Home Loan | Mortgage | Refinance

Archive for November, 2009

The lending industry created a nifty way for themselves to get out of properly recording the chain of assignment on your mortgage note. It’s called the Mortgage Electronic Registration Systems database (”MERS”).

When you get a loan on a property, there are two parts: the servicing rights and the owner of the actual note on your property. The servicing part is usually handled by a servicing company and that company is responsible for printing your mortgage coupons, tracking your payments and handling your customer service issues.

MERS’ website says “MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”

So what’s wrong with this system? A couple of things, but the most disturbing thing about the MERS database is that the entire system is set up so that you, the homeowner, have very little information about the ownership of the Note to your property.

The MERS system completely lacks transparency. Because the database was created by the lenders, they are the only entities who have access to it. You can find out who the servicer of your mortgage is, but that’s all the information that is available to you as a homeowner.

The database is also problematic from a legal standpoint, because it completely circumvents the proper legal process that was already in place.

Ownership of the Note to your property should always be recorded at the recorder’s office in the county in which the property is located. However, when lenders began packaging mortgage loans into mortgage-backed securities, it was too much work and expense to properly record the transfer of ownership at the local county recorders offices, which is why the lending industry came up with this database. They could buy and sell mortgages and track the ever changing ownership of Notes and servicing rights within their own industry and without prying eyes to point out that what they were doing was really improper and illegal.

This is why the “produce the note” issue is so compelling: there is a very real possibility that the true owner of your Note cannot properly document or prove that they own the Note, because the chain of assignment was never properly recorded, or the original Note was lost or destroyed in the rush to package it up with other mortgages and sell them off.

When I audit a loan, I usually see that the Note and Deed of Trust are properly recorded at the county recorder’s office at closing, and there are typically no other documents that show any transfer of the Note.

Many times, the original owner of the Note is no longer in business. If the original lender doesn’t exist, who is receiving the payments on the loan? This usually points to a mortgage that has been pooled and placed into a mortgage-backed security. These were sold on the stock market and had many investors who owned a piece of these securities.

Another interesting issue I’ve seen with MERS relates to the issue of standing.

Typically, when a Note is initially recorded, it lists MERS as the beneficiary on the Deed of Trust. MERS’ alleged status as a “beneficiary” under the Deeds of Trusts is false, as demonstrated by its own website.

MERS’ website also notes that “MERS remains the nominal mortgagee no matter how many times servicing is traded,” and that it is nothing more than a computer system designed by the mortgage industry (and capitalized by investors from the mortgage industry) to protect them from having to pay recording fees so that the entity that owns any mortgage loan is available.

MERS’ entire business operation is premised on the wholesale and ever changing sale or transfer of “servicing rights.” MERS does not own the loans; rather they are acting as a “nominee” for whomever might or might not say that it owns the note at any given time. Further, since MERS never obtains possession of the Promissory Note which secures the Deed of Trust, it cannot ever have the right to enforce the terms of the Deed of Trust, since that right is reserved to the owner and holder of the secured instrument, the Promissory Note.

MERS’ also purports to appoint unidentified and unspecified persons as “officers” of MERS for the purpose of executing documents to effect transfers.

A corporation cannot create corporate officers for the purpose of foreclosing on your property. Under this premise, MERS is contending that anyone who works for a mortgage lender, servicing company, foreclosing trustee, title company, etc. can become an officer of MERS without providing it with notification, without getting its approval or taking actions in its name that affect the property rights and security interests of others.

There have recently been quite a few challenges to MERS’ standing and its right to foreclose, and many courts are finding that MERS cannot foreclose because they lack standing, because they don’t actually own the Note.

The big problem for homeowners comes back to who actually owns the Note on your property. Let’s say you are in foreclosure, but somehow manage to “self correct” and bring the arrearage current. You scrape for a couple of months and manage to catch up on your mortgage payments, and you think you’re safe because you’ve paid the past due amounts.

Then, a few months later, you find out that your property is in foreclosure again, because the party who collected your money a few months ago didn’t actually own the Note, and the true owner was never properly paid. What a nightmare! This could happen to you.

So what’s a homeowner to do? If you are in foreclosure, and you live in a judicial foreclosure state (meaning they have to actually file a lawsuit to take your home), you can file a motion to request that the foreclosing party produce the original note to prove they have standing. You’ll want to do some research on how to do this in the state where you live, because local court rules vary.

If you live in a non-judicial foreclosure state (meaning they can just take your home through a trustee’s sale), such as Arizona, it’s much harder to challenge the foreclosure because you have to sue the lender or file a temporary restraining order and make these legal challenges within the framework of that lawsuit. Many times, if the homeowner is losing their home, they don’t have the money to fight a lender, and finding a sympathetic attorney to help you is difficult.

Josh and I are still working on finding attorneys who will work with homeowners for a reasonable fee; e-mail us for more information.

