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Economic reality is colliding with legal reality and the results are not pretty. In 2010, for the first time ever, more than one million homes were seized by banks. The number of foreclosure filings, which includes default notices, houses sold at auction, and those which were repossessed, hit 2.9 million, also a record. That’s economic reality. Legal reality came courtesy of the Supreme Judicial Court of Massachusetts, which affirmed a lower court ruling invalidating two mortgage foreclosure sales by Wells Fargo and U.S. Bank. Neither bank could prove they actually owned the mortgages in question at the time of foreclosure. Where do we go from here? According to Fox News “(T)he bleakest year in foreclosure crisis has only just begun.”
In order for the housing market to recover, it must first find a bottom. In order to do so, financial institutions must be able to proceed with foreclosures, repossess the properties, get them sellable and eventually move through the enormous backlog of inventory. Until this process occurs, the market will remain in a limbo of buyers waiting to see if prices will fall further, and sellers, whether they be financial institutions or individuals, wondering how much of a loss they will incur when buyers start making offers.
The ruling in Massachusetts, while technically correct, will exacerbate the problem. During the housing boom, banks and other lending institutions took millions of individual mortgages and “securitized” them by cutting them into smaller pieces and bundling them together. The individual “notes,” by which the borrower agreed to put up the property as collateral for the mortgage, were then transferred to a trust, and investors in that trust became the mortgage holders. During the go-go days of such bundling, it is now becoming apparent that the original owners of a given mortgage became obscured by a trail of questionable paperwork leading from one end of the investment chain to the other.
When Wells Fargo and U.S. Bank attempted to foreclose on two houses in Massachusetts, both were doing so on properties whose mortgages did not originate with those banks, but were part of an overall securities package each bank had purchased. In order to foreclose, a financial institution must prove they actually own the mortgage on the property in question at the time of foreclosure. Neither bank could do so, and until such time as they can, the homes remain in possession of their owners. “For homeowners and foreclosures in general, it means that any mortgage foreclosure which was initiated by a securitized trust, at a time when the trust had not obtained a mortgage assignment which gave it the lawful right to do so, is void,” said Paul Collier, attorney for one of the Massachusetts homeowners. “Those homeowners..still own the property.”
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