Matt Weidner – Fighting For The American People

Posts Tagged ‘foreclosure Summary Judgment’

Those of us who watch foreclosures every day know that the percentage of serious errors in these cases is very high.  There are both glaring, extrinsic errors which are so glaring that they just jump right out at you and latent errors of fact and law that will take years and even decades to come forth.

These errors make title to foreclosed properties either void or voidable depending on their nature and quality.  Whatever the nature of the error, the consequence is continued destabilization of the housing market and a serious undermining of real property ownership in this country (one of the bedrocks of our entire economic and political system).

What myself and other lawyers and activists are screaming about and trying desperately to get the attention of judges, press and policy makers is the fact that this Foreclosure Fiasco has repercussions that go so far beyond the borrower.  Those who are informed have lost their respect for the courts because our courts have conceded their dignity and authority to the foreclosure mills and Wall Street con artists that caused all this mess.  It is widely accepted that foreclosure files are a mess with deficient and fraudulent filings, yet our elected and senior judges just ignore all of this. (Damn those borrowers and damn the facts, they owe someone something, I don’t care who it is, I’m granting Summary Judgment.)

But their are consequences for institutionalized error, fraud and shysterism.  After all, isn’t that what brought about the near collapse of the international financial system?  Isn’t that what brought America to the brink of financial Armageddon?  But how soon we all forget.  How quick our leaders and judges are to forget those lessons.  It’s not just lone wolves in the blogosphere sounding the alarm now, have a look at this article from a mainstream  and very reputable source:

http://www.nakedcapitalism.com/2010/09/latest-real-estate-time-bomb-title-of-foreclosed-properties-clouded-wells-fargo-dumping-risk-on-hapless-buyers.html

Then after reading the warnings on the risk, read how our policy makers are running us head on into that very risk:

http://www.nationalmortgagenews.com/dailybriefing/2010_177/new-foreclosure-timeframe-1021074-1.html?ET=nationalmortgage:e256:16161a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=NMN_Daily_Briefing_091410

Saturday, September 18, 2010

Latest Real Estate Time Bomb: Title of Foreclosed Properties Clouded; Wells Fargo Dumping Risk on Hapless Buyers

Another ticking time bomb in the realm of real estate bad behavior is bound to go off sooner rather than later, and it is likely to impede normalization of values of residential property.

As readers no doubt know, there is a lot of actual and shadow residential real estate inventory in the US. The time from serious delinquency to foreclosure has lengthened considerably, due not just to crowded court dockets, but also bank/servicer disinclination to take possession (reasons include that investors take a dim view of bank real estate holdings; the bank is liable for expenses, most important real estate taxes, once it takes possession; more foreclosures would lead banks to have to write down clearly overvalued second mortgages, leading to losses and lowering bank capital levels).

Most analysts have argued that it would be preferable to accelerate the process of clearing the overhang of housing inventory, since prices need ultimately to return to price level in relationship to incomes and rent rates more in line with long standing historical norms. And the officialdom seems to accept this view, since Fannie and Freddie are pressuring servicers to move faster on foreclosures.

But what if this resolution process has new land mines planted in it? What if there are not widely understood impediement to foreclosed properties ending up with new owners? If there are good reasons buyers will have reason to be leery of buying houses out of foreclosure, we could have a lot of homes sitting vacant, a blight on neighborhoods and a source of even greater losses to banks and investors.

Yet it appears that the very same sort of corners-cutting that led financial firms to shovel money to weak borrowers could impede working through the inventory of seized residential real estate. An article discusses an analysis by AFX Title, a title search company, that shows problems with title on foreclosed properties to be widespread:

As the number of real estate foreclosures skyrockets, the odds are higher that a home you live in today, or at some point in the future may have had a foreclosure in its history. Even if the foreclosure has long since passed, a loophole in the way mortgages are recorded can create a serious title defect for future owners. Title analysis performed this month by AFX Title has detected this error to be common in random samples of properties it reviewed. “This could affect the property ownership of millions of homes nationwide” said David Pelligrinelli, of AFX Title. “The mortgage recording method which created this title flaw did not exist until recently. As title abstractors are just seeing this problem emerge now but a wave of title claims is coming over the next year or so.”….

