Just because state and federal regulators reached a settlement with banks over foreclosure fraud – we think – doesn’t mean that the banks have rid themselves of their liabilities, even on these foreclosure fraud-related issues. A settlement cannot stop court rulings, to use one example. In Massachusetts, a new ruling by the state Supreme Court may formally grant borrowers with the ability to contest their foreclosures on the grounds of faulty document processing.
The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation’s oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn’t hold the note proving she was obliged to pay the mortgage.
“If the Massachusetts court says this defense works, that would have a huge ripple effect across the country,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.
A ruling in favor of Eaton would show how a $25 billion settlement reached this month with state and federal officials still leaves banks exposed to liabilities tied to home repossessions. It also underscores the challenge of resolving a foreclosure process that Federal Reserve Chairman Ben S. Bernanke said in a study last month is plaguing the housing recovery.
At issue in Eaton v. Federal National Mortgage Association, also known as Fannie Mae, are two documents borrowers sign to get a home loan. The first is the mortgage establishing the right to seize a property. The second is the promissory note that creates an obligation to pay the debt. While the servicer had the mortgage when it foreclosed, it didn’t have the note. One without the other is known as a naked mortgage.
Industry trade groups have screamed and yelled that “the mortgage follows the note,” inferring an implied relationship between the two. But the Massachusetts Supreme Court may just invalidate that position. The Supreme Court showed in the hearing on this case that they could do so, as the precedent in the state is that the mortgage and the note must be held by the entity undertaking the foreclosure. In addition, the Court asked the parties to determine whether the rule on mortgages and notes should be applied retroactively or not. If applied retroactively, everyone who fell victim to foreclosure in the entire state over the past several years would have a legitimate claim to make.
I don’t know about the applicability beyond Massachusetts, which has very clear laws on these issues. And private individuals still face a host of obstacles, most of them financial, to mount a defense. After all, if you had the means to sue banks for years on end, you might just give them the money for your mortgage. But let’s be clear that this is the banks’ fault entirely. They were the ones who didn’t follow procedures for conveying mortgages and notes to securitization trusts. And they should have to pay the price for that.
Moreover, the residential mortgage market is apparently not the only one where the banks have a robo-signing problem:
The nation’s banks are looking at a robo-signing problem with commercial real estate which may dwarf the one for home mortgages, according to a new study.
Research by Harbinger Analytics Group shows the widespread use of inaccurate, fraudulent documents for land title underwriting of commercial real estate financing. According to the report:
“This fraud is accomplished through inaccurate and incomplete filings of statutorily required records (commercial land title surveys detailing physical boundaries, encumbrances, encroachments, etc.) on commercial properties in California, many other western states and possibly throughout most of the United States.”
Here’s the report from Harbinger, which is sufficiently alarmist. Maybe private individuals don’t have the cash to sue the pants off of banks over this, but you can be sure that at least some CRE players do. There are also securities backed by commercial real estate mortgages (known as CMBS, or commercial mortgage-backed securities). With the fraudulent paperwork, CMBS investors may be eligible to put back their securities on the banks. Basically, it’s exactly the same crisis, only in the commercial as opposed to the residential market.
Unfortunately for the Administration and the enthusiasts of the settlement, they have no escape for the mountain of crap that is the mortgage industry. Maybe I should be happy, because I’ll have enough to write about for many years.