Cleaning up the Foreclosure Mess (26 Responses)

The first major piece of legislation that the Senate will take up this Fall is “An Act clearing titles to foreclosed properties.” It is a solid and necessary piece of legislation that I do support.

In the years before the recession, many banks and mortgage companies fell into a pattern of issuing mortgages on unfair terms and/or to people with limited ability to make mortgage payments. Standards were low enough in the secondary market that the lenders could turn around and sell these “sub-prime” loans and make a quick buck without taking any risk themselves. In turn, unscrupulous investment bankers would pool those loans and sell interests in the pools to investors unaware of the shaky underlying assets they were buying. The panic that set in as those “collateralized mortgage obligations” lost market credibility was a major factor in the crash.

In the wake of the recession, vacant properties — unmaintained, vulnerable to vandalism and inviting to crime — blight many neighborhoods in communities like Springfield and Worcester. In some instances, they have been actually abandoned by owners who walked away from payments they couldn’t make; in other instances, they have been effectively abandoned by foreclosing banks who just haven’t gotten around to maintaining them and selling them to new buyers. Many homeowners were dislocated by foreclosing banks.

Into this toxic situation, a series of decisions by our Supreme Judicial Court has injected an additional dimension of complexity  that has slowed the foreclosure process — in some instances benefiting original owners who are unable to pay their mortgages, in some instances keeping abandoned properties vacant, and in some instances clouding the title held by innocent buyers of foreclosed properties.  These decisions did nothing more than affirm rather ancient rules of law, but they were, nonetheless, unanticipated by the real estate bar.

Here is the background: Massachusetts has, for over a century, been a state in which borrowers actually give title to their homes to mortgage holders. By the terms of the mortgage, which usually track language laid out in statute, the mortgage holder can sell the property without court permission if the borrower falls behind. Because the power to foreclose by sale is a very significant power, Massachusetts law requires the mortgage holder to abide strictly by very specific procedures in the foreclosure process.

Most of these procedures make obvious sense and are designed to assure that the the borrower has fair notice and an opportunity to cure the default and/or to renegotiate the mortgage if at all possible. For example, if a bank were to file a foreclosure without having made all the legally prescribed efforts to notify the homeowner, the foreclosure would and should be void.  However, the Supreme Judicial Court’s recent decisions have made clear that subtler technical details in the foreclosure process can also void the foreclosure.

Specifically, the SJC held in the Ibanez case that when mortgage loans have been sold and resold in the secondary market, the final holder of the mortgage note must have had the mortgage title transferred before initiating a foreclosure. Previously, the real estate bar had believed and specifically advised clients that “the mortgage follows the note” and if the mortgage note had been assigned it was OK to clean up the assignment of the mortgage title itself after the foreclosure and before the recording of the foreclosure sale deed. This was consistent with standard industry practices nationwide.

The discrepancies between national industry practice and Massachusetts law as clarified by the SJC in its recent decisions are only loosely related to the problems in the pre-recession mortgage market.   Sloppy documentation went hand in hand with unscrupulous lending, but even scrupulous lenders were following standard procedures inconsistent with Massachusetts law.  As a result, essentially all properties that have been foreclosed upon since the advent decades ago of current secondary mortgage market practices have a potentially clouded title.

The bill that the Senate will consider later this week simply states that allegations of defects in foreclosure procedures must be raised within three years. Currently, there is really no directly applicable statute of limitations and owners may have  difficulty selling or borrowing against their properties.  The bill protects only third-party arms length buyers of the properties. If the foreclosing bank or an affiliate still holds the property it gains no protection. Additionally, regardless of who now holds the property, the original owner will retain their existing rights to sue the lending bank for actual and punitive damages under the state’s consumer protection law for any unfair practices in the issuance of the mortgage or the foreclosure itself.  Homeowners who are still in their properties and actively fighting a foreclosure can continue to do so.

I am convinced that it is only right to give third party buyers of foreclosed properties some repose. I also believe it is good for the housing market to define a process that will remove uncertainty. While offending banks will benefit indirectly from the reduced uncertainty, they will remain fully liable to the extent they have done harm through unfair or deceptive practices.

This is a bill that came through the Judiciary Committee which I chair.  I have studied it carefully and I fully support it.  It adjusts a complex legal process and there has been a lot of confusion about it over the past couple of months of discussion in the legislature.  I’m eager to answer any questions that constituents may have about it — so please fire away!

On Thursday, September 17, the Senate passed this bill by a vote of 31 to 7.

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    Will Brownsberger
    State Senator
    2d Suffolk and Middlesex District