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The title problems resulting from the mass volume of foreclosure lawsuits in the courts is becoming a major problem in this country with a direct effect on the housing market now and for many years to come. Imagine the following scenario:
The bank filed a foreclosure suit, won, took title, and sold the property to an independent third party. Now imagine that you are the third party purchaser – you bought a home from a bank that obtained title via foreclosure. You move into and live in the house you purchased from the bank at a foreclosure auction. Then suddenly, the original homeowner, who owned the property before the bank foreclosed, has convinced a court that she still owns the property. Incredibly, in light of the bank’s failure to correctly prosecute the foreclosure lawsuit, the homeowner is right – she still owns the house.
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.
MERS announced it changed its procedures to require that an assignment of mortgage be filed prior to the start of any foreclosure suit. Typically, a mortgage is recorded in the public records with MERS as nominee for ABC Corporation. Invariably, when the foreclosure lawsuit is filed, it is not filed in the name of ABC Corporation it is filed in the name of Bank of America, JP Morgan Chase or some securitized trust – an entity with no relationship to ABC Corporation.
In most foreclosure cases, banks’ lawyers argue the plaintiff has standing if it is the “holder” of the Note (i.e. if it possesses the original note with a special endorsement in blank.) Many judges accept this position, no questions asked and thus, an assignment of mortgage is often viewed as irrelevant and superfluous.
Even if Bank of America, JP Morgan Chase, or the securitized trust has standing without an Assignment of Mortgage in the public record, ABC Corporation is still the mortgage holder of record. This means that even if Bank of America, JP Morgan, or whoever prevails in the foreclosure is the high bidder at the auction, acquires title, and sells the property to a third party, ABC Corporation is still the mortgage holder of record. What does that mean? Essentially, the entire foreclosure case was like a wild deed – it took place, but ABC Corporation can still institute a foreclosure lawsuit in its own name, as it would have priority over the bona fide purchaser who acquired title from the bank.
If ABC Corporation is the mortgage holder of record, and it is not named as a party in the mortgage foreclosure suit, and there is no Assignment of Mortgage, then the mortgage in favor of ABC Corporation still exists, even after the foreclosure, even after the auction, and even after the sale to the third party. The foreclosure happened, but as far as ABC Corporation is concerned, the foreclosure is irrelevant – it still has the mortgage.
To sum it all up, when purchasing your next Tampa home, especially in the case of foreclosure, it is very important to seek the advice of a real estate attorney and if possible, purchase title insurance when you purchase a property.
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