Who Can Foreclose on Your Home?

Picture this: a man purchases a house in 2007 with a loan from a major mortgage lender who then securitizes the loan.  After 9 years of making payments, the homeowner loses his job and defaults on the loan.  The lender sends a foreclosure notice to the homeowner, claiming the ability to foreclose on the loan.  But does the lender actually have the right to foreclose?  The answer is a bit complicated, and does not look good for the major banks.  To understand why, let’s take a closer look at exactly what the banks did and what it means for homeowners and real estate investors.

When a loan was securitized it was lumped together with a massive pool of loans and then sold in parts to investors around the world.  The investors were then paid from the principal and interest payments on the loans based on their percentage of ownership.  It sounds simple enough.  If it was that simple, why did mortgage lenders begin the process by selling each loan in the massive pool of loans through a sequence of sales?  And why was the last sale almost invariably to a single-purpose entity, usually a trust with a major bank as the trustee?  The point of this sequence of sales was to separate the pool of loans from the assets and liabilities of the originating lender.  They did this in case the lender was to file for bankruptcy or go into receivership.  If the loan had not been completely separated from the lender, the lender could then claim the loan by right of redemption, effectively leaving the investors with nothing. 

If the homeowner continues to make their payments, this is the end of the process for them until they have paid off the loan.  If the homeowner misses payments and the foreclosure process begins on their loan, that’s when things get hairy.

It would be virtually impossible to all of the investors on a securitized loan to act together in order to foreclose on a loan.  The investors on any one loan could be spread throughout the world.  Instead, the trust that purchased the loan from the originating lender is the entity that orchestrates the foreclosure.  The problem here is that the trust doesn’t own the loan anymore!  It is owned by the collection of investors who purchased shares of the mortgage backed security.  Instead of actually going through the work of making sure the foreclosing entity actually has the authority to foreclose, the standard action the banks take is to ignore the fact that the securitization took place and instead produce a mortgage assignment from the originating lender to the trust who then tries to foreclose.  The point of this is to make it appear as if the trust actually owns the mortgage and has the right to foreclose when it does not.

That should seem like enough of a reason for the courts to cast doubt on any trust attempting to foreclose on a securitized loan, but it doesn’t stop there.  There are safeguards built into the securitization hustle that create a duty for the loan servicer to cover any payments the homeowner misses.  So the homeowner misses a payment, but the owners of the loan are paid anyway.  Because of that, it is hard to prove that anyone with an actual contractual connection to the loan or the homeowner has actually suffered from a missed payment.  If they have not been hurt by the default, the foreclosure they are trying to collect on looks like double-dipping.

This doesn’t mean that all homeowners with securitized loans are in the clear and get a free house, but it does show that the banks should not get away with lying and cheating behind the scenes in order to take back houses that they have already been paid for.

Fortunately, in cases all across the country, more and more courts are demanding that banks prove their standing and that there is a clear paper trail behind each loan. As a result, homeowners across the country are finally receiving justice for wrongful foreclosures and unfair lending practices.

This is a great time to be a real estate investor working with distressed homeowners. Despite what certain courts are continuing to do, what we’ve seen around the country is that the law is finally catching up to the banks.  Along with District and Appellate Courts all over the country, the Supreme Court has ruled as clearly as possible in the homeowners’ favor. With their ruling in the Jesinoski case, the Supreme Court has clarified that TILA rescission is a powerful tool to stop foreclosure and help homeowners stay in their houses longer. It also creates an opportunity for investors to do some pretty amazing deals. The tides have turned and the banks are being forced to negotiate on our terms. No more begging the banks to accept our short sale and REO offers only to have them demand ridiculously high prices. We can now get the banks to the table and demand that they prove they have the right to enforce a loan.

This makes it more important than ever that homeowners and real estate investors act NOW. This is a massive opportunity for real estate investors. If you know of anyone with a defaulted or underwater note, you need to get in contact with my office immediately at (706)-485-0162. I have spent the last three years building up a team of experienced attorneys and fraud examiners/forensic auditors who specialize in exposing fraud committed in the mortgage process and using that fraud as leverage to negotiate the sale of notes. This opportunity is not going to be available forever; we need to strike while the iron is hot!

We have a huge opportunity to help homeowners and do some great deals with multiple exit strategies. For more information, call me at 706-485-0162.