A new act in foreclosure circus
LAST WEEK’S Supreme Judicial Court decision, in which the court upended a pair of Springfield foreclosures and upbraided Wells Fargo and US Bank for maintaining sloppy records is great news for homeowners facing foreclosure. Mortgage-servicing banks, which were in the habit of trading mortgages around like cheap baseball cards, will be forced to slow the pace of foreclosures even more, and carefully verify that they actually own the mortgages on the properties they want to foreclose on. But the decision brings uncertainty to buyers of foreclosed properties — buyers who might not have clear title to their homes anymore.
The SJC decision in Ibanez vs. US Bancorp justifiably beat up on a pair of banks that couldn’t prove they owned mortgages they foreclosed on. The reverberations should be especially strong for mortgage investors and big banks.
Investors who bought up bonds backed by huge pools of mortgages have already been pressuring banks to buy back pools of bad mortgages that they sold before the housing bubble collapsed. These cases only cover a relatively small universe of poorly underwritten loans, but billions of dollars are at stake. Investors burned by mortgage bets have been trying to line up a much more expansive set of lawsuits challenging not the mortgages themselves, but the way big banks handled them after they were sold. The Ibanez decision gives serious weight to those investors, who are eying massive potential payouts.
It can be difficult to care about disputes between wealthy investors and fattened banks, even with a 9.3 percent national unemployment rate testifying to the link between big bank losses and the economic well-being of everyday citizens. But the court’s decision doesn’t just complicate life for the country’s big banks. It also casts a huge cloud over individual home buyers.
According to the real estate tracker the Warren Group, there have been more than 44,000 residential foreclosures recorded in Massachusetts since 2006. In the majority of those cases, the foreclosing bank turned around and re-sold the seized property. So there are now tens of thousands of Massachusetts residents living in homes that, until relatively recently, belonged to somebody else.
In the Ibanez decision, the SJC overturned a pair of foreclosures because two banks couldn’t prove they owned the mortgages on the properties at the time of foreclosure. The court didn’t say the banks didn’t own the mortgages, or that the homeowners who had their houses seized hadn’t defaulted on their loans; it found that not having proper paperwork in place at the time of foreclosure was enough to invalidate the foreclosure process.
Because of the Ibanez case, and the staggering volume of sloppy paperwork that accumulated during the housing boom and bust, those other 44,000 foreclosures are suddenly subject to new scrutiny. It’s highly unlikely that just two properties, out of more than 44,000, were seized based on deficient records.
I took a random sample of 30 foreclosure deeds from Chelsea (one of the cities hit hardest by foreclosures) since the beginning of 2006. Of those 30 foreclosure cases, 10 had paperwork on file with the Registry of Deeds that raised the sort of chain-of-custody concerns at the heart of the Ibanez decision. In one case, no mortgage was on file with the registry. Another showed no paperwork assigning the note to a mortgage servicer. In other cases, mortgage originators didn’t sign off on documents transferring the notes into mortgage pools, or transfer paperwork was filed after a foreclosure occurred. All of the properties have since been re-sold.
That’s not to say any of those foreclosures will or should be overturned in court. But it is an indication of how pervasive sloppy record-keeping was, and how many foreclosures could be challenged on technical grounds based on the recent SJC decision. And it presents a series of terrible questions to anyone who bought a foreclosed house from a big bank. Among them: Is my mortgage valid? Will I be able to refinance or sell my home? Do I even really own my house?
Paul McMorrow is an associate editor at CommonWealth magazine. His column appears regularly in the Globe.