The foreclosure freeze that began less than two weeks ago over improper signatures on foreclosure documents is already beginning to thaw. A call to Bank of America’s home loan and insurance customer service line greets customers with an automated voice declaring that there is not a moratorium on foreclosures. Bank of America, Ally Bank and JP Morgan Chase among other bank put a temporary freeze on foreclosures on revelations that the foreclosure documents were not reviewed before they were signed.
What initially seemed like a grinding halt to foreclosures has turned into a small bump in the road. The foreclosure juggernaut will continue. The toxic mortgages are working their way through the system and following in their footsteps are the homeowners who lost their jobs in 2008 and 2009 and have been unable to replace the income that enabled them to afford their mortgages. Many of these individuals have been in their homes for 10 to 20 years in contrast to 2 to 5 years the homeowners who ended up with a subprime or Alt-A mortgage.
The banks are implementing follow-up procedures for reviewing foreclosure documents, making sure that sufficient oversight is in place. While improper signatures have raised concerns, a much more problematic concern lurks below the surface. You cannot foreclose on a property if you do not know who owns it.
Property ownership has traditionally been recorded by the county clerk and the records have been kept in a filing cabinet inside the county building. Title insurance companies have had a reliable source from which property ownership can be established. When a title insurance policy is written on a piece of property, the question of ownership rarely came up and if it did, fraud was usually involved. This process has worked well for hundreds of years and no one questioned its authority.
As the real estate boom took off in the 1990’s, many county clerks were unable to keep up with the sheer number of real estate transactions, not to mention the increase in home refinance and home equity lines of credit. Closings were postponed and an anxious market looked for an escape valve to relieve the pressure.
The answer was to create an electronic clearinghouse that bypassed the cost and delays of recording the sale of a loan from one entity to another. The Mortgage Electronic Registration System (MERS) was created in 1997 to expedite the transactions and enable ease in long distance transactions. MERS helped the process move smoother, track ownership, and hold title as an agent of the owner. It created efficiency in the system that paved the way for securitization and collateralized debt obligations, providing the capital necessary to fuel the real estate boom between 2004 and 2007.
The confusion in this system is that MERS is the mortgage holder regardless of the owner. Let us say your mortgage loan was financed by Chase in October 2006. Chase, looking to raise capital for future mortgage lending, packaged the mortgages it originated in the fall of 2006 into multiple security issues. These investment vehicles may have been sold through a hedge fund, Goldman Sachs, or Lehman Brothers to name a few, to pension funds, foreign governments and local municipalities looking to diversify their investment holdings. If a pension fund sells a portion of the issue purchased, ownership of specific piece of property can come into question, especially when there is not a paper document verifying ownership.
Foreclosure gate’s signature problem has inadvertently brought to light the murky world of property ownership in the age of MERS and securitization. The potential impact to the market is much greater than robo-signers. How likely are you to make a bid on a foreclosed property if the property owner is a question mark?
Capitalism is founded on transparency and trust. If our trust in the market erodes, prosperity becomes more elusive. Buyers in the foreclosure market go elsewhere reigniting the downward pressure on home values. How does the market grow if you cannot trust the information?
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