The U.S. Housing Market: Current Conditions and Policy Considerations
The ongoing problems in the U.S. housing market continue to impede the economic recovery.
House prices have fallen an average of about 33 percent from their 2006 peak, resulting in about$7 trillion in household wealth losses and an associated ratcheting down of aggregate consumption. At the same time, an unprecedented number of households have lost, or are on theverge of losing, their homes. The extraordinary problems plaguing the housing market reflect inpart the effect of weak demand due to high unemployment and heightened uncertainty. But theproblems also reflect three key forces originating from within the housing market itself: a persistent excess supply of vacant homes on the market, many of which stem from foreclosures;a marked and potentially long-term downshift in the supply of mortgage credit; and the costs that an often unwieldy and inefficient foreclosure process imposes on homeowners, lenders, and communities.
But Mousie, thou art no thy lane,
In proving foresight may be vain:
The best-laid schemes o’ mice an’ men ……………Gang aft agley,
An’ lea’e us nought but grief an’ pain, ……………For promis’d joy!
To a Mouse, Robert Burns
MERS, the Mortgage Electronic Registration Systems, was the creation of a mortgage industry beset by a tremendous spike in the rate at which mortgage assets were being passed around on the secondary market in an effort to reap the benefits of securitization. More transfers meant more paperwork, more trips to an increasingly backlogged county land office, more assignments and other mortgage-related documents to record, and of course more filing fees. Finally the industry came up with a plan, ingenious on its face, and yet shrouded in just enough mystery to conceal a number of assertions that are, upon closer scrutiny, decidedly untenable within the framework of existing law. Further gaps in the system have allowed unscrupulous individuals to play fast and loose with the foreclosure process, and although MERS has taken steps to prevent such mischief in the future the damage already done is of potentially staggering proportion.
The mortgage industry had a number of objectives, a salient of which was the creation of a privately run, electronic database that would be far more efficient and cost-effective in tracking the beneficial interests in mortgage loans, servicing rights, and warehouse loans than the traditional system of county recording offices. With today’s information technology this proved to be a challenging but nonetheless straightforward undertaking. But there was another objective as well, one that was far more ambitions—and problematic: to design a system that would allow successive owners of a mortgage loan to avoid the time-consuming and costly process of having to run to the local land office to file the necessary paperwork every time a transfer of the mortgage took place. It is in the methodology by which this latter objective would be accomplished that the intrigue begins.
The idea was for MERS to be set up as a member organization the members of which would all individually agree to name MERS as the mortgagee of record in the local land office. MERS would then track the mortgage loan electronically through its database and, because of the agreement with its members, would remain the mortgagee of record at the local land office. Thus the only time an assignment would be recorded would be if the mortgage loan were transferred out of the MERS system or the actual owner of the mortgage were planning to foreclose in its own name. This would not only save time and money but add liquidity to the secondary market as well, thereby making mortgage assets more attractive to investors. Simply put, the goal was to enable MERS’s designation as mortgagee in the public records to survive and persist in spite of multiple transfers of the underlying economic obligation on the secondary market.
It has been widely reported that MERS1 has broken or severely diluted2 the chain of title for real property records, but what does this mean? To understand the importance of the chain of title to a property and the complexities of land boundaries we need to look no further than the advice given to practicing attorneys.
“To properly evaluate a case, counsel and survey experts often must examine chains of title for all properties subject to the dispute. In the case of a boundary dispute, it may be necessary to search the chain of title back to a patent to determine paramount title or to locate true boundaries.” 3
As is readily apparent, a broken chain of title will have adverse effects on adjoining properties and in many instances the boundaries of properties within an entire neighborhood. Attorneys are advised to “seriously consider not taking the case or withdrawing from it.” If attorneys are advised to “seriously consider” withdrawing, how will the common victim of MERS (by proxy) get relief?
The complexity of the problem is obvious. As lenders and title insurers pass responsibility back and forth, property owners who purchased a foreclosed property that had been in the MERS system (and now have broken chains of title) and their neighbors will be forced into expensive and complex litigation in order to determine their boundaries.
