If you want a nice 8-minute primer into how the foreclosure fraud crisis works, here’s a video from Rep. Alan Grayson, complete with four real-world examples. He talks about a man who was foreclosed on when he didn’t have a mortgage and paid cash for the home; a home that had two foreclosure suits against it because both servicers claimed ownership of the title; a couple foreclosed on over a contested $75 late fee; and a story that sounded a lot like the ones from my HAMP series, only in the end the servicer used forged documents to claim ownership of the title.
Grayson takes us back to the very beginning of this crisis, during the housing bubble, where runaway mortgage sales and poor record-keeping led to confusion over title ownership on the part of the servicers. “The banks simply digitized mortgage titles into a privatized system, called the Mortgage Electronic Registry System (or MERS). And it did the transfers by trading Excel spreadsheets among the banks and trusts, rather than endorsing the notes as required by their own contracts, by state real estate law and by IRS rules.”
This was basically the original sin. Users of the MERS system did not make the proper procedures to own the notes, and according to Grayson, in 45 of the 50 states, they lack the legal right to foreclose. “Servicers are basically guessing that they have the right to foreclose when they do foreclose,” he says. This led to the foreclosure mills and the robo-signers and all the fraudulent activities and forgeries that we have seen.
This fraud really is catching up with the servicers. The New York Times reports today that the system has seized up, which they plausibly see as a positive:
Evictions are expected to slow sharply, housing analysts said, as state and national law enforcement officials shine a light on questionable foreclosure methods revealed by two of the country’s biggest home lenders in the last two weeks.
Even lenders with no known problems are expected to approach defaulting homeowners more cautiously and look more aggressively for resolutions short of outright eviction.
Despite the turmoil, some economists said the breakdown could ultimately lay the groundwork for a real estate recovery.
Stricken neighborhoods across the country, for example, could benefit. One big factor undermining home sales is fear of a large number of foreclosed homes coming to the market. If the foreclosures are delayed or never happen, housing prices might find a floor.
“Maybe this is like shock therapy,” said the economist Karl E. Case. “Maybe this will actually get the lenders to the table and encourage them to work out deals that are to the benefit of everybody.”
“We are reaching a point where the easiest way to make a buck is to steal it,” Grayson concludes. And he’s right. But his attention, and the attention of several others to this issue, is making a real difference, and could actually be the stick that was needed all along to force the banks to the negotiating table with their borrowers. If people know their rights, if they challenge the documents being used against them and the legal proceedings taking place, it’s certainly possible if not probable that they could come up with a better solution for themselves. [update after the jump]
UPDATE: I mentioned how the title insurance industry was chief among those wanting this resolved and the evictions to stop, because future homeowners would be vulnerable to claims. The first shoe has dropped in that process:
As more defaulting homeowners become aware of the lenders’ problems, they are expected to hire lawyers and challenge the proceedings against them. And if completed foreclosures were not properly done, families who bought the troubled homes could be vulnerable to claims by the former owners.
Apparently alarmed about such a possibility, one of the major title insurance companies, Old Republic National Title, has sent a bulletin to agents saying that “until further notice” it would not insure title to properties foreclosed upon by GMAC Mortgage, the country’s fourth-largest home lender and one of the two big lenders at the center of the current controversy.