Why is the foreclosure machinery of our nation's largest
banks grinding to a halt? Failure to follow the legal rules. In other words:
The latest comes from my home state of Massachusetts. The
state's highest court ruled that two foreclosures were invalid because they
were not properly assigned to the foreclosing party.
The theory of simply trading mortgage notes ran into the
reality of real estate law. The foreclosure process and laws are different in
every state. There are 23 states that require approval of a court to get a
foreclosure order. These have been labeled the "judicial states." The remaining
states do not require court action. In non-judicial states, banks aren't
required to submit anything to the court until they are sued by a homeowner
seeking to stop a foreclosure.
These homeowners sued because the assignments to the
foreclosing lender were missing at the time of foreclosure. The financial
institutions finally sorted out the mess and executed the assignments after the
We agree with the judge that the plaintiffs, who were not
the original mortgagees, failed to make the required showing that they were the
holders of the mortgages at the time of foreclosure. As a result, they did not
demonstrate that the foreclosure sales were valid to convey title to the
subject properties, and their requests for a declaration of clear title were
The decision does not seem to extinguish the mortgage
debt, it merely invalidates the foreclosure process. There is some doctrine
that the mortgage follows the note. That seems to be brushed aside when it
comes to the foreclosure process.
I don't think it's the lenders who are the ultimately the
losers in this case. Now that the assignments are in order, they can go back
and re-start the foreclosure process. For sure they are losing money. But it's
not the nuclear effect of having to walk with empty hands.
The group with the problem are the people who bought
foreclosed property from lenders. If an assignment is missing, the foreclosure
is improper and the lender never obtained good title to the property. That
means there was no transfer to the purchaser. If that person did not purchase
an owner's policy of title insurance, they are in trouble. At best, they will
have trouble refinancing the home and selling at home. At worst, the original
property owner is going to come back for the property.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.