The wave of foreclosures that was once projected to peak in 2009 and then in 2010 just keeps coming: wishful projections aside, there’s no clear end in sight. And since any guess as to when the market will stabilize is just that—a guess—opinions as to whether or not this is a good time to buy real estate vary. But that’s because most analysts are looking at the wrong factors. The real question for anyone considering buying real estate today isn’t whether prices will continue to fall, rise again or stay stable. The real question for a home buyer today is “When the dust settles, will I actually own this house?”
In January, a Massachusetts court ruled that a bank couldn’t foreclose on a property if it couldn’t demonstrate a proper chain of title. That shouldn’t have come as a surprise: the ruling basically affirmed that only an entity with a valid security interest in the property could foreclose on the property. But the Massachusetts court took that rule to its logical conclusion and invalidated the two foreclosures in question—foreclosures that had occurred nearly four years earlier.
Legally, the decision was the correct one, but it sent shock waves through the industry because those two cases were far from the only ones in which the chain of title was questionable. And many of those foreclosed properties—perhaps hundreds of thousands of them—had already been transferred to new owners who had paid value in good faith. Suddenly, the future of those properties was back in question. The Massachusetts case isn’t binding precedent in other states, but the same issue is cropping up around the country.
Earlier this year, the Florida Bar advised foreclosure attorneys that they were obligated to inform the court if they had reason to believe that forged or fraudulent documents were being entered into evidence, even if the case was closed and the property had already been re-sold.
Where the dust settles on those improper foreclosures remains to be seen, and purchasing a foreclosure property without thoroughly investigating the chain of title and the foreclosure procedure followed in the case would be a bit like rolling the dice in Vegas. But it doesn’t end there. If these issues applied only to foreclosed properties, it would be a simple matter to avoid them. It might limit a buyer’s options in the current market, but it would be possible. However, the widespread disregard for legal process and even fraud in the mortgage industry calls many other properties into question—perhaps most properties.
In the rush to flip, slice, dice and securitize mortgage debt over the past 10-15 years, a lot of corners were cut. And, frankly, a lot of laws were broken.
Conservatively, 60% of current US mortgages are held by MERS, an electronic recording company. However, the manner in which MERS “holds” those notes has no legal basis in most states, and recording statutes have largely been ignored. As a result, many transfers that have taken place within the MERS system aren’t valid. It’s difficult or impossible to untangle who really owns the note and has the ability to transfer it or release a security interest.
To further complicate an already disastrous situation, recent revelations of widespread robo-signing have created new doubts about the chain of title with regard to hundreds of thousands (or perhaps millions) of properties. Because of the sloppy transfers described above, many mortgage servicers found themselves entering the foreclosure fray without valid documents. For a while, that wasn’t too much of a problem: they’d simply whip up an affidavit saying the note was lost and proceed as usual. But through the efforts of a handful of consumer attorneys like O. Max Gardner, III and April Charney, courts began to recognize that the problem ran deeper than a lost note and homeowners and their attorneys began to see ways to fight foreclosure. When that happened, servicers needed a paper trail.
Since that paper trail didn’t exist, many mortgage servicers set about creating it, some with the help of outside companies like the now-defunct Lender Processing Services subsidiary DocX. Low-level employees spent each day sitting in rooms forging the back-dated signatures of people who had been falsely appointed Vice-Presidents of various institutions to try to plug the holes in the paper trail. But the rush continued; some robo-signers say they processed a thousand documents a day. That meant sloppy work, and the forgeries soon became obvious.
Registers of Deeds like Jeff Thigpen in North Carolina and John O’Brien in Massachusetts started digging into their records, and discovered thousands of forged documents. Although it remains to be seen how those documents will be handled, both men have pledged to reject any new documents that contain forgeries. That might seem like a no-brainer, but the consequences will be serious: there are hundreds of thousands of forged documents floating around in the chains of title of existing properties, and thus far no clear answer as to how homeowners can obtain valid title to their own homes or effect a valid transfer.
With those questions unanswered, purchasing real property can be very risky business.