October 26, 2010 Newsletter
FORECLOSURE has been the dominant word in the real estate world for the last two years. With the newest revelations, many foreclosures have been postponed or cancelled. This edition will attempt to explain why foreclosures are being cancelled or postponed and what it means to the market.
First, a little legal explanation of how mortgages work. A borrower signs a Note and a Deed of Trust. The Note is the IOU agreeing to the terms of repayment. The Deed of Trust is the mortgage document recorded at the land records saying the lender has an interest in this property. Now, in today’s financial world, the Notes are bought and sold among investors: many times in pieces. In any earlier Colony newsletter I explained tranching, which basically is selling mortgage notes to investors in pieces. Investors may have the first 36 payments, another investor the next 36 and so forth. What has come into question is who is the actual holder of the Note. Attorneys challenging a foreclosure have asked the lender foreclosing to produce the actual Note as the IOU. If unable to do so, it comes into question whether they have standing to foreclose if they are not the actual noteholder. Back in law school we learned that the party holding the Note has the power to call the Note due for non payment. The term was a “holder in due course” meaning if the Note was sold, it is the party who paid value for the Note and did not acquire the Note other than by legitimate, legal means. With 4 or more investors holding pieces, the servicer (the lender collecting the payments) is sometimes not able to produce the actual Note. Attorneys defending foreclosures have successfully defended foreclosures under the basis of inadequate documentation proving the ownership of the loan. One can understand why lenders have stopped foreclosure proceedings when they run the risk of having the foreclosure overturned on technical grounds.
In Maryland we are facing a different dilemma. Many law firms who specialize in handling foreclosures are “factories” processing hundreds of foreclosures a month. In an assembly line process, they still are supposed to have the attorneys sign affidavits that they have determined the legal documents filed with the court are accurate and correct. For whatever reason, and its not our purpose to criticize or pontificate, the attorneys have allowed their paralegals to make those determinations, signed on their behalf, and then have someone notarize that signature. To be fair, many law firms have their assistants and paralegals process documents and do so accurately. The issue the courts are addressing is the notaries are certifying to the court that the attorney signed the affidavit and did in fact review the paperwork. Notaries are not supposed to notarize a signature they did not witness and attorneys are not supposed to attest to the court they reviewed documents they did not review. The courts and foreclosure auditors are relying on the representation by the attorney that everything was done correctly. Unfortunately, not following the rules will result in many notaries losing their commission and some attorneys will lose their license to practice law, even if the documentation was correct.
The sad part of these situations is until the lenders straighten out their paperwork you will continue to see headlines about the foreclosure “crisis.” The realty is this phase will pass and there are wonderful deals out there for savvy buyers and investors. We have investors who are aggressively buying in this market. If you want advice on investing, selling, short sales, foreclosure buys or refinancing, we can help you in your decision making. We want to be your law firm and title company. Call me at 410 884 1160 x 3007 or email me at email@example.com.