The Salt Lake Tribune ran a story focusing on some rulings in that state that essentially gave homes back to borrowers because nobody could figure out who owned them or who had the right to foreclose.
A Utah court case in which the owner of a Draper townhouse got clear title to the property, even though he still owed $132,000 on it, raises new legal and financial questions about a property-records database created by mortgage bankers.
The award of a title free of liens means that whoever owns the promissory note on the Draper property — likely a group of faraway investors — no longer has the right to foreclose to collect on a delinquent loan. Indeed, the townhouse owner has sold the property and kept the money. Those who own the promissory note probably don’t even know what occurred.
Decisions such as the one 3rd District Judge Glen Iwasaki handed down in the Draper case could have a big impact as the state wends its way through hundreds of lawsuits involving foreclosures, loans on properties for more than they’re worth and predatory lending practices that led Utahns to lose their homes as the real-estate bubble burst.
This is all tied up with MERS, the online database that has stood in for the land records system in as many as 60% of the mortgages in America over the past decade or so. As we’ve seen, MERS is essentially a way for the largest banks to avoid recording fees, by naming them as the mortgagee on the original record and then transferring the mortgage and the note through their database. The problem is that MERS is named as an owner on loans in which it has no financial interest, and the judicial system doesn’t yet know how to manage that. This has confused the hell out of title insurance companies, who cannot determine who holds the note or even who can collect payments on it. As a result, in this case, the courts and the title company failed to figure any of that out, so they gave title back to the homeowner.
The attorney for the man in Draper, Utah, says he has won two other cases this way, and another attorney in Utah got a default judgment giving title to borrowers who owed $417,000 on a home.
The owners of the note could always go back and try to recoup this money, but as Christopher Peterson of the University of Utah says in the article, MERS calls into question their ability to succeed:
Under laws adopted by all 50 states, the owner of a “negotiable instrument” such as a promissory note must be in physical possession of the document, said Peterson. Otherwise it would be like someone trying to cash a photocopy of a check instead of the actual check.
“One cannot be a holder of a note unless one is in physical possession of that note,” he said.
But Peterson said evidence is coming out in courts that shows the actual promissory notes or mortgages signed by buyers were not transferred as the notes made their way into the mortgage-backed securities investment pools.
That could mean in these cases that no one is in a position to try to collect because the actual notes are lost or destroyed, potentially making some promissory notes investors think they hold worthless.
This is essentially the nightmare scenario for the banks. These initial judgments have the effect of turning mortgage backed securities into non mortgage backed securities. If the note never transferred to the mortgage pools, then the investors and their loan servicers cannot foreclose and cannot collect payments. In response, the investors will surely try to put back the securities, which are essentially worthless at that point, on the banks from which they purchased them. And that’s when these enormous losses in the mortgage market go back to the banks. They don’t have enough money to deal with the repurchases.
There’s a case in the Utah Supreme Court right now that would set a precedent disallowing MERS the right to foreclose on any property in the state. Similar lawsuits are working through other state courts. They don’t all have to be successful to essentially invalidate huge numbers of mortgage contracts. If this is not systemic risk, nothing is.
Mike Shedlock calls this a travesty of justice. According to him, the investor gets screwed out of $417,000, in the above case, and a family who “deserved” to lose their house got it free and clear.
This gets the case entirely backwards. When the homeowners signed the mortgage contract, they didn’t request that the bank transfer it multiple times improperly and then throw it into a legal gray area where nobody could determine proper ownership. They did not request that the banks involved use a private database of questionable legal standing instead of the land recording system that worked for hundreds of years. The banks made this mess. The homeowners may be profiting from the consequences (or maybe not; we don’t know the facts of the case), but those consequences came from the actions of the banks. The investors now have every right and responsibility to invalidate the securities. If the law worked as it should, the responsible party for this colossal fuck-up would pay the price.