Is There a (Juris) Doctor in the House?

There's a 60% default rate associated with modified mortgages.

November 15, 2010

Many homeowners could use a doctor right about now—a Juris Doctor, that is.

Should you hire a lawyer to review your mortgage documents when you buy, sell, or refinance your home?

OK, I can hear the clucking already with those lawyer jokes and comments about being licensed to steal. Well, stick with me. You might rethink the notion that you don’t need a lawyer when conducting a mortgage transaction.

I haven’t hired a lawyer to review my mortgage agreements since I bought my first home in 1982.

And while I haven’t bought a home in years, I have refinanced enough 15-year mortgages to feel like the home I’ve been living in for the past 22 years has been bought and sold more times than Brett Favre has unretired.

So much for saving money with a shorter-term mortgage.

Subscribe to Credit Union MagazineIt just didn’t seem like I needed an attorney to check things out. But I’ve been rethinking that “wisdom” in light of the whole mortgage processing scandals that hit news outlets every week or so.

Today if I buy or refinance, I’m going to hire a lawyer. Better to be safe than sorry if some lender of ill repute—not a credit union for sure—would deliberately (or not) mess up the review of the paperwork.

Luckily, I haven’t had to face the dire straits that so many Americans today face, having taken out mortgages they cannot afford, suffered a serious setback financially because of health or marital status, or lost a job.

Fortunately, I rarely bet on the hole cards.

An estimated 3.5 million home owners will receive foreclosure notices this year, a 26% increase over 2009, according to government data.

And the percentage of mortgages that are delinquent has soared. The Mortgage Bankers Association says loans delinquent 90 days or more stood at 9.5% in the first quarter of 2010, up from 4% at the same time in 2008.

Next: Potential for gridlock

Potential for gridlock

Credit unions have largely escaped bad press. But the potential is there.

At a recent National Credit Union Roundtable for Directors meeting in Boston, the National Credit Union Administration’s Tim Segerson reported that real estate loans represent almost 55% of the credit union portfolio. Though only 3% of credit union first mortgages were delinquent two months or more, one-third of homes today have negative equity.

Real estate modifications have gone from $2 billion to more than $6 billion, and now represent 2.4% of total real estate loans. While that’s not a huge number, there’s a 60% default rate associated with modified mortgage loans, Segerson said.

Today’s foreclosure controversy stretches beyond GMAC Mortgage, JPMorgan Chase, and Bank of America. There are dramatic tales almost everywhere, including the mortgage processor whose employee reportedly executed 400 affidavits a day for the lender without reading or verifying that the information was correct. Attorneys general in at least 17 states are investigating improper foreclosure practices.

In oversimplified terms, millions of mortgages have been shipped around the global financial system—sold and resold—without the documents that traditionally prove who legally owns the loans and the properties.

When and if these loans become troubled and lenders seek to seize them, judges are beginning to question who really owns the title.

For struggling homeowners trying to avoid foreclosure there might be standing to say some lenders have been less than forthright in their dealings. But will it stop the foreclosure process or just delay it? What’s the borrower’s recourse?

For some lenders—most notably banks—there’s a question of whether past and present foreclosures are valid. For the fragile housing market there’s potential for years of gridlock and continued uncertainty in an already wobbly market.

Next: A second TARP?

A second TARP?

At the center of the fights over the legal standing of banks in foreclosure cases is the Mortgage Electronic Registration Systems (MERS), Reston, Va.

According to its website, “MERS is an innovative process that simplifies the way mortgage ownership and serving 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.”

Put another way, MERS “allows big financial firms to trade mortgages at lightning speed while largely bypassing local property laws throughout the country that required new forms and filing fees each time a loan changed hands,” reports The Washington Post. “Without this system, the business of creating massive securities made of thousands of mortgages would likely have never taken off.”

Only recently has the company’s role come into question. Court cases in several states have challenged MERS’ standing, some successfully.

In other places, like Minnesota, legislators explicitly gave MERS the right to bring foreclosures. Meanwhile, this whole mess has some saying the foreclosure problems could even trigger the need for a second Troubled Assets Relief Program.

While all this was going on, the Interstate Recognition of Notarizations Act, a bill that could have shielded bank and mortgage processors from liability for foreclosure documents that were prepared improperly, was quietly turned away by the White House after passing through the House in the spring and the Senate in September.

Fortunately, credit unions still are the good guys of lending. And I don’t know what you’re thinking after reading all this. But for me, the next time I get a mortgage or refinance one, I‘ll probably hire a lawyer so I have someone to blame if things go sour.

Is there a doctor in the house?

JAMES HANSON is vice president of business to consumer publishing for the Credit Union National Association. Contact him at 608-231-4080.