Desert Oasis- Richland Pasco Kennewick

I’ve been asked a few times by buyer clients to look for Tri Cities Washington foreclosure homes for them to purchase. Each time I tell them the same thing; I won’t be involved in the purchase of a foreclosed home. Some agents say they won’t do it because it’s such a long, drawn-out process and can be a heart-breaking experience for their clients when, at the end of 3 to 6 months, the bank backs out. But that’s not my reason.

The reason I won’t be involved in the purchase of foreclosure homes comes down to my concern with the title status on these homes.

I started reading up on the situation with these foreclosures a little over 2 years ago. With the sub-prime market melt-down we reaped the foreclosures that were a result of highly-risky lending practices by the banks.

Throughout the history of the United States, in state laws that were passed and court cases that upheld them, citizens rights regarding their homes were amongst the most important rights guaranteed in this country.

There are two main documents involved in a real estate transaction; the Deed and the Note.

Real property ownership is controlled via a “Deed”. These deeds are recorded in the county in which the property lies. When an owner sells (or gives) a property to another person, this deed is transferred and also recorded at the county recorder’s office. It’s how we know who legally owns and controls a property.

When a buyer borrows money from a lender, the instrument of this debt is represented by a “Note”. This is your “mortgage”. Now, I’m keeping the terminology as simple as possible, and for purposes of this post I’ll only be talking about a lender being a mortgage bank.

The “Note” is a promise to pay made by the maker of that “Note”, or “Deed of Trust”. About the only time the “borrower” actually sees the “Note” is at the closing table, and with all the papers they have to sign, they don’t really read it. Why should they? They know that it’s part of almost every real estate transaction.

Your original “Lender” almost always sold your note. They bundled it into a “pool” with other “Notes” and sold it onto the secondary market to investors.

Now, here’s where what’s called a “break in the chain of title” almost always occurred.

It’s a legal requirement that a “Note” can only be transferred physically and in writing. But that would have been too unwieldy for the banks, so they created an agency to facilitate the transferring of all these “Notes”.

In 1995 MERS (Mortgage Electronic Registration Systems) was created. MERS claims to be a privately-held company and their function is keeping track of a confidential electronic registry of mortgages and the modifications to servicing rights and ownership of the loans. Some of the shareholders included AIG, Fannie Mae, Freddie Mac, WaMu, CitiMortgage, Countrywide, GMAC, Guaranty Bank, and Merrill Lynch. It was formed by the banks under the pretext that it would lower the cost of recording an assignment of ownership in county land records.

By the way, the filing fee is the lowest cost in acquiring a home.

The reality of course is MERS allowed for the mortgage backed security (MBS) business to explode since it allowed mortgages to be shipped off to Wall Street to be minced into tiny tranches and sold off by the big investment banks to pensions, foreign investors, retail investors, and everyone else that wanted a piece of the mortgage bubble. Below is a great chart from the New York Times showing how a MERS transaction occurred. Click the picture to open it full-sized:

And now to the crux of the problem. In court cases all over the country, judges are ruling that MERS had no capacity to be a “holder in due course”. Kansas Supreme Court, Massachusetts, Missouri, and others have ruled on this. A case in Washington State’s Supreme Court is now being heard. MERS didn’t have the legal standing to “own” a security instrument; in this case a mortgage “Note”. That’s not even counting the fact that that rarely did a “physical transfer” of the  “Note” ever occur and if there was a transfer it was rarely, if ever, recorded at the county recorders office. Massachusetts Courts (and other States) have revealed the possibility that unlawful foreclosures, dating back to 1989, might be invalidated and that buyers of foreclosed properties and short sales may have clouded titles.

Now we have a break in the chain of title.

Eventually, the borrower defaults on the mortgage “Note” and then the home is foreclosed on. The home is sold at a Trustee’s Sale and the buyer of the foreclosed home receives title in the form of a “Deed”. The title company issues title insurance. But how did that happen if there was a break in the chain of title back on the original “Note”?

By the way, it’s estimated there are over 60 million home mortgages that went through MERS.

Now for the rub.

Florida Courts have ruled that when a foreclosure is “vacated” and title returned to the original owner, the proceeds of the sale do not have to be remitted back to the buyer of the foreclosed home. Other states currently have cases that in all liklihood will have the judges hearing them come to the same conclusion.

So, not only does the buyer of the foreclosed home lose title (ownership) of the home, but doesn’t get the money back from the purchase.

It’s a mess. It’s getting messier. I just can’t see a good reason to be involved.