The real estate business has been mired in the doldrums since the housing bubble burst and markets collapsed. As the Bush Recession expanded more and more workers lost their jobs sending foreclosures soaring. In order to maximize their greed banks and law firms created foreclosure mills to process paperwork and engaged in massive fraud. Courts began seeing homeowners hiring lawyers who demanded the bank foreclosing produce the original mortgage note to prove their standing to bring the cases before judges. It turned out they couldn’t do so and foreclosures began being thrown out of court. As word of the mess got around the giant foreclosure fraud scandal grew and grew. Today fifty states joined forces to investigate and prosecute the fraud and forgeries which forced some homeowners out of their abodes illegally, some by mistake.
It isn’t a good time to be a real estate agent. The three largest mortgage servicing companies, all subsidiaries of major banks, have frozen foreclosures and now have frozen the sale of foreclosed homes. This means that perhaps half of all homes on the market cannot be sold. Banks want to review the paperwork on each deal to insure the integrity of the process. If a homeowner was ousted illegally they could have recourse to go to court and prove fraud. That could reverse the foreclosure decision. Judges tend not to look kindly on fraudulent documents and evidence being brandished in their courts and tend to act definitively when faced with such activity.
As if this weren’t bad enough the questionable legality surrounding the transfers of mortgages through a service called MERS (Mortgage Electronic Registration Systems) without registering the sale of the loans through county deed offices. Here in Pennsylvania we have 67 county Recorder of Deed offices where every property title and mortgage transfer must be recorded. This ensures the integrity of land titles. Who wants to expend thirty years or more making mortgage payments then discover they still don’t have title to their home and/or land? This is the new nightmare scenario facing the majority of American homeowners because of MERS.
MERS was created to cheat all those county deed offices of their revenues. As the mortgage market heated up and Wall Street began creating new, exotic securities from them banks decided they didn’t want to pay those pesky fees. They banded together and created MERS and began trading mortgages electronically using spreadsheets. Unfortunately state laws, designed to preserve the integrity of land titles, require all original documents move with every mortgage transfer. This way every county can tell you who owns every bit of property and who holds the loan for each parcel. Without the integrity of the title process who would buy property? Homes are too expensive to pay for for 30 years only to learn no one knows who the title belongs to. This is what we now face because of MERS.
Because the documents never followed the mortgages no one can locate the original loan documents for most mortgages. This means the 60% of all homes whose mortgages are officially listed as being held by MERS may not be able to get clean titles. The chain of title was broken when the loans were sold without the required documents.
If you are a homeowner you may not be able to ever get a clean title for your property. If you’re selling you may not be able to convey a title to the buyer or their mortgage holder. Without clean titles no bank will provide a mortgage as the title is their security for the loan. Who would buy property without a title? While most of the attention thus far is being paid to “robosigners,” false notarizations and other abuses the threat to titles is, by far, the most destabilizing facet of this issue.
How does a realtor work in this atmosphere? Half of all listings are now off limits. It may take months for banks to sort out each one, if ever. Mortgages were sliced and diced and sold off in derivatives and credit default swaps. Few banks or investors hold entire loans. Who actually holds a mortgage and therefore has legal standing to foreclose? No one knows… Therefore no one knows who holds legal title. Since the banks decided to bypass the established legal process, county deed offices, the trails went cold and taxpayers were defrauded. State Attorneys General, way too late, are now after the banks for this fraud.
If you want or need to sell your home establishing clear conveyance of the title might make that impossible. If I were in the home market right now I wouldn’t even look at a home without first establishing the integrity of its title. Why waste your time and your investment to have some bank come in later and claim the property? Without a title you have nothing for your money. Would you buy a car from someone on a corner and not get any paperwork? Of course not and neither would you buy property that way. Unfortunately that is the new reality in real estate.
This will push real estate firms teetering on the brink over the edge. Realtors dependent on a healthy, stable property market will be unable to sell homes as the public demands clear titles. With only 40% of U.S. real estate loans untouched by MERS (think of MERS as the kiss of death for a title) that leaves few parcels of land available for sale. I predict very few real estate companies will see 2011. Any current deals pending closing are now frozen. The prospect of new buyers coming into this market is dismal until everything gets sorted out and buyers can be assured they are getting titles to their acquisitions.
What will emerge from this mess? Lots of lawsuits, tons of lawsuits. The banks are going to be sued by every state for bypassing the legal requirements and fees. Buyers of foreclosed homes who now cannot get clear titles will sue, homeowners foreclosed on illegally will sue the banks and their lawyers. MERS is the biggest potential target but the entity doesn’t really exist. It has no employees, no offices, no assets. It exists only as a forum for the transfer of mortgage loans vis Excel spreadsheets. It is owned by the seven sisters of American banking however and their assets will be the target of countless lawyers.
If you want a flourishing new career in this recession my advice is to become a real estate lawyer. These lawsuits will sprout like dandelions in the spring and will spread like wildfire. I don’t see how the major banks can survive this debacle. Already the major assets tied up in foreclosed homes are frozen. None of these properties can be sold at this time freezing that cash flow. As angry homeowners realize there may not be a clear title at the end of their mortgage period many may decide to stop paying their mortgages ending that cash flow. The fines, penalties, legal judgments and legal fees may well deplete their remaining assets.
The integrity of the land process is fundamental to a healthy market. The days of con men selling Florida swampland or oceanfront property in Arizona, tracts of land in the old west which didn’t exist and other innumerable cons devised over centuries to separate honest people from their money developed into governmental supervision to insure the integrity of land titles. This is one of those areas in which government is not just useful but mandatory. Wall Street decided to meddle with this ancient system establishing clear lines of ownership when they allowed sheer greed to overwhelm judgment. Banks seeking to satisfy 24 hour financial television network expectations for short term profits forged ahead with new practices which destroyed the integrity of the deal. The coming collapse will devastate the American economy and it is imperative that Washington devise some rescue to save us from a massive financial meltdown. If it were me I wouldn’t leave a dime in any of the major banks. Law school is looking like a really good bet however.