>No one is responsible for anything any longer. Perhaps the fact that we now have an “immediate gratification mentality”, credit cards, and morons graduating from high schools and colleges, that we find ourselves in this quagmire.
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p>You cannot prevent stupid people from doing stupid things—up to and including killing themselves with, tobacco, alcohol, and illicit drugs.
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p>If banks and mortgage companies are engaging in fraud—take the matter to our attorney general. On second thought—belay that, Martha Coakely hasn’t done any law enforcement since she became the AG—-take it to the US attorney.
or Margaret Marshall will come out with another colossal legal opinion. These banks control most of our government. I noticed that Barney caved recently. I wonder how they got to him.
The buyer should indeed have been aware, and should suffer the consequences. Except that in my view, the buyer is the moronic big mortgage buyer who recklessly snatched up shady mortgages, from the same shady brokers over and over again, without caring whether they were any good or not. And the buyer is that same big mortgage buyer who didn’t bother to follow the laws in the state where the mortgages were written. And the buyer is the big mortgage buyer who couldn’t scrape up the right paperwork even after being told they needed it.
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p>I don’t think anyone’s saying that the home buyer shouldn’t have to make payments on the mortgage, or should have the mortgage thrown out, or anything like that. But the home buyer is, and should be able to use Big Mortgage Buyer’s shoddy business practices to avoid foreclosure until, and unless, someone who can prove ownership of the mortgage decides to foreclose.
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p>The emptor who should have caveated is getting what it deserves.
Don’t banks and mortgage companies have a personal responsibility not to make credit available to those who shouldn’t qualify?
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p>If not, and it’s all about personal responsibility on the part of the consumer, why have credit applications at all? Everyone gets all the money they want, so long as they declare themselves personally responsible to pay it back sometime before death!
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p>You’re right. You can’t stop stupid people from doing stupid things. But that does’t mean we should reward enablers.
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p>And I knew enough about the case to make the initial posting. The language in the decison just added some color and depth.
I read about something similar happening in Indiana in a DKos diary a few weeks back – seems the issue is not unique to Mass.
Probably a silly question, but is there any kind of liability associated with any part of this broken chain of ownership? Because if there is, parties have a strong incentive not to play.
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p>As it is, I can’t see why these intermediate banking entities (for lack of a better), that would derive no benefit and that maybe no longer exist, would be coaxed back into the field to facilitate someone else’s seizure of property.
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p>Unless they get paid to do so, which would really raise the irony level to 11.
Someone who shouldn’t have had a mortgage, or a bank that had shoddy lending practices, are separate issues. This is not about ‘immediate gratification mentality’.
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p>A house has many owners over time. My current house has had 6 owners, some good bill payers, some not. But I have clear title to this property. I once owned a house whose mortgage was sold many times as little banks were gobbled up. But when we sold the house, the title could be followed from a small Massachusetts savings bank through all the transactions to a holding company in Florida. I passed on a good title. That house has now been home to 2 more families.
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p>The foreclosed houses can also live on. If they have clear titles, someone else can own them.
In terms of climate change, they are embodied energy. It is much better for our planet if they are reused than if they are let to rot with no one to care for them. Clear title is much more than a legality.
In 99%* of the cases, the forecloser obtained the mortgage legally and appropriately in the sense that they struck a deal with the current owner, both sides understood the transaction, and money and handshakes were exchanged.
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p>So, now what? The courts will likely agree that they paid for the property, and that the chain goes back to the rightful owner (lending bank). The problem is the paperwork.
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p>It would seem that a judge, arbiter, or some other middle man should need to step in and make this lawful… get the deeds registered, make it official, and allow foreclosure proceedings to continue. If set up well, the total cost to the holder of the loan will be higher if foreclosure is pursued than if a new loan can be arranged between the lender and lendee. This is a preferred outcome — the person stays in her home, the lender converts bad debt to good (at least better), and less time is spent in arbitration.
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p>How do we make sure it plays out this way?
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p>
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p>
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p> * totally made up number
Why should we, the taxpayers, waste any of our precious time or money to help out businesses whose own shoddy business practices are costing them money? Why shouldn’t we let them learn the “free market” lesson?
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p>The shoddy business practices that led to the extension of the unwise mortgage in the first place (with all of the follow-on negative consequences for the homeowner, the housing market, the broader economy and the banks) are the ones that led them to not properly document the chain of title. And this was entirely forseeable – see Tanta’s posts on Calculated Risk if you doubt me. She predicted exactly this sort of problem many, many times because she used to be in those backoffices and she knew how they should be run and how they were actually run.
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p>Banks have already received many, many bailouts and other forms of hidden and not-so-hidden support from our state and federal governments. Why should we give them even more and keep protecting them from the consequences of their own mistakes? When does it end?
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p>
I sure didn’t. The entity who claims ownership should have to pay for the proceedings if they can’t show that they followed SOP w.r.t. the registry of deeds.
A legal transfer of property in the state of Massachusetts requires the owner be specified and the transfer of deed be recorded. When we bought our house we paid a lawyer a lot of money and title insurance to make sure we had a clean title and this couldn’t happen. The fact that these securitized mortgages didn’t do that makes their ownership illegitimate, regardless of the money that changed hands.
