Five years ago, John Tuccillo, the former chief economist for the National Association of Realtors, warned that home loans had become so easy to obtain that "anybody who could breathe on a mirror can get a mortgage."
I thought about that quote this week when a newspaper colleague attempted to get the prepayment penalty removed on the loan he took out four years ago. The mortgage included a penalty if the borrower refinanced or paid off the loan within the first five years.
"What is crazy is that I nearly walked away from the mortgage at first because I felt it was too easy to get," the man said. "The loan officer didn’t really care about verifying my income — she just wanted to get the deal done and closed. Now, we can’t seem to locate the investor who bought the loan to see if they would waive the prepayment penalty."
The case is a good sidebar example surrounding the current "robo-signing" issue that has brought a moratorium on foreclosures. As you probably have heard or read, many major lenders, including Bank of America and JPMorgan Chase, temporarily suspended foreclosure proceedings because of inaccuracies in processing (BofA announced on Oct. 18 it would soon renew its foreclosure operations).
In some situations, foreclosure trustees reportedly have been allowing assistants to sign affidavits (sworn documents of fact) and other papers. The bottom line is that the moratorium will allow more homeowners in default to prolong their stay in their homes.
"The situation is the result of the enormity of the foreclosure problem in numbers, not its real effect on the propriety of the process," said Tom DiMercurio, who has spent nearly 40 years analyzing, managing and selling foreclosed properties.
"Politicians are making a mountain out of a molehill. This ‘egregious’ process is the same as always used — signing documents based on data in a system without independent verification. Ultimately, what difference does it make when someone has not paid for many months, even years?"
The reasons behind foreclosures are as varied as the borrowers who took out the loans. Some were misled by unscrupulous lenders; some knowingly bought more house than they could afford, banking that the years-long run of appreciation would continue; others were caught off guard by the leaps in an adjustable-rate mortgage.
Now, have the same slipshod methods used to get consumers in the door simply crippled lenders trying to get them out?
"As a lawyer, I always separate out the fact that people might have bit off more than they could chew and have some sort of obligation here," said Rob Crichton, attorney in law office of Keller Rohrback LLP.
"I look at it from the legal perspective of ‘What do the lenders have to prove to prevail?’ The banks were sloppy and have created a real messy problem."
Most housing professionals believe that the only road to recovery is to sell off the inventory of foreclosed homes as fast as possible. The dilemma is that there is so much "shadow" inventory of foreclosures yet to hit the market. Too much at the same time would be crippling, so lenders have been trying to dole out portions at a digestible pace. That is why there are incidences in which owners who have not made a payment in two years are still in their homes.
While the robo-signing issue is now on the front burner, real estate attorneys believe a larger issue may become the lender’s ability to foreclose without both the deed of trust and promissory note in hand.
This goes back to the example of my newspaper colleague trying to find the investor who purchased his note. Most banks bundle their mortgages and sell them to the secondary market where they are sold again and again.
This highly regarded secondary market system for mortgages, designed to instantly replenish home loan funds for local lenders and the envy of other countries around the world, now can’t seem to get out of its own way.
In a nutshell, the promissory note entitles the holder to seek repayment of a debt specified in the note while the deed of trust entitles the holder to take a designated property as compensation for a loss. According to Crichton and other attorneys, without both documents, there is no legally binding connection between nonpayment of the loan and the right to take that particular property.
In time (and money), the robo-signing problem will eventually be ironed out. In the interim, it will cause more title insurance issues and a greater need to locate and couple the original note and deed of trust.