[This post was originally posted on Rain City Guide] There has been a lot of news lately about “robo-signers,” the “foreclosure mess,” and other signs of the coming (returning?) financial apocolypse. So what is the big deal, anyway?
The “big deal” concerns a fundamental tenet of property law. Some types of property (such as all real property, and some personal property such as a car) require an owner to register or otherwise record his ownership. Once ownership is recorded (e.g. once the deed by which a buyer takes title is recorded with the County Recorder) then the owner is known and can be determined by others, regardless of the location of the property.
In contrast, the owner of most personal property is identified primarily by possession. If you have possession of personal property, it is presumed that you are the owner, subject to the adverse claim of another (which could be proven with other evidence of ownership, such as testimony, receipt of purchase, etc.) This second category includes a financial instrument such as a promissory note. The “holder” of such a note (i.e. the person entitled to repayment of the debt set forth in the note) does not register or record his ownership. Rather, possession of the note is on its face evidence of ownership.
In the context of a promissory note secured by real property, the law has evolved literally over a thousand years (this area of the law can be traced directly back to English law that evolved in the Middle Ages). In order to exercise the rights of ownership of a promissory note, the “holder” must have possession of it. Otherwise, there is no way to confirm ownership, and thus no way to confirm that the person seeking to enforce those rights really HAS those rights to enforce.
Now the problem: Over the last decade, mortgage loans were commodified. Way back in the last century — yep, just ten years ago — a lender would typically make a loan and then retain ownership and possession of the note. However, to introduce greater fluidity into the mortgage market, banks took to selling these loans to trusts (typically maintained by investment banks). The trusts would then sell “shares” of ownership in the trust (which includes ALL of the mortgages pooled within the trust) to investors. These are known as “mortgage backed securities.”
As part of this process, the original promissory note in EACH instance should have been forwarded to the trust for safekeeping. But guess what? That did not always happen. So now the original note has been lost in many instances. To account for this reality, all 50 states in one form or another allowed a “holder” to attest under penalty of perjury that it was the legal holder of the note thus giving the holder the right to foreclose on the home securing the loan. The “holder” no longer had to present the original note in order to prove that it was entitled to the rights conferred by that note.
But as we now know, lenders failed to actually confirm that they really were the “holder.” Instead, low level employees responsible for HUNDREDS of files every day simply signed so indicating without actually confirming as much. Lenders proceeded to foreclose on loans even though they simply lied when saying they had confirmed that they had the right to do so even though they could not produce the original note.
In other words, banks routinely lied under oath and the law does not appreciate such conduct. Indeed, for the 23 states that require a lawsuit in order for foreclose, these lies were made directly to the court! Bad form, to put it mildly!! Moreover, the banks misused the legal system to their advantage at the expense of homeowners by lying about the procedural requirements designed to protect the homeowners/borrowers, who may not have the resources necessary to otherwise defend themselves in court. The government — i.e. the entity tasked with insuring that the law is followed and applied correctly — has taken notice.
So that’s the background. Over the next few days I will explain in Part II the problems created or worsened by this conduct and how this might play out in the future. In Part III I’ll explain how this relates to our fair state of Washington.