The problem is created through a break in the chain of mortgage ownership. Until the 1980’s, most mortgages were loans between the homeowner and a bank, who lent the money directly. More recently, the mortgage financing system transformed into an international system of securitization, with mortgage lenders packaging their loans into securities, bought and sold by investors like stocks. These transactions even split individual mortgages into sections, where each loan could have parts owned by different investment banks.

The transfer of ownership in these mortgage backed securities (MBS) was done with contracts on the balance sheets of Wall Street investment banks, such as Morgan Stanley and Goldman Sachs. The company who originally appeared to make the loan was normally a retail lending company such as Countrywide or Lending Tree, who typically acted as a sales company, and sometimes remained contracted to service the loan.

In the event that the loan goes into foreclosure at a later date, the then-current owner of the loan files the foreclosure and sells the property to a new owner, often at auction. The land records would show a deed of transfer from the investment bank to the new owner. This creates a break in the chain of ownership of the mortgage rights. In many cases, the transfer of ownership of the mortgage loan has gone from the original lender, through several owners, and then to the foreclosing bank, none of which is recorded on the property title history. Technically, the foreclosing bank has no recorded title rights to foreclose in the first place…

There are reports that some title insurers are indicating that they will not insure for this title defect.

Yves here. Some readers may take this all to be unduly alarmist. But confirmation that this problem is real and potentially serious comes via a new “gotcha” practice by Wells Fargo on foreclosure sales. Wells is sufficiently concerned about the risks of selling properties out of foreclosure that it is springing an addendum on buyers, shortly before closing, which effectively shifts all risk for any title deficiency on to the buyer.

Now why is this a big deal? Go reread the boldfaced sentence above. If a bank like Wells does not have the right to foreclose, it cannot have clean title to the property. So the bank could conceivably be selling something it does not own.

Let’s say you buy a vase from a store. You open the box when you get home and find out the box is empty. You’d clearly be within your rights to get your money back.

With the Wells Fargo addendum, even if the bank has sold you the equivalent of an empty box, you have no recourse to Wells. Zero. Zip. Nada.

Let’s go back and give a bit of context. Wells is encouraging buyers in foreclosures to use its attorney and title insurers and reportedly offers to split fees. So the bank is taking steps to steer buyers not to get legal advice. This matters because the problems in this document would not be evident to a layperson. And it’s not even evident to lawyers not expert in real estate; I learned about this situation because a lawyer I know who does a fair bit of real estate work had been contacted by a friend of his, a lawyer looking to buy a house over foreclosure. Wells had presented the prospective buyer with this supposed “standard” addendum on the day of closing and said they would not negotiate it (you can read it in full at ScribD). The buyer was advised not to sign it.

On the surface, this document may not seem all that troubling. But what it does, in effect, is say “Warning, warning, you are buying a property out of foreclosure, there is risk here, and you can’t hold us responsible for anything we told you in the sale process.” (see paragraphs 1 and 2). Now the not-trivial problem with that is: how can you possibly evaluate the risk of buying a property out of foreclosure without asking the current owner? And if the current owner isn’t legally responsible for what they say, or more important, what they deny is a problem, they buyer cannot perform effective due diligence. This vitiates a principle that is well embodied in most areas of consumer and business law, that a seller is liable for the representations he makes about his wares.

Now specifically, the potential problem with the deal is the bank in many states will at best be giving the buyer a “quitclaim” deed (the addendum finesses this in paragraph 18, that the buyer only gets a “special/limited warranty deed. As the lawyer who took a dim view of this addendum put it, “This is like the ‘Special Olympics,’ not like ‘You are my special someone’.” That means the bank is merely transferring whatever it interest it has.

But per the AFX article above, the bank may own nothing. It may have foreclosed without having a clear enforceable right to the property (this is the basis of the burgeoning number of cases where borrowers are successfully challenging the bank/servicer’s right to foreclose, because it cannot prove it actually owns the note, which is the IOU between the borrower and the lender; if you don’t own the note, in 45 states, you have no right to enforce the lien on the property).

Now this little problem can be solved by title insurance, right? Well, guess what, some title insurers have exited the business, some others are starting to write policies with meaningful exceptions when they can’t go to the courthouse and find a clear chain of title. Oh, and Wells is trying to steer you towards their title insurer. What do you think the odds are that their title insurance policy doesn’t have exceptions?