Judges in Arizona are not particularly sympathetic to homeowners who are waiting until the last minute to ask them to stall a foreclosure, so you need to be more proactive. If you decide to sue the lender, you need to do it around the time you receive the Notice of Default or a few months before the actual foreclosure date. Otherwise, it just looks like you’re retaliating against the lender because they are foreclosing. Also, the judges in Arizona don’t get that the federal laws really do tie their hands. TILA says that you only need to find $35 in undisclosed finance charges if you’re in foreclosure, and the judges aren’t buying it.

I wish I had some better answers for the homeowners in non-judicial foreclosure states, but at this point, your best option is to get a loan audit and consider hiring an attorney who “gets it” to force the lender to modify your loan in exchange for your waiver of rights under TILA.

As always, I encourage you to contact your elected officials and let them know you’re mad as hell about what’s happening with the lending industry. Demand that they represent your interests as the taxpayers. Together, we can change the way things are done in this country.

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The Mortgage Disclosure Improvement Act goes into effect on July 30, 2009. Please understand that this is federal legislation that could affect your closing date. All mortgage professionals must comply with the requirements as noted below. A loan cannot close or fund unless it has met the requirements listed below. The requirement is applicable for all mortgage loans (unless exempted as noted below). It has been implemented to protect the consumer, but it could cause delays in the closing.

On July 30, 2008, Congress enacted the Housing and Economic Recovery Act of 2008 (HERA). Within HERA, Congress included amendments to TILA which are known as the Mortgage Disclosure Improvement Act of 2008 (MDIA). On October 3, 2008 Congress further amended the Mortgage Disclosure Improvement Act as part of the enactment of the Emergency Economic Stabilization Act of 2008 (Stabilization Act). With the enactment of HERA and the Stabilization Act, the Federal Reserve Board is now amending Regulation Z with all provisions of the MDIA and making these changes effective as of July 30, 2009.

The immediate changes you need to know about MDIA requirements are as follows:

1. MDIA implements a 3-7-3 rule that creates new timing and waiting requirements with regard to the issuing of Truth-in-Lending disclosures and when closing can occur. The 3-7-3 rule requires the lender to:

a. Upon the taking or receipt of a loan application, provide an initial Truth In Lending(TIL) to the borrower(s) within 3 business days of the application (no change to current requirement).

b. Impose a waiting period BEFORE allowing a mortgage loan to close. The waiting period requires a lender to wait until the 7th business day following the delivery or mailing of the initial TIL to the borrower(s) before a creditor may close any loan. The 7 day period may be waived only if there is a bona fide and/or extreme and/or urgent reason to do so. This would be handled in the same manner as a waiver of rescission, which is virtually impossible to achieve. Therefore, there will be virtually no waivers of the 7 day waiting period.

c. Impose an additional 3 day waiting period before a loan may close in any instance in which the Truth In Lending(TIL) is outside of regulatory tolerances (e.g., for regular or fixed rate loans more than .125% and for irregular loans more than .25%). The 3 day period begins with the mailing of the TIL. A corrected TIL is required whenever a TIL is outside of regulatory tolerances.

d. The TIL may be mailed via regular mail or overnight or by e-sign or e-mail. However the lender sends the TIL, they must still comply with the 3 day waiting period. MDIA does not assume a quicker waiting period might occur and does not allow the lender to proceed until after the 3 day waiting period has ended.

2. Lenders can under no circumstances collect any upfront fees prior to the consumer’s receipt of an accurate TIL unless the fee is to cover the cost of the consumer’s credit report.

a. The fee collected must be bona fide and reasonable (no padding of fees and do not collect a fee unless the consumer is actually responsive if there was no intent to charge them for the credit report).

b. A lender and third party such as a broker must adhere to the same rules regarding the collection of fees. If a third party forwards a consumer’s written application to a lender, both the lender and third party do not collect any fee, other than a credit report fee if a credit report was pulled.

c. If a third party forwards a consumer’s written application to a second creditor following a prior creditor/lender’s denial of an application made by the same consumer (or following the consumer’s withdrawal), where fees have already been assessed, the new creditor/lender or third party does not collect or impose any additional fee until the consumer receives an initial TIL from the new creditor/lender.

3. An initial Truth-in-Lending disclosure must now be issued on a closed-end principal dwelling and a second home whether transaction is a home purchase transaction, a new construction loan, or a refinance. Previously, initial TIL’s were not required on refinances. The changes continue to exclude issuing an initial TIL on an investment property loan or a HELOC.

a.. For a primary residence, any non-owner occupant must also receive a copy of any TIL that is issued.

4. A new required “Notice” will be added to the TIL advising a consumer they are not obligated to proceed with the loan if they do not wish to do so.

5. No initial TIL is required if a consumer withdraws or is denied within 3 days receipt of the loan application.

6. Under the amended rules, a business day is any day other than Sunday or a legal holiday – which is the same as the current rescission day definition.

7. Any waiver of the 3 or 7 day waiting periods must be treated the same as waiving rescission. There must be a bona fide emergency before a waiver request will be considered.

a. A waiver when granted may not be a preprinted letter. The borrower(s) must handwrite a request to waive the 3 day or 7 day period and must describe the bona fide emergency.

b. Any waiver requested and granted must be signed by all parties that take part in the transaction.

8. MDIA does not amend any requirements specific to HELOC loans.

David A Miller

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