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p>These banks screwed up, they should lose the properties if they can’t come up with the right paperwork. This isn’t a technicality, this is how we do business is a properly regulated economy. Too bad for the banks. If it’s a problem with empty houses, have the state or city seize them, pay the fair market value to the owner – but since that can’t be determined, they get to buy em up for free. I’ve got no sympathy for these banks – Zadig is right, caveat emptor for the banks.
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p>If I were to buy a car with a warranty, but not get a copy of the title or a copy of the warranty but demand the dealer fix the car based upon my receipt, they’d laugh me out of the room. If I buy a pair of shoes but lose the box and receipt, there’s no reason a store should take them back. In both cases I screwed up, just like the banks did. Unfortunately for the banks, all they bought was a piece of paper, which they’re free to use any way they want…
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p>
But look, if there isn’t a competing claim on the property, there’s no reason to throw the baby out with the bath water. The bank should have to pay for the process of re-legalizing the property which we all agree that they purchased.
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p>The Registry of Deeds process exists for a reason, and the banks ignored it. They should have to make it right. But taking the property away from them simply isn’t appropriate.
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p>
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p>And if you went to court to try to get the title or copy of the warranty, and if the court was convinced that you did in fact pay an agreed upon amount of money for the car, then the fair thing to do would be for the court to order the prior owner to hand it over. Now, you may have to pay court costs, etc for your mistake, but you still own the freaking car.
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p>
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p>The box is part of the product, and worth quite a bit as it turns out because consumers don’t trust shoes without a box (don’t know why). If you’ve only lost your receipt, the store has to make a judgment call: did you really buy the shoes here? Maybe you’ve got a credit card statement or something. If there’s a paper trail and/or a believable story, then yeah, it’s reasonable for the store to make good on the purchase (exchange, store credit, refund, whatever).
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p>
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p>Not exactly. For one thing, cars and shoes aren’t like real estate — you can’t possess a chunk of land the way you can possess an item. Secondly, it’s very likely that all parties agree that each intermediate claim of ownership on the mortgage between the initial bank and the current owner was made in good faith, with both parties agreeing on exactly what the intent of the sale was. If the judge/arbiter believes that the chain of possession was always made in good faith and fairly, then stripping them of ownership of property due to their failure to abide by a regulation doesn’t make much sense. Why is the public better off by doing it?
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p>The bank has to make things right, but making things right means re-establishing that the property is held correctly w.r.t. the deed. That means fines, fees, documentation, and notarization. It shouldn’t mean forfeiture.
I certainly have no sympathy for banks, especially the big banks like BofA.
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p>Having said that, it seems to me that in this discussion we are facing an ugly specter that folks like Paul Krugman — and Barney Frank — have been talking about: the basic liquidity of the US economy.
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p>When we say “These banks screwed up, they should lose the properties if they can’t come up with the right paperwork” it is, like it or not, the depositors of those banks who will ultimately pay the price. The FDIC is not nearly well-enough funded to address the fundamental liquidity crisis we are describing.
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p>I think the original seller of BMG Smith’s house walked away with a pile of money that he or she rightfully received in exchange for the deed to the house. That money is spent. Gone. No matter which corporate entity ends up holding the bag, the depositors money is gone — it is rightfully in the pocket of whoever sold BMG Smith the house. A bunch of additional money has been taken from depositors in the pyramid of bogus transactions that have taken place since then — more money taken from depositors.
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p>We now face a massive liquidity crisis, and this issue is just one of its symptoms. It’s going to get much worse before it gets better, and it’s going to cost trillions of dollars. We are, I think, talking about recapitalizing (many suggest even nationalizing) the US banking system.
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p>That isn’t red or blue, Republican or Democrat, it’s dollars and cents. It started with Reagan, we got an inkling of it in the S&L scandal (and when we simply deferred the day of reckoning), and it got much worse during the Bush era of complete deregulation.
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p>This one is big, my friends, and we’d better start treating it that way.
Do the current “holders” of the mortgage just have to hire some additional forensic staff and untangle these giant knots?
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p>Does the government declare a massive fraud has taken place, give everyone 6 months to clear up all these issues, claim what can’t be untangled as abandoned property, and re-sell it?
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p>Do the banks walk away from these properties, let them rot and fall to the ground?
Where’s the intent to deceive? There’s no apparent intent to deceive — merely a lack of following the legal procedure.
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p>There’s two subclasses:
A. Properties where two or more parties claim ownership
B. Properties where only the holding bank claims ownership
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p>In the case of (B), just make ’em demonstrate lots of paperwork showing that they’re legit (not free!) and make ’em pay for the legal procedure and overhead (not free!), and maybe even make ’em pay a fine on top of that (not free!). But, seizure of land without compensation doesn’t make sense.
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p>In the case of (A), now it’s tougher. Our land-registration procedures help ensure that this is a situation that’s quite rare in MA, but we certainly have methods of dealing with it now. Use those methods, no?