So what is the risk? The lawyer explains:

The typical (unsophisticated) buyer thinks that because they have a lawyer at closing (no matter whose lawyer it is), a title policy, etc…….that they are all safe and sound. They struggle through one of these REO transactions for a month or two, finally get in the house, something bad goes wrong, and they find out that 1) the title policy won’t cover them and 2) the land isn’t unique (see the nasty provision in paragraph 27 on “specific performance”), so a refund is all you get – and you are out on your ear. Hopefully, with a refund – and that may be the best outcome. But if somebody comes in, and voids a foreclosure, your title policy doesn’t pay – Wells Fargo has clearly disclosed that this was a foreclosure, so you only got what they had (nothing), and you have no recourse, no insurance, and guess what, an unsecured loan for half a million bucks.

Given how many sales will be done out of REO, and the rising number of problems surfacing with making sure that mortgage securitizations took all the steps to become the real party of interest in a particular property, it is only a matter of time before we see some blowups of the sort the attorney was worried about, of a buyer shelling out hard dollars for a house, or taking a big mortgage, and winding up with nothing. And a few incidents like that getting the press they deserve will put a pall on REO sales.

Think the risk isn’t real? Then why has Wells bothered to insist that REO buyers sign a new type of addendum, when it has been selling REO for decades? This effort to shift all title risks on to the buyer is a tacit admission of problems. And look at the document itself. The buyer has to initial it in eight places as well as sign it. That’s a clear statement of Wells’ intent to shift the risk to the buyer.

We all need to be doing our part to help our courts fulfill  the directives to get this foreclosure docket moving and get 62% of the cases concluded.  The problem we have right now is all of the attention seems to be focused on reaching that 62% goal by granting Summary Judgment.  Given the current state of affairs of document chaos that exists in most courts, I believe granting Summary Judgment is not the responsible path to achieve this goal.

First, I believe the foreclosure process, as it is currently being implemented, is so fraught with questionable practice that continued entry of these judgments in many cases is not appropriate from a procedural, evidentiary and technical basis.   Second, even if an individual case were ripe for entry of Summary Judgment in so many cases (and certainly on a cumulative basis), it would serve no useful economic purpose to grant Summary Judgment.  That home is far better off with the current resident occupying it and maintaining it than if foreclosure were concluded.  Finally, I’m convinced that there are going to be a significant number of Summary Judgments entered during this period that should not be entered (and that the Plaintiffs do not want entered) because the Defendants are in formal work out arrangements with their lender.  I am concerned that foreclosure sales will be scheduled and Certificates of Title issued before anyone realizes that the entry of Summary Judgment was not appropriate given the facts.

The Real Cause of the Foreclosure Backlog

The far more compelling issues of foreclosure backlog are those files have stalled or been abandoned by the Plaintiffs, either from neglect or because they cannot tie the evidentiary pieces together that are necessary to make a prima facia case for foreclosure.  I am convinced that if our clerks culled the docket and researched the files, they could far more quickly (and more fairly) achieve the 62% reduction goal by dismissing cases.  In addition to the equitable principles involved, there are important legal and appellate principles involved which argue much more strongly in favor of dismissing the cases and allowing the Plaintiffs to proceed after they have gotten their documentary house in order and confirmed that the file really is ready for foreclosure or summary judgment.

I’ve just finished going through every file in my office and am drafting motions that will help to effectuate these goals….I share with you and encourage you all to examine your files for similar facts and legal issues:

HAMERSMA – Mt to Effecuate Master Order

HAMERSMA – Cases for Master Order

I will write much more on this later, for now based on what happened today, I’m busy going through my files to make sure they’re all in order and reviewing my office and court procedures from top to bottom.  Attached here is the Motion for Contempt that started all of this:

SMITHHYATTCONTEMPT

Later, I will post the judge’s actual order and a transcript of the proceedings.  Importantly, the judge in this case has acknowledged what a tremendous drain on taxpayer resources the current foreclosure mill operations represent.  She reserved jurisdiction on this case to pursue in direct criminal contempt charges and held open an Order imposing fines of $7,000 per day against the firm for failing to take immediate corrective action.

Perhaps the most important point to take from all of this is that judges are not obliged to simply enter Summary Judgment in every case.  There are additional options.  Our judges and our courts have powers and steps they can take to insure cases either proceed or are dismissed by the court.

I’m going back to reviewing my files….much more on this later!