Who will be financially responsible for the litigation to quiet title?
This White Paper documents the importance of a chain of title and the far reaching effects of a lost chain of title.
This Article argues that a principal-agent problem plays a critical role in the current foreclosure crisis.
A traditional mortgage lender decides whether to foreclose or restructure a defaulted loan based on its evaluation of the comparative net present value of those options. Most residential mortgage loans, however, are securitized.
Securitized mortgage loans are managed by third-party mortgage servicers as agents for mortgage-backed securities (“MBS”) investors.
Servicers‘ compensation structures create a principal-agent conflict between them and MBS investors. Servicers have no stake in the performance of mortgage loans, so they do not share investors‘ interest in maximizing the net present value of the loan. Instead, servicers‘ decision of whether to foreclose or modify a loan is based on their own cost and income structure, which is skewed toward foreclosure. The costs of this principal-agent conflict are thus externalized directly on homeowners and indirectly on communities and the housing market as a whole.
This Article reviews the economics and regulation of servicing and lays out the principal-agent problem. It explains why the Home Affordable Modification Program (“HAMP”) has been unable to adequately address servicer incentive problems and suggests possible solutions, drawing on devices used in other securitization servicing markets. Correcting the principal-agent problem in mortgage servicing is critical for mitigating the negative social externalities from uneconomic foreclosures and ensuring greater protection for investors and homeowners.
Tens of millions of home mortgage loans, with a face value running into the trillions of dollars, may not be collectable. Furthermore, the owners of those homes may not be able to get clear title in the event that they pay off the mortgage.
The Mortgage Electronic Recordation System is a foundational piece of the modern American mortgage system, and is thus at the base of the financial system as a whole. This system has come under substantial legal challenges in recent years. In some forums MERS has prevailed; in others it has not. The uncertainty surrounding transfers of interests in land made via the MERS system threatens the financial system as a whole, by casting doubt as to the value of the ubiquitous Residential Mortgage Backed Security (RMBS), and by causing homeowners to doubt whether they can pay their mortgage with confidence (whether they are paying the correct entity) and whether their purported mortgage holder can ever give them clear title. Up to 33 million mortgage loans could be affected by the legal challenges to MERS. Even if MERS is technically operating within the boundaries of the law, the existence of a private system to manage transfers of interests in land is contrary to the fundamental public policy purpose of public records. The issue of compliance with existing State law is doubtful at best in some states, as this paper will show. The solution to these problems is for the several states, preferably acting on the advice of the National Conference of Commissioners on Uniform State Laws, to enact statutes banning private book transfers and providing mechanisms to clean up the existing confused situation. This will benefit both individual citizens and financial institutions, by ensuring that existing securitized mortgage debt is collectable and by giving ordinary borrowers the ability to pay with confidence. Without correcting the problem the ultimate collectability of a large number of mortgages will be called into doubt, thus undermining the financial system. Also, without clarification of title with regard to mortgages transferred through the MERS system, ordinary debtors will have reason to doubt their lender’s ability to give good title when they pay off the mortgage.
Though rates of foreclosure are at a historic high, relatively little is known about the link between foreclosure and health. We performed a case–control study to examine health conditions and health care utilization in the time period prior to foreclosure. Homeowners who received a home foreclosure notice from 2005 to 2008 were matched (by name and address) to a university hospital system in Philadelphia and compared with controls who received care from the hospital system and who lived in the same zip code as cases. Outcome measures included prevalent health conditions and visit history in the 2 years prior to foreclosure. We found that people undergoing foreclosure were similar to controls with regard to age, gender, and insurance status but significantly more likely to be African American. Rates of hypertension and renal disease were significantly higher among cases after adjustment for sociodemographic characteristics. In the 2 years prior to foreclosure, cases were more likely to visit the emergency department, have an outpatient visit, and have a no-show appointment. Cases were less likely to have a primary care physicians (PCP) visit in the 6 months immediately prior to the receipt of a foreclosure notice. The results suggest changes in health care utilization in the time period prior to foreclosure. Policies designed to decrease the incidence of home foreclosure and support people during the process should consider its association with poor health and changes in health care utilization.
