Massachusetts Attorney General Martha Coakley filed suit yesterday against a number of national lenders seeking civil penalties and restitution for unfair and deceptive business practices related to home mortgages (PDF of Suffolk Superior Court complaint HERE). By my reading of the complaint, the improper conduct alleged can be divided into four distinct categories:

1. Lenders initiated (and in some cases conducted) foreclosures without first being the legal holders of the mortgages in default. During the past decade especially, home mortgages played a secondary role as investment vehicles. This caused mortgages to be bundled and transferred among investors. When a mortgage goes into default, however, investor agreements often required the original lender to conduct the foreclosure. Done correctly, the investor would execute a document called an Assignment of Mortgage which would formally transfer the underlying mortgage back to the original lender which would then conduct the foreclosure. What happened in practice is that the original lenders often jumped the gun and commenced the foreclosure proceedings before the formal assignment paperwork was in place. The AG complaint seeks to penalize these premature foreclosures. It’s important to note that there is no allegation that any of these foreclosures were conducted by entities with no interest in the mortgage, but by entities that had not perfected their actual interest before starting the foreclosure.

2. Required affidavits were executed by “robo-signers”. Massachusetts law requires a foreclosing lender to record an affidavit within 30 days of a foreclosure auction certifying all of the steps that were taken in the foreclosure process. Any affidavit is to be signed by a person with personal knowledge of the information contained in the affidavit. This count of the complaint alleges that employees of these lenders routinely signed affidavits without any knowledge of the information contained in the affidavit. There is also an allegation that some employees signed the names of others to these affidavits. To be complete, it doesn’t appear that there is any allegation that the contents of these affidavits was untrue, just that they were signed by individuals with no knowledge of the facts.

3. Lenders misled borrowers in loan modification discussions. This is the most serious allegation in my view. Here, it says that lenders who were purportedly engaged in efforts to modify loans to prevent foreclosures routinely misled or misinformed home owners, often conducting foreclosures contrary to assurances of forbearance of such foreclosure activity.

4. Lenders failed to record legally required documents at the registry of deeds. Back in 1997, major national lenders banded together and created a separate corporation called Mortgage Electronic Registration Systems Inc, better known as MERS. MERS was a type of trust for mortgage lenders. MERS would hold the mortgage while the investors would transfer the underlying promissory note among themselves. This would alleviate the need to record an Assignment of Mortgage every time a promissory note was transferred. The AG’s complaint alleges that Massachusetts law required the lenders to record an assignment of mortgage every time a promissory note was transferred. Back in October, I wrote an article in the Real Estate Bar Association’s quarterly newsletter explaining why I believed that the MERS arrangement as practiced since 1997 did not violate Massachusetts law or practice, so I interpret the law differently than does the AG on this point, but there is no telling how the courts will rule on this issue.

So that’s my synopsis of the complaint against these major mortgage lenders. The root cause of this conflict lies in the dual nature of a mortgage. A mortgage is two separate transactions: there is the promissory note by which the borrower promises to repay the lender in accordance with certain terms contained in the note. This is a contract and is governed not only by contract law, but also by a type of generic, nationwide commercial body of law intended to promote interstate business and finance. The second part of the mortgage is the mortgage itself, which is a type of deed and, as such, is governed by property law. Property law is unique from state to state and is grounded in history and tradition. Little about property law can be applied generically across the country. During the housing boom, major national lenders were almost exclusively concerned with the high finance aspects of mortgages: the faster the promissory notes could be bundled and sold to investors, the more money could be made. To these investors, state specific property laws that governed the mortgages associated with these promissory notes were annoying anachronisms of an earlier age that were routinely ignored or neglected. In my view, the Attorney General’s lawsuit rightly seeks to hold these lenders accountable for alleged violations of the property law of the Commonwealth. Still, the bottom line is that none of the foreclosures in question (setting aside the deceptive loan modification practices) were not legitimately facing foreclosure. This means, I assume, that the thousands of foreclosures that may be invalidated by the outcome of this suit will simply be redone once the proper paperwork in in place.