Why the Foreclosure Mess Settlement Proposal Can't Fix the DamageEver since this fall, when the mortgage industry's robo-signing scandal first broke, people have been aware that banks have been illegally foreclosing on homes.

Now there's a huge fight over what to do about that, mostly focused on a 27-page proposal that was supposed to represent the consensus of the 50 state attorneys general, but apparently doesn't. On top of that effort came a report of a "shock and awe" modification push from the federal government, but as Yves Smith at Naked Capitalism details, it's neither good policy nor practical.

One feature of both the attorneys general's proposal and the "shock and awe" maneuver is speed.

The attorneys general are in such a hurry to find a solution that they haven't even investigated the banks: They're just relying on consumer complaints to define the problem. Similarly, the shock-and-awe plan involves an impossible six month deadline. As Treasury Secretary Timothy Geitner explained to Congress: "All parties have a stake in bringing this to resolution as quickly as possible" and "It's very important that we try to bring this to bed as quickly as we can."

At least part of this desire for a fast fix is rooted in the belief that an agreement will help the housing market recover, which in turn will help straighten out the overall economy. That's true to some extent: If millions of mortgages were successfully modified and unnecessary and servicer-driven foreclosures were halted, as the settlement proposes, that would be good for the economy and the real estate market.

The Enormous Clouded Title Problem

But the settlement doesn't go nearly far enough to save the housing market. In fact, it can't go far enough, because it can't address one of the most confounding problems the banks have created: the millions of properties nationwide that now have "clouded" titles.

To put it plainly: Because of these bad titles, property owners can't prove they own the properties they think they bought, and banks can't prove the had the right to sell them.

Even though it's impossible to know how many properties are affected, I have confidence in saying millions nationally for the following reasons:

  • More than 1 million foreclosures have been completed since 2005; nearly 200,000 were completed in the third quarter of 2010 alone.
  • Foreclosures involving securitized mortgages seem to be flawed as a rule, not the exception.
  • Even when foreclosures may have been otherwise valid, the practices of foreclosure attorneys have clouded titles.
  • The problems are ongoing. More flawed foreclosures are completed every day.
  • The clouded title problem extends well beyond foreclosures. Both MERS, the electronic database that holds more than half the mortgages nationally, and possible securitization failures could have damaged the titles of the properties even though the borrowers are current on their mortgages.

The Solid Effects of Clouded Titles

You can't sell real estate when you can't establish that you own it -- banks won't loan money for purchasers to buy the property. That's because the bank wants to be sure that if it forecloses, it will get good title to the property. (Yes, this issue practically oozes irony.) That's why banks won't approve a mortgage for a property if a title insurance company won't insure its title. And title insurance companies won't do that if they know the title is clouded.

A few months ago, the Massachusetts Supreme Judicial Court issued its Ibanez decision, which made it clear that the banks' foreclosure practices -- and indeed, the standard securitization deal -- violated longstanding basic Massachusetts real estate law, and thus, many completed Massachusetts foreclosures were invalid. The foreclosing banks, which had either since sold the properties or still "owned" them, had no right to foreclose, and therefore had never owned those properties. So who owns them now? Well, the fact that it's a question is the very definition of "clouded title."

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Since it has been a couple of months since the Ibanez decision, I called a couple of large title insurance companies in the Boston area to see how title insurance for improperly foreclosed properties is being handled. To bypass talking points and smooth-talking spokespeople, I called insurance sales agents, representing myself as someone contemplating purchasing a Massachusetts foreclosure. Because I didn't say I was a member of the media, I'm not going to name the companies. But the conversations confirmed my thesis.

One agent called improperly foreclosed homes in Massachusetts "uninsurable." Another explained that the problem underscored in the Ibanez case has been around for years, and that any title company would need to look at foreclosures dating at least until the late 1970s, when securitization became more common, to make sure no improper foreclosure had happened in all those years. And some properties, she noted, had been foreclosed on multiple times.

That agent did note that the problem was worst for properties improperly foreclosed on in recent years that were still bank-owned. Those properties were truly uninsurable. That's because the bank couldn't make a claim on the title insurance policy it had purchased when making the original loan, since it was the entity that clouded the title. Indeed, honoring that policy would be like letting a arsonist collect on fire insurance. Thus much of the current bank-owned inventory in Massachusetts is largely uninsurable and thus unsellable.

No settlement with the servicers is going to solve that problem. And it's a national problem, not a Massachusetts one.

Where to Lay the Blame

When it comes to the clouded title problem, one group is wholly innocent: the borrowers -- "deadbeat" or not. The title issues are the equivalent of unforced errors in tennis: the banks have done this to themselves.

And one party is generally guilty, in the sense that none of the problems could have developed this far if it had been doing its job, and that's the government.

By government I mean: regulators, particularly at the federal level; law enforcers at both the federal and state level; state legislatures and Congress to the extent they passed laws making the situation worse or failed to pass to pass laws that would have helped; and finally, Fannie Mae and Freddie Mac for their role in setting up MERS.

