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Saturnalia: The National Review on Foreclosure Mess

23 October, 2010 (14:25) | Business, Finance & Financial Services, History, Law - Civil | By: Peter Kinder

According to Roman myths, a prophecy that one of his sons would overthrow him inspired Saturn to eat each of his sons at their births – except Zeus whose mother hid him and who did topple his father. Goya’s ‘Saturn Devouring his Sons’, the blog ‘Vince’s Ear’ rates #1 on its list of the Scariest Paintings.

More than once since the Supreme Court in Bush v. Gore declined to uphold the sanctity of the vote and therefore a republican form of government, I have thought today’s conservatives have reversed Goya’s image: The sons are devouring their fathers.

By ‘their fathers’, I mean the principles on which the conservatism of, say, Edmund Burke are based. On issues as diverse as torture and campaign financing, today’s conservatives have exalted power and money above justice and ordered liberty.

Last week, I blogged about The Foreclosure Flood and the role of the Mortgage Electronic Registration System in it. It seems the latest father to be devoured is the sanctity of property transactions.

National Review on the Mortgage villains 

Opined The National Review’s editors in the Oct. 14 issue on ‘The New Mortgage Mess’:

The United States has a 21st-century system for trading mortgage-backed securities but a 19th-century system for keeping track of actual house titles. That is the product of the shared interests of local governments that treat titling fees as one more cash cow in the golden herd and parochial business interests, such as title-insurance companies, that profit from the inefficiency of our antiquated system. As the turbocharged securitization process crashes into the crude title-recording system, thousands of foreclosure cases are stalled because it is proving difficult or impossible to prove who actually owns the title to a particular house, and who therefore has standing to sue for foreclosure.

Let’s leave aside that the vaunted 21st century trading system appears not to include 20th century niceties, such as the disclosure of material information to the valuing of the securities.  Let’s also leave aside the role of the MERS system in the debacle — but see the update at the blog’s end. Let’s just look at the title bit.

It just isn’t true that ‘thousands of foreclosure cases are stalled because it is proving difficult or impossible to prove who actually owns the title to a particular house, and who therefore has standing to sue for foreclosure.’  If A has title to Blackacre, why would she ‘sue for foreclosure’, why would she foreclose on herself?

Titles and Interests in Realty
 The only person concerned with suing – as opposed to being sued – is B who lent money to A with title to Blackacre as security. B’s successors in interest – the people to whom the lender sold A’s mortgage – all the way down the line to Z or beyond get its claim on the property, its right – standing — to sue.  You foreclose to get title.

In the current foreclosure follies, title isn’t usually at issue until after foreclosure. What is at issue is whether banks filed notices of mortgage transfers – proofs of the existence of claims on the property – and whether some notices actually filed were forged. That notice is of B or Z’s right to foreclose. A very big difference!

On being sued, the title holder, A, has the right to demand B, more likely Z, prove its right to foreclose on Blackacre. A foreclosure plaintiff without a provable interest in Blackacre has no greater rights to the land than a thief. So if a court allows Z to foreclose on a property without a proper interest, the transaction – and the system itself – comes into question.

The Purpose of Recording Interests
 The purpose of recording real property interests is profoundly – and rightly — conservative. It fosters the free transfer of interests in real property by ensuring a buyer has notice of any existing claims on it.

Experience with rushed recording processes as in the various ‘land rushes’in the 19th century led to the stability and care demanded in the 20th. The inadequacies – some reaching the level of criminal – of title recording in places like Oklahoma offered national lessons.

The National Review’s editors leave reality behind when they criticize the system’s ‘inefficiency’. It is inefficient because underlying it is something profoundly susceptible to human error: a metes and bounds survey. Hence, the absolute necessity of process and checks both by county officials and by lawyers handling transactions.

Recording: A Practical Necessity
The notion that recording interests in land is just ‘one more cash cow in the golden herd’ of local government defies experience and history.

I spent a lot of time in Recorders offices — known in some states as the Registrar of deeds. As a child, our County Recorder was a great friend. I hung out in his office, and he let me watch its workings and learn how to use its systems. Then, researching my thesis, I dug into land records in several western Ohio counties.

But my most intimate experience with land records came doing a three month project on the ownership of the rights to the Pittsburgh #8 coal seam underlying about 10 square miles along the Ohio River.

The records evolved from the 18th century’s reliance on trees as boundary markers and arcane measurement standards through the 19th century’s more routine markers and archaic measurements to the 20th century’s more systematic approaches. Had I not already gained a lifetime’s respect for title workers and their processes, that summer task would have won it for them.

(Few recognize that in a crucial way George Washington fathered our country by surveying the western reaches of Pennsylvania and Virginia before the Revolution. His work contributed directly to the orderly development of the Northwest Territory and set the pattern that extended across the continent.)

Title Insurance
 And as for title insurance, what were the NR’s editors thinking!

Anything that offers defense of a buyer’s title at pretty short money seems a good hedge. Leave aside the benefits of having a conservative, process oriented business whose profitability depends on the reliability of work done by public officials….

Integrity: A Lost Virtue
That’s reality and history. Why would today’s conservatives urge rejection of both to return to a system of ‘let the buyer beware’?

Integrity, it seems, has disappeared from the conservatives’ approach to both market processes and individual and corporate responsibility. It is a loss I hope we can survive.  It is time conservatives and progressives alike stop cannibalizing our fathers.

Update: 25th October:

From the comments on Yves Smith’s The Naked Capitalist, a note clarifying the role of MERS and its corruption of the recording system:

davidgmills says:

I filed a lawsuit to remove the cloud on my homestead a year and a half ago in Memphis, alleging that the Deed of Trust on my homestead, held by MERS and the origination lender, was invalid.

I am not in default. I am an attorney of 33 years.

It may be of huge interest to Wall Street what happens to these trusts and pooling and servicing agreements, but these issues are not nearly as important to the average homeowner as the issue of whether mortgage liens are valid.

This process of securitzation radically changed the ability of a property owner, a title company or a prospective purchaser to determine who needed to be paid to secure clean title to the property. Before securitization, the creditor could be identified because the creditor was the lienholder. After securitizaion, a strawman called MERS became the lienholder. It is no longer possible to look at the deed records and be able to identify who the creditor is who needs to be paid to secure a release of the lien.

I can’t stress enough how this is such a fundamental change in property law all over the country. By simply naming a strawman as the lienholder, rather than the true noteholder, a deed recording system that was public and transparent has been replaced by a system that is private and secret.

And the courts that have looked at this are refusing to let deed recording go private and secret. Three state Supreme Courts have already declared this system to produce invalid liens, as have many bankruptcy courts. Just this week a class action suit in Georgia was filed to set aside all foreclosures by MERS when practical to do so, or if setting aside foreclosure proves impractical, then to compensate the owners foreclosed upon.

What this all means for Main Street and the average property owner is that your mortgage note is most likely to be declared to be unsecured if the issue is really pressed by a competent attorney who understands this. You may owe your note, (that’s even questionable if the note is lost or missing) but your property will no longer be collateral for it.

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Comment from mindful
Time 2010/10/26 at 08:14

Oh, the irony! If anyone wanted any more evidence that today’s “conservative” movement is anything but, your snippet from National Review is it. There is abolutely NOTHING conservative about overturning title recording procedures that developed over the history of our country.

Incidentally, I am guessing that whoever penned the editorial referenced above has no understanding at all of simple internal controls. Too back-office for their exalted minds, I guess.

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