The securitization industry may be about to reap the whirlwind of its failure to take the need for reform seriously. As we’ve indicated, industry incumbents have adopted a denialist approach to widespread evidence of serious documentation problems and procedural abuses, and have fought reasonable, pro investor proposals tooth and nail.
The Washington Post reports on several pending legislative proposals in the state of Virginia, all of which seek to level the power imbalance between the financial services industry and mortgage borrowers. The interesting thing about this pushback is that Virginia is not at all left leaning state. These measures instead appears to result from the fact that it has one of the fastest foreclosure processes in the US.
As the Washington Post tells us (hat tip Lisa Epstein):
Homeowners…would be given more time to defend themselves under one proposal. Another bill would require lenders to get the approval of a judge before seizing a home. A third would give homeowners a last-minute chance to avert foreclosure by catching up on overdue payments.
The effort to transform Virginia’s foreclosure process faces an early test Monday, when one of the more far-reaching bills is scheduled for a hearing and a vote in a House subcommittee. The measure would force banks to maintain up-to-date records on Virginia loans in government offices, potentially restraining global trade in these mortgages.
Note that the proposal to require judicial approval before a foreclosure sale is forward-looking and would not affect current foreclosures. But it also would represent a meaningful impairment of lender’s rights in that state. Virginia is a “deed in trust” state, which means the lenders holds title to the house until the mortgage loan is satisfied. The second proposal, to give borrowers the right to cure a default up to the time of the sale of the home, sounds nice but probably does not add up to much.
Giving a borrower the additional time between when a foreclosure is final to when the property is sold to get current is unlikely to lead to more “cures” but would give borrowers more time to mount a legal defense. Nevertheless, it would be far more meaningful to give borrowers clear rights to see the bank’s payment records and detailed calculation of the amount claimed to be due and owing, as well as a process that would allow borrowers to challenge errors and obtain speedy corrections of mistakes and related inappropriate fees.
The most interesting and potentially significant proposed change would effectively put MERS out of business in Virginia. Here is the language from the proposed bill:
Whenever a debt or other obligation secured by a deed of trust, mortgage or vendor’s lien on real estate has been assigned, the assignor or the assignee, at its option, may cause the instrument of assignment to be recorded in the clerk’s office of the circuit court where such deed of trust, mortgage or vendor’s lien is recorded provided such instrument is otherwise in recordable form, or may cause a certificate of transfer signed by the assignor to be recorded in such clerk’s office, and such instrument of assignment or certificate of transfer, upon recordation, shall operate as a notice of such assignment. The instrument of assignment or certificate of transfer shall be indexed in the name of the assignor and in the names of the obligor or maker, and the trustees, as applicable, all of whose names shall be set forth in such instrument or certificate. The certificate of transfer shall conform substantially to the following:r
So the bill would require the traditional practice of having the local courthouse records show for the public at large to see who specifically has a lien on a particular piece of real estate. Thus every transfer of a note (the borrower’s IOU) would also need to be recorded and the associated fees paid. Before industry defenders howl that this will end securitizations, yes, it would change the economics substantially and result in more loans being kept by the orginating bank. But the idea that it would kill securitizations is a gross exaggeration. There was a real estate securitization industry long before MERS became a large scale force in the early 2000s.
In addition, as I read it, this bill would also effectively bar foreclosures in the name of MERS.
The tectonic plates are starting to shift in mortgage land. It would behoove industry incumbents to be a tad more pro-active, but expect them instead to continue to try to block any meaningful change, relying on the usual claim of “it will destroy the housing market”. Funny, they seem to have already done that.