By Henry J. Lane, Attorney with Lane and Hamer P.C.
In our last installment, we discussed some of the problems that arose when large groups of individual mortgage loans were sold by lenders and bundled into securities being traded on Wall Street. The overwhelming amount of work necessary to document the transfer and assignment of individual mortgages being traded led to a number of controversial developments.
Early on, the banks recognized the enormous expense and delay involved in documenting and recording transfers of mortgages every time a bond or other investment vehicle secured by those mortgages was traded. To address the issue, the major banks organized a separate company called Mortgage Electronic Registration Systems, Inc. (MERS) to be the record title holder of all of their mortgages. So when Bank of America or one of the other large participating banks made a mortgage loan to a typical homeowner, the bank prepared the documents so that the mortgage was being given not to Bank of America but to MERS as an agent for Bank of America. MERS then created an electronic data base indicating that it held the mortgage given to secure a particular loan and that Bank of America was the institution that actually made the loan and owned the promissory note that was secured by the mortgage. Subsequently, when the Bank transferred the mortgage to Fannie Mae, Freddie Mac or another institutional investor, Bank of America notified MERS that the mortgage had been transferred and MERS updated its data base showing the new owner. If the new mortgage owner then subsequently transferred the loan to another investor it was again simply a matter of notifying MERS to update its data base and the transaction was complete.
Although a loan may have passed through many individual banks, investors and servicing companies during the life of the loan, the title holder to the mortgage was only shown in the Registry of Deeds as MERS. The system operated fairly well for a number of years, but at some point the local Registers of Deeds came to the realization that allowing MERS to hold title to individual mortgages and to separately track the actual owner of the loan on its own data base resulted in individual mortgage assignments not being recorded in the local Registry of Deeds. Not having to record the individual assignments also meant that the banks did not have to pay the $75.00 recording fee which meant the individual Registries were foregoing a significant amount of revenue for the Commonwealth on an annual basis.
While the controversy over whether or not banks and investments companies could use the MERS private registration data base to track ownership of mortgages as opposed to recording every transfer in the local Registry of Deeds continued to fester, a more serious problem arose when the number of mortgage foreclosures dramatically increased in recent years. Massachusetts law has long required that in order for a mortgage foreclosure to be valid, the bank or other investor foreclosing must be the institution shown as the owner in the local Registry of Deeds. Since many of the mortgages were now held in the name of MERS, the individual bank or investor could not start foreclosure proceedings until a physical assignment of the mortgage loan was prepared, delivered to the local Registry of Deeds and recorded. That particular requirement was overlooked by many banks in the early days of the foreclosure crisis, leaving many banks and individuals who purchased foreclosed property with defective titles.
In addition, the requirement that the individual mortgage be transferred to the actual owner in the records of the local Registry of Deeds required completing all the necessary paperwork, locating the person authorized to execute the paperwork, having the signature notarized and physically delivering it to the local Registry of Deeds and paying the recording fee. Since banks and other institutional investors weren't equipped to prepare all that documentation, many of them hired service bureaus to prepare the documentation, and to arrange for recording. Some of the largest service bureaus were responsible for arranging the necessary documentation for hundreds or thousands of mortgages creating what has become known as the "robo-signing" controversy. Since only a limited number of people employed by the service bureaus were authorized to sign documents for MERS or large banks and institutional investors, many of the service bureaus would have dozens of people preparing documents and simply deliver them to the authorized signer for signature. In a number of cases, when the individual authorized to sign left the employment of the service bureau or was otherwise unavailable, other employees would simply continue signing documents using the name of the authorized but no longer available employee and have a notary public falsely attest to the signature. Although on their face, "robo-signed" documents did not appear to be defective, eventually individual title examiners as well as Registers of Deeds noticed that the signature of some of the authorized signers appeared to vary dramatically, suggesting that they were actually signed by different people using the same name and raising immediate questions concerning their authenticity.
As these various irregularities came to light, individuals facing foreclosure have attempted to use them as a basis for delaying or avoiding foreclosure. However, despite the publicity that the issues have been given, most of the court decisions have resulted in predicable results. If the paperwork was in fact not properly recorded prior to a foreclosure, the foreclosure was defective, requiring many banks to redo foreclosures resulting in an additional delay and expense but ultimately reaching the same result. Similarly, if a homeowner facing foreclosure was able to establish that one or more of the documents transferring the mortgage was not signed by the appropriate individual, the remedy was simply to require the bank or other institutional lender to file a corrective document. In virtually all of these cases, since the homeowner did in fact default in making the payments due on the mortgage, ultimately the mortgage holder has been successful in completing the foreclosure.
Recently the Attorney General of Massachusetts filed a major lawsuit naming many of the country's largest banks as defendants alleging that they improperly used the MERS system to circumvent recording requirements, used "robo-signed" documents in preparation for foreclosures and failed to negotiate loan modifications and workouts in good faith.
The Attorney General's lawsuit does raise several public policy questions. First, with respect to the recording of individual mortgage assignments, does the Commonwealth generally have a real interest in trying to raise money through relatively high recording fees for mortgage assignment documents when a privately managed data base is able to accomplish the same result at a much lower cost? Or, is it important to have all records relating to ownership of real estate and mortgages in a single location? Second, were any individuals actually harmed by a "robo-signed" document prepared by a service bureau or bank, or, if not, is it crucial for the integrity of the system that documents acknowledged by a notary public are actually signed by the legally authorized person?
The final allegation in the Attorney General's lawsuit, concerning a failure of banks and institutional lenders to handle loan modification and work out proposals in good faith, raises the question of how to weigh the interests of the consumer against the interests of the lender's shareholders or depositors. The litigation is in the early stages and will probably take many years to resolve if a settlement among all the parties is not reached.