Foreclosure Freeze Fix? Property Title Warranties

Despite all of the sensational headlines calling for a national foreclosure freeze, the best solution to the fiasco is more centralized than many politicians would have you believe. After all, only one small industry is at the center of the robo-signing foreclosure conundrum that's currently gripping the housing market: Property title companies. Make title companies right, and the problem will fade away.

A quick recap: Recent reports suggest that the Mortgage Electronic Registration Systems (MERS), a computerized database that contains all current property title information, had some procedural flaws when recording and establishing the accurate chain of title on some properties.Since 1997, MERS has registered over 65 million properties.

Some attorneys and elected officials allege MERS (and the banks they represent) bypassed local recording requirements and prohibited borrowers from knowing who really owned their mortgage. Because of this procedural defect in establishing a proper chain of title, any subsequent actions like foreclosure would be initiated using "fraudulent" documents and thus should be thrown out -- hence the calls for a foreclosure freeze.

I believe this is all, in a word, hogwash.

First, I'd be surprised if there were numerous cases in which someone was wrongfully foreclosed on and was subjected to some material damages due to robo-signing. If there are, you make that person whole and don't hold up due process on 100,000 other cases. Foreclosure proceedings begin when a borrower does not continue to make their mortgage payments.How or why a borrower stopped paying for their mortgage is not relevant to the robo-signing issue.Banks may be many things, but proponents of foreclosure is not one of them.Foreclosure is an expensive process from which they rarely profit.

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Regardless, these defects do need to be corrected quickly since title companies are refusing to insure title on properties that were mortgaged by lenders who used the MERS platform and otherwise committed errors in the processing of foreclosure paperwork. Subsequently, banks will not lend on a property that does not have title insurance ... so we have a bit of irony here.

Banks won't lend on a property without title insurance, and title companies won't insure title on property that was mortgaged by (in many cases) the very same banks -- due to the robo-signing procedural defects.

Part of the solution resides in requiring banks that participated in the MERS robo-signing procedures or other flawed paperwork processes to provide additional warranties to the title companies, effectively insuring them against any claims that could, however unlikely, arise.Bank of America has already begun to offer such warranties; expect others to quickly follow suit.

Recognizing that a protracted foreclosure stoppage would be incredibly detrimental to the housing market and economy as a whole, the Federal Housing Finance Agency (FHFA) has released their remedies for dealing with foreclosure process deficiencies.It provides the framework for banks and mortgage servicers to immediately clean up their processes and produce the proper paperwork (if and where necessary) and -- in the absence of any defects -- avoid delay and foreclose appropriately.

Foreclosure moratoriums, foreclosure freezes, robo-signing scandals, etc., all make for great publicity, especially if you are an elected official seeking votes or an attorney seeking clients. However, their broad calls to action without understanding the details and consequences thereof could have a profoundly worse effect than what they are purportedly trying to "help" with.

For a further look into this matter, you may read my post at The XBroker.

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