Even in that context, the largest share of the blame still must go to banks and their lawyers: But for them, the clouded title mess wouldn't exist. Here's how all of them created the crisis.

How Ownership Gets Confused

First, banks across the nation have used fraudulent documents to "prove" they have the right to foreclose. This is the classic robo-signing situation, and it, at least, would be solved if the attorneys general's settlement proposal was adopted.

While the issue is clearest in judicial foreclosure states -- where the documents are getting more scrutiny -- the problem exists everywhere. In nonjudicial foreclosure states, the problem frequently surfaces first in federal bankruptcy courts when banks ask for permission to foreclose on debtors in bankruptcy. The problem also shows up in those states' courts as homeowners try to fight the foreclosures.

For this title clouding problem, blame the mortgage servicers, who incidentally are also the big banks.

Second, as both the Ibanez and Kemp case from New Jersey illustrate, banks' standard securitization procedures may have failed to properly assign the promised mortgages to the securitization trusts, which means those securities aren't really mortgage-backed after all. It also means that the ownership of those mortgages (and in some states, title to the properties) remains with different banks that were part of the securitization processes -- banks that may or may not still exist today.

The clouded titles that result from busted securitizations are a particular problem in those states where the lender who holds the mortgage holds legal title to the property until the mortgage is paid off. In those states, all the borrower has is the right to use and enjoy the property until the mortgage is paid off and she gets legal title. Importantly, busted securitizations cloud the titles of current and defaulted mortgages in those states equally.

For this problem, blame the securitizers, who include the big banks, Wall Street, and their big law firm attorneys.

Forgeries and the Illegal Practice of Law

Third, foreclosure attorneys have processed their filings in illegal ways. For example, in Pennsylvania, the attorneys have done foreclosures with papers no lawyer reviewed, bearing signatures forged with the firms' named partners' permission. Those foreclosures, which were done via the illegal practice of law, appear to be void -- and there are many. Or consider that several Maryland firms have also had underlings forge lawyers' names on foreclosure documents, including on more than 1,000 deeds. Or consider the practices of the now defunct David Stern foreclosure mill in Florida.

Remembering that the Lender Processing Services business model emphasizes speed over substance and LPS deploys lawyers for something like half the mortgages in default, it's impossible that these problematic practices of foreclosure attorneys are limited to Pennsylvania, Maryland and Florida.

For this problem, blame both the foreclosing banks and their foreclosure lawyers. Blame the banks, because it was their relentless cost cutting that got us the current foreclosure business model. Blame the lawyers, because they knew what they were doing was illegal and let their greed get the better of them.

The Mess That Is MERS

Fourth, and perhaps most problematic, is the MERS debacle.

MERS mortgages have questionable validity.
Whether or not the MERS model is legal seems now to depend on which judge is making the decision. Cases in different states, and even within the same state, are coming out differently. Where the MERS model is illegal, foreclosures done by MERS or by the people it assigns the mortgage to have clouded titles. Even where the MERS model is legal, the system's incredibly sloppy record keeping could leave multiple banks believing they have the right to foreclose on a given property.

For the MERS problem, blame the following, in no particular order: Fannie Mae and Freddy Mac, who were instrumental in creating it; Covington and Burling, the law firm that blessed it; Moody's, for blessing it as well; and the big banks who ran with the flawed system and made it what it is today.

Fixing the Problem

Because real estate law is state-based, fixing the clouded title problem will take legislation in all 50 states. But before legislators get busy drafting bills, a much more detailed investigation of the problem in each state needs to be done. How many properties are involved? How many different types of title problems? How many different players helped cause the problem, and how can they be made to pay for fixing it? What should be done about the innocent buyers of illegally foreclosed property? What should be done about the borrowers who were evicted by the wrong bank?

It's a horrible mess. And it's one that the rush to cut a deal with the banks is blowing right past.

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I personally think that bankruptcy is much better than foreclosure. You seem to bounce back from bankruptcy a lot faster now days. They have secured credit cards and all kinds of ways to rebuild you credit. But foreclosure is more like an event that even with recovered credit, could keep you from buying another home.


