It seems like everyday another major bank announces it will halt all foreclosure activity to review procedures and paperwork. There are many reasons. Real estate law is unique to every state. Here in New England, much of that body of law predates the establishment of the United States. Major national lenders in the interests of their efficiency, have sought to homogenize fifty different systems of property law into a single one for the entire country. While this is probably impossible even if done well, these national lenders brought the same sloppiness and imprudence they used in writing these mortgages in the first place to the foreclosure process. Consequently, their procedures in each state have their own unique flaws.

Here in Massachusetts, the major problem seems to be with assignments of mortgages. What we think of a mortgage is in fact two different transaction. The first is a contract between the lender and the borrower in which the borrower promises to repay the loan with interest in a set period of time. This contract is memorialized in a written promissory note. The second part of the transaction is a conveyance of real estate – that’s the mortgage. When the borrower signs the mortgage document, he conveys an interest in the property to the lender. That interest is a contingent one: if the borrower fails to repay the loan in accordance with the terms of the promissory note or if the borrower fails to pay the taxes on the property or to insure it or to maintain it, the lender has the right to seize the property and sell it at auction. The proceeds from the auction are then applied to the amount owed on the note. Any excess money is paid over to the borrower/home owner, but if there’s a deficiency (which is usually the case), the lender may sue the borrower on the note for the balance owed.

Many years ago local banks made loans to local residents and patiently monitored the situation for years until the loan was fully repaid. But beginning thirty or so years ago, local banks began “selling” these notes to investors. The investor received a steady flow of income (the interest payments) while the bank received an infusion of cash to make more loans. Since the bank made much of its money on transaction fees at the time of the loan, the more loans, the more revenue to the bank. A basic rule of property law is that “the mortgage follows the note” so when one of these loans was “sold” by the originating bank, that bank would also record a document called an “assignment of mortgage” which would transfer that bank’s rights under the original mortgage to the investor who now held the note.

During the housing boom of the past decade, local banks held only a small slice of the home mortgage market. Much of the market share was seized by mortgage brokers who would go anywhere and promise anything to make a loan. Since they were paid up front based on the volume and size of loans, they had little concern for whether the loan would be paid back. In a typical mortgage transaction, before the ink of the borrower’s signature was dry, the promissory note would be shipped off to Wall Street where it would be repackaged with thousands of other like loans as bonds that were sold to investors. The faster this process worked, the faster everyone involved got paid.

With speed seen as a virtue, the quaint custom of recording an assignment of mortgage whenever a note was transferred fell by the wayside (in many cases, at least). When these mortgages started going bad and the investor holding the note proceeded to foreclose, these missing assignment became an issue. With no assignment, the investor holding the note had no legal right to foreclose. And the entity that legally held the mortgage, no longer held the note. Perhaps even unaware of the legal consequences of this dilemma, investors and their agents went ahead and did the foreclosures on hundreds of properties in Lowell. Many of these homes have since been resold to new buyers. But because the investor doing the foreclosure may not have had the legal right to do so, the foreclosure could be void which means the original home owner/borrower would still own the property. This is not the case with most Massachusetts foreclosures but it’s a situation that exists with enough of them to conclude that it’s one giant mess that will take years to straighten out. The longer this process takes, the longer it will be until the broader housing market can begin its recovery.