Buying a foreclosed property seemed like a great way to get a bargain, until the fallout from the robo-signing controversy made buying riskier. It used to be obvious who held the mortgage on a piece of property. “In the past, mortgage holders would be listed on the records at the county courthouse,” senior attorney Gordon Dickson founder of Proper Law stated in an interview. “Anybody could look it up. It’s a practice in common law that extended back before the founding of this country.”
During the last decade banks began combining home loans into a pool. Then, if the individual loans fell under a certain dollar amount, they were backed by the government-sponsored entities, Fannie Mae or Freddie Mac. In recent years, large private lenders like Countywide Financial or Wells Fargo pooled mortgages too, slicing them up and selling them as securities which were sold to multiple investors.
Mortgage Electronic Registration System (MERS)
Instead of recording transfers of ownership, many lenders relied on the Mortgage Electronic Registration System (MERS) as a way to expedite mortgage security transactions. On many mortgages it was listed as the beneficiary of the note instead of the real lenders, so the promissory note could be freely sold and resold. “This process has stolen millions in fees from county recorders,” Dickson said. “In a recent New Jersey case, an executive of Countrywide admitted that in her ten years with the company, it had never followed proper registration procedure.”
A couple of key court decisions cast doubt on the legality of MERS establishing a chain of title. In a California bankruptcy court May 2010, In re: Walker, the court found that that MERS had no authority to act as a mortgage lender and initiate a foreclosure, because it was only “nominee” acting on behalf of the true owners. On January 7, 2011 the Massachusetts Supreme Court decided unanimously in the case of U.S. Bank National Association v. Ibanez that the foreclosure sale of Antonio Ibanez’s home was invalid, because the bank was not the holder of the mortgage at the time it initiated foreclosure proceedings. There was no doubt however that Ibanez defaulted on his $103,500 home loan. At issue was not the default, but who was owed the loan.
Concerns over the title validity of MERS transfers slowed foreclosure sales from many lenders. As many as 4.5 million home foreclosures could have been similarly affected and ruled illegal. In December 2012 Massachusetts Land Court Judge Gordon Piper ruled that the theory of “equitable assignment of an improperly foreclosed mortgage“ could be used to clear title of an improperly foreclosed property. With that precedent, foreclosure sales have picked up.
There is only one way to protect yourself from improper, previous title transfers if you are buying a foreclosed home and that is to get title insurance; not just the lender’s policy, essential to get a mortgage, but an extended owner’s policy to protect your own interest in the property. With this kind of protection, you would never have to give up your new home due to title issues.
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