October 29, 2011 in Finance
The Massachusetts Supreme Judicial Court issued a momentous decision on October 18, 2011. This decision could be disastrous for the banking industry. It could produce a perfect storm that causes a derivative crisis, one that will make 2008 look like a walk in the park.
I suggest you think again.
This decision was necessary because banks, commercial lenders, and commercial investors often buy and sell mortgages on the open market. In addition, they buy and sell the servicing of these mortgages. All of this buying and selling requires underlying paperwork. Sometimes – maybe most of the time – this complex paperwork isn’t handled correctly.
Therefore, when a lender or mortgage servicer forecloses, it often doesn’t have the necessary paperwork to do so.
The Massachusetts SJC’s decision rules that it is illegal to sell a foreclosed house if the paperwork is not in order. And, since that impacts approximately two-thirds of the homes sold in Massachusetts during that time, this creates quite a mess for Massachusetts.
Let’s look at the implications. According to the ruling, when a house is foreclosed illegally:
- The person who lost the home via foreclosure is still the owner.
- The person who bought the home is not the owner.
- The remedy is for the buyer to sue the bank.
Since the Massachusetts SJC is highly respected, other states will likely follow their logic. This creates quite a problem nationally. The estimated number of foreclosure transactions across the United States since 2008 is more than six million. Many of these homes were bought by investors and resold which means two parties suffered damages. The number of cases could easily exceed ten million.
Again, you may be thinking, “Yeah, so what? This doesn’t affect me. I haven’t been foreclosed on and I haven’t purchased a foreclosure.”
Again, I suggest you think again.
If you have a mortgage, do you know who owns it? Do you know who has the correct paperwork to administer your mortgage? If not, how can you be sure you will be able to sell your house if you need to do so? How can you be sure you will get a clear title when you pay the mortgage in full?
Do you realize that paying your mortgage if you don’t know the answers to these questions may be a fraudulent act?
Some legal experts are recommending their clients contact their mortgage company and request the paperwork on the history of the loan. Along with this request, they suggest telling the mortgage company that all future payments will be made to an individual’s savings account until the company provides clean paperwork.
This refusal to pay mortgages along with millions of lawsuits for botched foreclosures (The State of Delaware filed suit this week.) could very well be the perfect storm for the next banking crisis, especially if underlying derivatives are tied to the mortgages.
What do you see as other possible consequences of the court’s decision?