When you thought you’d seen every possible stuff-up in mortgage land, a new one comes to light.
When the housing market correction started, most savvy observers pointed out that prices needed to revert to long-term relationships with rentals and income levels. And many have also pointed out that it is reasonable to expect prices to overshoot on the downside.
The powers that be have been trying to forestall the inevitable that by using super low interest rates and purchases of mortgage backed securities to keep mortgage borrowing rates low, making housing more affordable. It isn’t clear how productive that massive effort has been. Not only have banks have tightened up on lending standards (which was warranted) but smart buyers might be worried about financing homes when rates are artificially low. When intervention ceases as inflation picks up and the Fed starts to mop up liquidity, the rise in mortgage rates may prove to be disproportionate to the increase in inflation, dampening appreciation.
But with these ongoing large-scale subsidies, and the almost certain prospect of banks pressing for continuing favored treatment (recall, for instance, the “securitization market is TBTF” argument by American Securitization Forum president Tom Deutsch), it’s disturbing to see members of the financial services industry continue, through incompetence and an undue focus on cost containment, take actions that are detrimental to the housing market.
Evidence of the latest self-inflicted wound comes via e-mail from Lisa Epstein of ForeclosureHamlet.org, namely that some lenders, such as Fannie Mae, had not obtained title to foreclosed properties before selling them out of foreclosures. There’s already been a hue and cry over possible clouded title due to the discovery of errors and corners-cutting, particularly the electronic mortgage registry MERS producing an inability to verify the chain of title (and MERS being so loosely run as to raise questions about the integrity of its data). In classic “shoot the messenger” behavior, people who have pointed out these issue have been criticized for publicizing these failings and arguably hurting the housing market. But this is tantamount to arguing that the media should hide information about serious auto defects because it might hurt GM.
While the latest fiasco has been reported in Orlando, it isn’t hard to believe that the same problems exist in other parts of the US, since Fannie, Freddie, and outsourced servicer process managers like LPS worked to implement standardized processes to the extent state real estate laws permitted.
From the Orlando Sentinel:
A funny thing happened to DeBary resident Russ Vas Dais as he was about to buy a foreclosed home: He learned the bank selling him the house didn’t actually own it.
Fannie Mae had foreclosed on the property but, in an apparent paperwork problem, never took ownership.
“It was quite shocking to learn the bank didn’t have title to it,” said Vas Dais, who had worked in the real-estate sales and appraisal business for 18 years. “I just felt that there are a lot of incompetent professionals who aren’t paying much attention. …
Another emerging obstacle that could further complicate the foreclosure process: legal appeals that can reverse judicial foreclosures and can put a property’s ownership into deeper doubt.
Christopher Hunt, senior attorney with the Orlando law firm KEL, said the firm has beefed up its appeals staff and plans to start filing 20 foreclosure appeals a week. The firm In July persuaded the 5th District Court of Appeal to overturn state Circuit Judge William Law’s foreclosure against Stephanie and John Crown of Lake County. The bank that took ownership, Chase Mortgage, never put the house on the market, and the Crowns have been able to continue living in it.
Buyers of foreclosed properties could find themselves caught up in such litigation if the foreclosure is overturned in the courts, Hunt said.
“I think that is actually going to happen,” he added. “We’re not going to be able to prevent that in every instance. When that does happen, it’s bad for everyone. It’s a disaster in the making.”
Even in commercial real estate, foreclosure sales have proven so problematic that one Orlando broker likens them to “catching a falling knife.”
And a mere two days ago, the Sun-Sentinel reported that a foreclosed home was sold twice, meaning two buyers closed on and paid for the same property.
As we’ve indicated repeatedly, foreclosure sales are final; the risk is not so much to the home buyer, as the article implies, but the lender that foreclosed. As Bob Lawless wrote:
…most every (or maybe even every–I’ll let someone else do the 50-state survey) state provides the strongest possible finality protections for deeds obtained through foreclosure sales. We also see similar rules for other judicially supervised sales in other contexts such as sales of personal property subject to a security interest or bankruptcy sales….
Suppose Henry and Helen Homeowner lost their home in foreclosure proceeding, and it has since been purchased by Bill and Betty Buyer. Now, Henry and Helen discover the affidavits in their foreclosure proceeding had some of the very same apparently fraudulent signatures reported in the media. When Henry and Helen complain to the court, the answer should be: “Your complaint is against Deutsche Bank (or whoever foreclosed) and not against Bill and Betty. You can recover damages from Deutsche Bank but not eject Henry and Helen from possession.” In turn, this will mean that that Bill and Betty (or their lender) will not have to look to the title insurer for recovery.
However, as one might infer, Bill and Betty Buyer may still be the initial target of litigation, and could thus wind up spending time and money in getting the wronged seller off their back and on to suing the right party.