Big news this week in the world of foreclosures and the impact on the housing recovery…
News is finally coming to light publicly on major media networks like CNBC about what those of us who are entrenched in the real estate business have known about for months: the big banks that are issuing new foreclosure notices every day DON’T have the legal right (the proper chain of title) to actually foreclose on a borrower. The media is calling it the RoboSigning Scandal. For a good, but somewhat complicated overview of the problem, watch this CNBC video from Monday, October 1st, 2010 and then read my cliff notes below for a simplified version of the story that truly is going to affect every American:
So here’s my abbreviated explanation of what is going on. It’s a little complicated, but stick with me and I think you’ll soon understand what this means to everyone:
1. A borrower purchases a home and uses Bank of America (formerly Countrywide), JP Morgan, GMAC, etc. to get a mortgage
2. During the time the borrower owns the home, the Big Bank sells the rights to this borrower’s mortgage on the secondary market. To do this, the Big Banks create a “Mortgage Backed Security” thereby lumping the borrower’s mortgage together with hundreds and thousands of other borrower’s mortgages.
3. This security is bought and sold multiple times on the secondary market to investors and/or other banks.
4. Each time the security is sold, documents and affidavits are signed (or in many cases they weren’t signed at all or outright forgery took place) by representatives of these banks/securities in an attempt to create an ownership trail for who actually owns the mortgages within the security. During the transfer of ownership on the secondary market, many times these affidavits of ownership were signed by notaries that aren’t even reading the documents or the documents were notarized months after the ownership transfer took place. In some cases, actual “Robots” or fictitious persons or notaries whose licenses were expired signed these documents (highly illegal). In the meantime, during the real estate boom years, those buying and selling these securities get rich.
5. Then comes the mortgage crisis and real estate values plummet across the country. People begin to lose their jobs and in many cases can no longer sell their homes because they owe too much money to the Big Banks. Eventually that original borrower falls behind on their payments. Soon there after, the ORIGINAL bank who owned the mortgage in the beginning starts the foreclosure process.
6. HEREIN LIES THE PROBLEM. In many cases, the original bank is NO LONGER THE LEGAL OWNER OF THE MORTGAGE. Once the foreclosure process starts, the law clearly states that the foreclosing entity (the Big Bank), can only initiate a foreclosure if they actually can prove that they OWN the underlying mortgage. Because of the multiple ownership transfers of the mortgage backed security and sloppy and illegal practices by some of the bank representatives, these banks can’t actually prove that they are the rightful owners of the mortgage, but they push on anyway and succeed in foreclosing on millions of homeowners across the country. Because an ownership trail was never confirmed by the title companies issuing policies on the newly foreclosed properties, a large majority of the foreclosures that have taken place or that are scheduled to happen were done so illegally. All I can say at this point is: Wow.
7. Fast forward to the first week in October 2010. Several stories are beginning to unfold. Last Friday, major title companies across the country begin to announce that they will not issue title insurance on bank owned properties going forward (which means someone trying to buy a foreclosed property will not be able to get financing to purchase that property!). Essentially what the title companies are saying is that the big banks can’t prove ownership of these foreclosed properties. That means that people who were kicked out of their homes may still have a legal right to that property and the new owners of those properties may have their ownership interest at risk!!! Major media outlets are just getting ahold of this story and the Justice Department is launching an investigation into the matter. With the media just now waking up to this story, it may soon be more clear what the ramifications of this story mean for borrowers, the banks, Wall Street, the housing market as a whole, the economy, and buyers of foreclosed properties. Bottom line: ALL of us are affected by what is coming to light — and in a very big way.
Here’s my initial take on what this means for those of you who are looking to buy, sell, invest, lease, or even stay in your home over the next 2 years: Hold onto your hats… we’re in for yet another potential bumpy ride.
I don’t want to sound like an alarmist (because that is definitely not my thing), but this is a very big story with huge ramifications for everyone and there are no clear cut answers or solutions to this problem. To prove my point, last week Bank of America, JP Morgan Chase and Ally Financial (formerly GMAC) announced that they were going to temporarily halt all foreclosures in 23 states until they could get a handle on what their own employees have been doing to homeowners that are in foreclosure (Minnesota is not one of the states listed, but I have my suspicions that these same banks and others will be stopping foreclosures everywhere soon… and/or the government will step in and do it for them). — UPDATE: One day later, since writing this article, Bank of America just announced today that they are now extending their freeze on all foreclosures to all 50 states. — If all of this weren’t enough of a story, Congress quietly tried to pass a law just before their last recess that would have allowed these very same Big Banks to make it almost impossible for a homeowner to try and challenge any foreclosure notice (thereby essentially stripping a homeowner’s right to face their accuser in court). In my opinion, this is perhaps the scariest part of the whole story… your elected officials tried to side with the Big Banks and condone these illegal practices. The good news is that the Obama administration just announced that they will NOT be signing this legislation.
So for now, many people facing foreclosure could be allowed to stay in their homes rent free while the rampant fraud that has taken place gets addressed by the banks, the courts, and the government. While I don’t agree that people should be able to live for free and dodge their responsibilities, I also could never side with the Big Banks who have blatantly skirted the legal system while at the same time reaping huge profits. Attorneys are going to have a field day with this. Meanwhile, the “shadow inventory” of foreclosures will continue to grow like a silent killer lurking in the darkness. What this does to the housing market is unclear at this point (I’m still trying to wrap my arms around it!). My gut tells me that this means opportunities for investors, but the jury is still out on that. For those people that have stayed current on their mortgages, you are probably screaming at this point (we all should be), but if you are one of the lucky ones to be unfazed by the housing crisis, keep solace in this fact: you hopefully won’t have to go through the stress that so many others are facing or will be facing soon.
Bottom line… there is a much bigger story here that is just starting to unfold.
If you made it this far, thanks for reading. 🙂 Let me hear your comments… and stay tuned for more.