The Massachusetts Supreme Judicial Court ruled on Friday that two large mortgage firms had foreclosed on homes without sufficient proof that they had the right to foreclose:
Picture yourself in this situation:
- You purchased a home months ago, moved, enrolled the kids in school, faithfully made your mortgage payments and went happily on with your life.
- Oh, yes, the house you bought was being sold by a mortgage servicer who took possession through foreclosure.
- One day your life is interrupted by a notification that the bank you bought your home from may not have had the right to sell it to you because they never actually owned it themselves.
- It turns out that the foreclosed mortgage had been sold, maybe more than once, eventually landing on the books of the bank that sold you your house. Probably, that loan was "securitized," i.e., packaged with many other loans and marketed as part of a "mortgage-backed security." The problem is that somewhere along the way, the actual ownership of the loan was muddied so regardless who the mortgagor was supposed to be sending payments to, it became unclear which lender really had the legal right to take action in the event of default.
- Now, if you don't really own your house, who does? And what happens to the money you sent to the lender who holds your mortgage note? Could a court decide that you have no right to live there? Will the company that issued your title insurance policy provide the legal assistance you require? Will they cover any loss you experience?
- Assume the title company, in its effort to protect you and avoid paying a very costly title claim, sues the lender who previously foreclosed and sold the house to you. What if that bank claims that it was misled about the quality of the mortgage loans it invested in, and another lender or two are called to account. What if a court at some point rules that the previous owner should be able to take back the property? How long could this take to resolve? What would you do?
Conceivably, that's where mortgage foreclosure litigation is headed. This is not about the "robo-signers" we heard so much about a few months ago. Some cases may involve actual fraud; more likely most will come down to dotting i's and crossing t's. In every case, there may be a completely innocent homebuyer caught in the middle. With rare exceptions, the previous mortgagor was actually in default so foreclosure was an appropriate step. The question is: Who had the legal right to do so?
The lesson? Proceed with caution when buying foreclosed properties. Major mortgage lenders stopped foreclosures entirely late last year in order to review their portfolios and confirm their ownership. That should mean that the process is handled better now and in the future than it was over the past couple of years. I don't usually find that foreclosed properties are great bargains anyway, but for the right buyer and the right property this risk may be acceptable. For many or most owner-occupants, though, this is well worth thinking about.