New Foreclosure Rulings Could Slow Market Healing

The Massachusetts Supreme Court upheld a ruling Friday that nullified the foreclosures on two homes because the banks, Wells Fargo and U.S. Bancorp did not have the necessary paperwork on file at the time of the filing. Because of this ruling there is the real possibility that tens of thousands more lawsuits could be filed, painfully prolonging the inevitable foreclosures.

Regardless of their intentions, it seems like big banks keep hurting our economy. First they played a central a role in the original housing market crash, and now they are inadvertently slowing down the housing recovery by cutting corners in the foreclosure process.

The banks’ problem at present stems from corner-cutting they did back during the housing boom. As mortgages were made by lenders, they would be sold off to bigger banks or others, who would then package the loans into bundles and sell them as securities to investors. In the process, the “note” (the piece of paper that shows that borrower is liable for the balance of the loan and also that the house is the collateral for the mortgage) on each mortgage was not always passed on to the new owner of the loan, because they could use an “endorsement in blank” instead in order to transfer the loans faster. But in the event of foreclosure, the owner of the loan must legally possess the note and many companies never recovered those original notes.

According to Professor Adam Levitin quoted in a recent CNBC article:

“The mortgage is still owed, but there’s going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you’re stealing my money. You’re going to then have trusts that don’t have any assets that have been issuing securities that say they’re backed by a whole bunch of assets, and you’re going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they’re going to do, and you’re going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.”

So, now there may be a new slough of lawsuits, that could nullify a handful of foreclosures and hold up thousands more in the court system. Unfortunately for the homeowners, their homes will almost certainly fall back into foreclosure because the note will eventually be found. Plus, the simple truth is that the homeowners have not kept up with their payments and won’t be able to make up the months or years of nonpayment. So all these held-up foreclosures will happen anyway, just at a slower pace, effectively dragging out the full recovery of the housing market.

So, thanks big banks. Have you gotten the message yet about CUTTING CORNERS?

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on January 10th 2011 in Mortgage News

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