Nearly a year ago, I was doing everything I could to alert the public about the impending title problems resulting from foreclosures being processed too quickly. The New York Times and USA Today wrote stories about it, here, and several Florida reporters did so as well, contemporaneous with my blogs, here, here, here, and here. But basically the issue went away quietly.
Now, it’s re-emerged, finally and appropriately, in two key ways.
First, MERS announced it changed its procedures to require that an assignment of mortgage be filed prior to the start of any foreclosure suit. To me, this is a tacit yet glaring admission of the huge title problems that have existed in a huge percentage of foreclosure cases. This isn’t a complicated issue, either – it’s just one that everyone has ignored.
Take your standard MERS mortgage – a mortgage recorded in the public records with MERS as nominee for XYZ Corp. Invariably, when the foreclosure lawsuit is filed, it’s not filed in the name of XYZ Corp., it’s filed in the name of Bank of America, JP Morgan Chase or some securitized trust – an entity with no relationship to XYZ Corp.
In most foreclosure cases, banks’ lawyers argue the plaintiff has standing if it is the “holder” of the Note, i.e. if it possesses the original note with a special indorsement or indorsement in blank. Many judges accept this position, no questions asked. In other words, an assignment of mortgage is often viewed as irrelevant/superfluous.
But I’ve often asked “what about title?” Remember, the ultimate purpose of a foreclosure lawsuit isn’t merely to foreclose, it’s to convey title to someone. Has that been happening? Unfortunately, no. Even if Bank of America, JP Morgan Chase, or the securitized trust has standing (a huge if, but that’s a whole other blog), without an Assignment of Mortgage in the public record, XYZ Corp. is still the mortgage holder of record. This means that even if Bank of America, JP Morgan, or whoever prevails in the foreclosure is the high bidder at the auction, acquires title, and sells the property to a third party, XYZ Corp. is still the mortgage holder of record. What does that mean? Essentially, the entire foreclosure case was like a wild deed – it took place, but XYZ Corp. can still institute a foreclosure lawsuit in its own name, as it would have priority over the bona-fide purchaser who acquired title from the bank.
That sounds crazy, I know. But think about it. If XYZ Corp. is the mortgage holder of record, and it’s not named as a party in the mortgage foreclosure suit, and there is no Assignment of Mortgage, then the mortgage in favor of XYZ Corp. still exists, even after the foreclosure, even after the auction, and even after the sale to the third party. Yes, the foreclosure happened, but as far as XYZ Corp. is concerned, the foreclosure is irrelevant – it still has the mortgage.
There are only two ways to prevent this – join XYZ Corp. as a defendant in the lawsuit (meaning the final judgment of foreclosure would be res judicata as to any subsequent claim on the mortgage), or record an Assignment of Mortgage in the public records.
In my view, MERS finally caught on to this problem, hence the change in its procedures. But what about the hundreds of thousands of foreclosure cases that were completed or remain pending (prior to this change)?
It’s up to all of us to educate judges about this problem. “Yes, judge, the plaintiff may have standing. But even if it does, XYZ Corp. is an indispensible party, and you cannot enter a final judgment of foreclosure without it.” When the judge acts confused, explain that since XYZ Corp. is the mortgage holder of record, it can prosecute a foreclosure lawsuit even after the plaintiff acquires title and sells the property to a third party. And since that defeats the purpose of a foreclosure, subjects homeowners to two lawsuits on the same debt, and will cause indescribable title problems (for innocent third parties), we cannot allow that. Apparently, MERS now realizes as much, hence the change in procedures.
Old Republic is starting to feel the impact of title problems, announcing it may have to stop issuing title policies. Is the timing of this announcement a coincidence, coming right on the heels of MERS changing its policies? Maybe, but I doubt it. Apparently … hopefully … the title insurance industry is finally catching on to the huge, widespread title problems that are emerging as a result of foreclosure cases being pushed through in a sloppy, haphazard manner.