July 17 2013 at 3:52 PM Report abuse rate up rate down Reply

My case is racketeering, cash out, no closing documents. My question, I filed a Chapter 13 in Federal Court back in 2005. Just when the mortgage fraud started to come to light.
Q: Can I go back to the Federal Court and ask them to reopen my case? My homestead is still vacant. The mortgage companies are Argent, Amerquest, AMC Mortgage, Deutsche Bank in a pooling of see unities.
Note: To this day I still do not have my closing documents or how Argent placed a $49,000.00 dollar lien on my homestead.
I am still in Court but I have made mistakes and the lawyers know that. Cause#20070290
Argent was my mortgage company that wrongfully cashed out $49,000.00 dollars against home improvements on my homestead property 405 N Trinity, Cleburne TX 76031. I have searched the county records, and no one can find a home improvement permit. Keep in mind no work was ever done to my home stead. Also Argent is now out of business. And no one is living in my home, but someone is gutting / removing my cabinets, floors, and fixtures. What can I file in Federal Court to make the current first lien hold to produce the cash out documents showing who what when and how they are able to have a valid claim?
My case is racketeering, cash out, no closing documents. I filed chapter 13 in Federal Court in 2005. Just when the mortgage fraud started to come to the light. The chapter is dismissed.
Q. Can I go back to the Federal Court and ask them to reopen my case while my home is still vacant? The mortgage Companies are Argent, and mortgage Deutsche Bank in a pooling of securities. Note; to this day I still do not have my closing documents or how Argent placed a lien on my homestead.
I was in court but now I am in Appeal Court. I have made mistakes and the lawyers know that cause #20070290 but the Civil Court still doesn’t get it. Please notice Jessie R. Fantroy was President Lyndon B. Johnson, personal cook during the Civil Rights and Presidency. 405 N. Trinity is her original HOMESTEAD, and now they are gutting it. For verification use this link.
I lost the summary judgment and keep fighting until the constable removed me on January 09, 2009. My two year period is about up and the Nation realize the massive mortgage fraud can anyone help me
Rickey; email FCNIR@aol.com

December 30 2011 at 6:21 AM Report abuse rate up rate down Reply

The money banks are ******* out of your community in foreclosures is NEVER coming back...not in your lifetime. Instead of investing here at 3-4%, they get 20-30% return in Brazil, India, China...and get the added bonus of payment in strong currencies, not toilet paper dollars.

April 19 2011 at 10:36 AM Report abuse rate up rate down Reply

Let me share a personal exmaple of how the foreclosure debacle is playing out. Several years ago we sold our last house to a general contractor, who recently lost it to the bank. It was a Freddie Mac loan. The house had a tax value of $400K and a loan balance of $370K. Do you know how much Freddie sold it for? $31,500! As in "thirty-one thousand". This was not some bombed-out crack house in Detroit, but a nice home in a quiet suburban neighborhood in the northeast. Don't you think the homeowner would have scraped up the cash to buy it back for less than ten cents on the dollar? Heck, I would have bought it again, had I known.

The house was quickly re-sold for over $250K, with no work done to it whatsoever. Ths is the sort of shady crap "our" Freddie Mac is pulling across America, as they quietly work to divest themselves of millions of distressed properties.

So, are you angry yet? You should be.

March 31 2011 at 12:34 PM Report abuse +1 rate up rate down Reply

If Barney Franks and the Banks had waived pre-payment penalties in early 2007
most of the Mortgages could have been Re-Financed before the tremendous drop
in prices...............OH NO ! We want our pre-payment penalties !

Bankers are famous for being Nuts and destroying customers !

So if the house is on par with the original price, lower the rate by 100 basis
points...............if not then try to get payments out of the tenant, if the
title is clouded then sign a contingent agreement to convey title when it is
cleared, someday !

March 20 2011 at 10:44 PM Report abuse +1 rate up rate down Reply

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March 20 2011 at 7:24 PM Report abuse rate up rate down Reply

Interesting...Former President Clinton began the housing crisis with Barney Frank which encouraged martgage lenders to create liar loans (no documentation required, put any amount you want on a mortgage application)for those not even close to being qualified to purchase a home in the US. Low and lower middle income people were able to buy large propeerties for next to nothing with large mortgages secured by very low payments. How can any person buy a home with a $900 payment and then 3 years later have to pay a $2,000 a month loan. We can thank Fannie and Freddie Mac to insure these loanss so when the loan fails; banks are re-paid by the government. These practices continued under Former President Bush and also under President Obama. The only difference is Obama claims "no Knowledge of these types of loans"..Interesting...Obama voted for all of these types of loans for low income people could buy a home to the same people would vote for him. The mortgage mess is everyones problem and until someone in authority has the guts to stand up and say the banks, mortgage lenders and ultimately the taxpayor have to pay for these underfunded or unpaid loans. Solutions include area familiar appraisers need to visit each property, determine value of property and begin the process again with a new mortgage and loan to establish community values and bring in new owners to pay taxes, fix porperties and decrease vacancies within towns and cities. It takes a special person to admit the housing crisis will be permanent until banks, etc take responsibility. Does Obama have the guts...I don't think so based on his tendency to blame everyone else for problems rather than taking steps to solve them.

March 20 2011 at 5:58 PM Report abuse rate up rate down Reply

Great and so very true Article.

March 20 2011 at 12:01 PM Report abuse rate up rate down Reply

the greatest pres. of all time OBAMA!!!!!

March 20 2011 at 11:27 AM Report abuse -1 rate up rate down Reply
1 reply to bufortharmon's comment

In your dreams and America's nightmares. He is a baby killing war monger. Isn't that what you said about President Bush when he defended America?

March 20 2011 at 2:49 PM Report abuse rate up rate down Reply

A. Field - thank you for continuing your articles on this subject. There are, however, few comments here that make any sense today....

March 20 2011 at 11:02 AM Report abuse rate up rate down Reply