The rest of us have been dealing with it for years. Just a few examples: tenants in foreclosed properties who can’t find anyone responsible for repairs; owners facing foreclosures, who can’t find anyone to negotiate with; municipalites who can’t get the owners board up or repair foreclosed buildings. I agree with most of the commenters here that the banks and mortgage companies, at the very least, should not be exempt from the problems they caused themselves.
One positive reform would be separate the idea of foreclosure from eviction. It makes sense that homeowners who can’t pay their mortgage lose title to the property. It’s not clear to me that they should be evicted. It makes more sense that they be treated as tenants, and not evicted except for just cause.
Emptying out the building quickly is a hardship for everyone except the banks, and even for the banks it only makes sense in a red-hot market, when they can turn over the building quickly at a profit. In a falling market, it makes sense for nobody.
You make a sympathetic point, but the essence of ownership of land is possession and the right to exclude others from possession. Why would I accept land as security for a loan if, upon default, I can’t take the land?
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p>TedF
…and it’s certainly not the reason banks or mortgage companies make loans. Loaning money is a business; the purpose of loaning money is to turn a profit. The security for a loan is a way to recover the lenders losses in case of a default.
The bank, as owner, would still have all the rights of a landlord and plenty of ways to make money off their asset. They could either rent it out, or sell it to someone else.
Most people would say that the essence of ownership is the right to do what you want with your property. But everyone accepts limits on those rights. You think you own your property? Try running a junk car business on your front lawn. Or try subdividing it into a rooming house.
Some of the restrictions on your ownership are actually pretty silly, but for the most part ordinary owners accept them. Allowing people living in a house to rent after a mortgage default isn’t silly at all: and the theoretical damage to the investor who currently holds the mortgage is pretty slight.
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p>Really? One of the rights of a landlord is not to lease the property. And as for sellers, would you buy a rental property if you could not decide whom to lease it to?
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p>I think what you are proposing is confiscatory.
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p>TedF
just make it default that there’s an x month lease automatically created for (80% * mortgage payment) upon foreclosure, where the renter (former owner) has right of refusal upon foreclosure.
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p>X can be 12 or 6 or 3 or whatever makes sense. 80% could be whatever too (though obviously if it’s 100% the person would have just paid the mortgage).
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p>If I own a property with tenants holding leases and I sell the property to you, you’ve got to honor those leases. This would be essentially the same thing, only the bank owns it instead of a tenant. It would have great public policy implications — it would help banks decide to not foreclose so quickly, it would help reduce disruption of families, particularly if they’ve got kids in school, and it would help keep neighborhoods a bit more stable. Of course the bank doesn’t want to manage the property — but they’re not in the business of selling properties either. There’s no reason why they can’t hire a management company to run the property in the mean time.
The banks have really brought this mess upon themselves. Here is my summary of the holding:
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p>1. The mortgage contained a power of sale;
2. The original mortgagee properly assigned the promissory note to a second bank;
3. The second bank was not the record holder of the mortgage (even though it was the owner of the debt)–an unrecorded assignment of the mortgage, endorsed “in blank”, was not sufficient to transfer title;
4. The second bank attempts to foreclose the mortgage under the power of sale;
5. The second bank later becomes the record holder of the mortgage;
6. In these circumstances, the foreclosure was invalid, because only a mortgagee can foreclose.
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p>A couple of points:
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p>1. The plaintiff banks apparently were holders or even holders in due course of the promissory note, and the homeowner still owes them the money borrowed. And yes, I agree with the commenters who say that the holder of the note can ultimately foreclose if it can get the paperwork straight. Ultimately, the holder of the note has an equitable right to require the holder of the mortgage to assign the mortgage to it, as the court recognized. Another way of saying this is that the bank is held up on a technicality, but in fairness it should ultimately be allowed to foreclose.
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p>2. The banks could easily have avoided this problem by taking title (a mortgage is a conveyance of legal title) in the name of MERS, as nominee, since, as the court notes, there is no requirement that the holder of the mortgage be the same as the holder of the promissory note.
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p>TedF
We may see problems soon with the MERS system.
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p>Have you read the Kansas SJC decision? It raises questions whether MERS has standing to bring forward a foreclosure.
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p>Granted that’s Kansas law, but what are the chances that it won’t be reflected in Mass?
I commented on MERS in the other thread. It seems to me that Judge Long’s decision expressly acknowledges that under Massachusetts law, record title to the mortgage does not need to be in the same hands as the promissory note, so I don’t see a problem with MERS here.
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p>Here, by the way, is the quote from the decision:
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p>”The holder of the mortgage and the holder of the note may be different persons.”
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p>TedF
The bank has an interest in the property by the owners’ consenting to a mortgage. To perfect that interest the bank files the documents at the county registry of deeds. Thus, any liens or other encumbrances perfected before the mortgage is perfected gain priority over that mortgage.
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p>Usually, 2nd mortgages, judgments, some liens, lose their interest to a properly perfected 1st mortgage. They get whatever is left over (if anything) from the 1st mortgage foreclosure based upon their date and times of filing at the registry.
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p>Does this mean that attachments made after the first mortgage will may well stand in priority over the 1st mortgage? This sounds like a lawyers delight. It boggles the mind.