written by
Thomas C. Baxter, Federal Reserve Bank of New York;
Stephanie Heller, Federal Reserve Bank of New York;
Frederick Miller, Gray Plant Mooty;
Linda J. Rusch, Gonzaga University School of Law May 12, 2011
A Foreclosure Crisis
Problems with mortgage foreclosures have been in the headlines during the past several months. The media attention arises from several concerns. One concern relates to whether lending institutions have followed proper foreclosure procedure. Another reflects a popular misconception among many that a mortgage can become separated from the note it secures. Yet another concern arises out of the complexity of some of the structured transactions involving the mortgages.
Abstract:
Few American homeowners know much about the small, Virginia-based company that has revolutionized the mortgage industry over the past fifteen years. Yet, Mortgage Electronic Registration Systems, Inc. (MERS) is the named mortgagee on nearly two-thirds of all newly originated residential mortgages in the United States. Industry leaders – including Freddy Mac, Ginnie Mae, and a host of private lenders – created MERS in the mid-1990s to help facilitate a burgeoning market in mortgage-backed securities.
At the time MERS was created, a robust and lightly regulated secondary market for mortgage-backed securities seemed like a good idea. The recent subprime mortgage crisis, which has impacted millions of American homeowners and played a key role in a global recession, has done much to challenge that presumption. One unfortunate byproduct of the subprime mortgage crisis has been a dramatic increase in the number of American homeowners facing foreclosure. For many of these homeowners, the MERS system may compound their hardships by effectively masking the identity of the owner of their loans. One of the benefits of MERS membership, according to MERS, is the legal right to foreclose on a defaulting homeowner in MERS’s name rather than in the name of the entity who actually owns the mortgage. This can mean that homeowners have no way of ascertaining the identity of the party with whom they can negotiate their loans.
Several state courts have considered challenges to MERS’s right to initiate foreclosure actions in its own name. MERS claims to have the legal authority to initiate foreclosure proceedings throughout the United States, but not every court has agreed. Some jurisdictions have expressly upheld MERS’s right to foreclose, while some have questioned or limited MERS’s foreclosure rights. Still other courts have reserved judgment, expressing frustration and confusion regarding MERS’s role in an increasing number of foreclosure and bankruptcy proceedings, and the ostensible connection between MERS and the subprime mortgage crisis.
MERS is currently a plaintiff in as many as forty percent of pending foreclosure actions in some locales. This Note argues that foreclosure actions brought in MERS’s name, without joining the real party in interest, are unlawful. Furthermore, this Note reveals how granting standing to MERS in foreclosure actions threatens to undermine the protections for homeowners that foreclosure law has traditionally provided, and violates important property law doctrines that ensure the proper functioning of the recording system and minimize clouds on title.
Per a tip SFF received: This Bill should boil it down to where the GSE’s should only accept loans where there is a proper Chain of Title recorded in Public Records and a Chain of Indorsements showing a proper Chain of Negotiation to the GSE’s where both chains match from Origination to final purchase by the GSE’s.
The National Association of Independent Land Title Agents (NAILTA) has released a white paper on the recent troubles with the Mortgage Electronic Registration Systems (MERS) mortgage registry and a position statement in favor of the premise behind a bill sponsored by Representative Marcy Kaptur (D-OH) known as H.R. 6460, or the “Transparency and Security Mortgage Registration Act of 2010”.
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111TH CONGRESS
2D SESSION
H. R. 6460
To prohibit Fannie Mae, Freddie Mac, and Ginnie Mae from owning or guaranteeing any mortgage that is assigned to the Mortgage Electronic Registration Systems or for which MERS is the mortgagee of record.
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