Tuesday, October 19, 2010

Who owns the damned mortgage, anyhow?!

By now pretty much everybody has heard about "mortgage-gate" -- where the banksters foreclosed upon homes where they didn't own the mortgage and where, in some cases, houses were foreclosed upon that didn't even have a mortgage on them.

Now, some folks say that this means that all these foreclosures were invalid. Well, probably not. Most of those homes that were foreclosed upon really were in default, though clearly bypassing the normal mechanisms resulted in atrocities. The real question is: Was the mortgage satisfied by the foreclosure action? Do the buyers have clear title to the formerly-foreclosed homes?

My best guess is that there are a lot of investment buyers who are going to get some unpleasant surprises shortly as they suddenly find the home they bought for cash at a foreclosure sale itself foreclosed upon by the real owners of the mortgages that the banksters fraudulently claimed they owned. Because see, if they are the legal owners of the mortgages, and the banksters, not the legal owners, got the money from the foreclosure sale... well. There was no legal foreclosure, and the mortgage lien has not been satisfied and legally remains on the title. And in many states, an unsatisfied lien above a certain percentage of the home's value can trigger a foreclosure sale.

Even in those states where the unsatisfied liens (unsatisfied because the banksters, not the owners of the mortgages, foreclosed on the homes) don't trigger foreclosure sales, the home now has a clouded title, meaning that you can't sell the damned thing without losing all your equity to someone you don't even owe money to. The deal being that the lien goes with the *house*, not with the owner of the house, and if nobody has paid it off either through a valid foreclosure or otherwise, it's still there.

Those of us in civil foreclosure states have a slightly easier (harder?) time of it here, because we're deed-in-trust states -- the deed to the home is in trust at a title agency, rather than having a lien on it. The title company gets to decide who to release the title to, and once they make that decision, there's an unclouded title -- if you were the valid holder of the mortgage and the title company released the title without paying you off (instead paying off a bankster who didn't own the mortage), you can sue the title company, but the title itself is clear and the buyer doesn't have to worry about someone foreclosing on him for a mortgage he didn't even know about. But even here there is going to be a problem with title companies having to fork over way more money than is in their reserves to the winners of the successful "you gave my title away without giving me my money!" lawsuits... and if the title companies collapse, who owns the titles to all the properties they currently hold in trust? And without solvent title companies to hold titles in trust, the whole deed-in-trust system collapses.

In short, it's a mess. But it's a mess for the buyers of the foreclosed properties in lien theory states, and it's a mess for the title companies in deed-in-trust states (which means it's a mess for both buyers and sellers there). As for the notion that the foreclosed properties will revert to their former owners... dream on. At best, if it can be proven that the property was fraudulently foreclosed upon, the former owner qualifies to get money equal to the equity he had in his home at the time -- which probably was none, for most of these properties, most of which were way underwater. In general, civil courts award cash damages rather than order substantive actions whenever it is possible to remedy the harm via cash, because that requires the least hassle on their part. In this case, from a legal point of view, the harm is the loss of equity that the foreclosed-upon homeowner experienced, and the remedy is, err, cash. And maybe an order to the bank that the foreclosure be stricken from the homeowner's credit report record, but that's the farthest that a court will go.

In other words, people saying that this is going to keep people in their homes, or return people to their homes, are smokin' crack. That's just not how our legal system works or, for that matter, has ever worked -- the English common law system we inherited is predisposed to cash remedies where those are sufficient to deal with economic harm done. All that's going to happen now is that the banksters are going to have to go back to the investors who own the mortgages and get the mortgages legally assigned back to them before going to foreclosure. Well, that and cleaning up the past mess is going to be a big issue, because now we have several million people nationwide who own homes with clouded titles, where they can't sell the damned things because there's someone out there, somewhere, who owned the mortgage and still has a legal claim to a lien on the home -- and until that is sorted out, the title is stuck in limbo.

-- Badtux the Legal Penguin


  1. Who would "buy" a foreclosed home now? Possibly a million U.S. houses will be foreclosed upon this year? Who takes control of the titles -- the banks? The hedge funds? I've seen reports that the same mortgages were sold multiple times, because they were just data entries in complex mortgage bonds, and nobody much cared what went into those sausages. If you own a piece of a bond that has a piece of 1,000 mortgages, and the bond won't redeem, who gets the physical house that's part of that bond?

    Rhetorical questions without answers. I can foresee a situation where the most powerful entities -- those with enough money to hire lawyers, the new equivalent of mafia gunsels -- will end up controlling lots of houses and other property. Either they'll do it piecemeal, with individual seizure actions agains selected sites, or wholesale by bribing legislators to change the rules to suit them. Either way, lots of Americans will end up dispossessed, paying rent to big fish, maybe even Teh Fed. It's a Third World way to live, and little by little the nation's housing stock will get run down, because uncaring tenants and uninterested rentiers aren't going to keep things maintained.

    Also, the housing market will continue to be frozen. Who would buy under such circumstances? A major sector of the economy will be like a possum in the headlights. What does this do for the fractional reserve-based monetary system and the U.S. dollar's status as world reserve currency?

    Rhetorical questions again. I have a lot of 'em, and a lot of dread. I might come off as a tinfoil doomer, but there's so much shit that's like a dump truck full of sand poured into the gears of the economy that I can't help but think things are going to come to a shuddering halt. The lights won't come on. The water won't come out of the tap. It's not going to be muddle through; it's going to be hunker down.

    There's no universal law that says civilization has to keep continually moving forward. There have been many times when the progress level of humanity was knocked backward. I think this is one. It's bad to be living through such times, but at least I've spent the bulk of my life living through the good period. The ones I feel sorriest for are the 20-somethings, who have tasted the good times for just a little while, but will see that yanked away from them. The really young, who have barely known it, won't miss it that much. Most of them will die quickly anyway.

  2. The government has let decay the concept of ownership, for the most valued category of assets in the country.

    I'd say it's at least a third of a government's reason to exist in the first place, and they've fucked it up.

  3. Bukko, Nanbgs, title scams have been prevalent in this country since the beginning. After the American Civil War, Southern states used such scams to push black farmers off their land. County courthouses regularly had "fires" back then which would destroy all the titles on record and require people to come in and say what properties they owned... and the white farmer who coveted the black farmer's property would always say he owned that property, and of course the all-white jury would always agree.

    So really, we're just continuing an old American tradition with the current bankster shenanigans. The more things change... eh.

    - Badtux the History Penguin

  4. I would argue that this wave of title scams is orders of magnitude larger than anything since the theft of land from the First Nations' people. It's of such a critical mass that it will sink the U.S. dollar-based monetary system. They screwed the pooch on this one. The economic system relies on at least a bit of honesty so that all contracts don't have to be enforced at the point of a gun or the retainer of a lawyer. When the system's DNA is revealed to be fraudulent, it collapses.


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