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The New Economy and the Mortgage Crisis

The trouble with paying off the mortgage.

I recently learned of some friends who had paid off their mortgage on their home. In years past, that is not something that I would ever consider to be a risky transaction, but in today’s new economy, you cannot routinely expect that your money will be forwarded to the actual holder of your note, and you cannot expect to routinely receive the original note marked “paid in full” and you cannot routinely expect to receive a Release or Reconveyance of the Deed of Trust.

The problem is that the “note” on your home was likely sold by the originator that retained the servicing rights [1] then assigned to a Sponsor for securities underwriting, [2] and then ultimately to a New York Trust. In this process there was a lot of “double booking” of loans because these transactions were recorded by Mortgage Electronic Recording System (known as “MERS”) which relied on a “person” entering “info” into the system with no checks and balances to make sure the input data was accurate. People have been sued multiple times on single notes and other similar irregularities have occurred. Lastly, there is LPS or Lender Processing Services which is an intermediary between the loan Servicers and the lawyers who bring the legal action on defaults whether by non-judicial foreclosure or suit on the note. [3] One LPS employee recently testified in court that he signed “tens of thousands” of Notices of Default on properties where he had no knowledge that the debtor was actually in default. This is called “robo signing” which is just one factor that has destroyed the credibility of the process.

The lesson in all this is that in this New Economy it is more important than ever to be proactive in protecting your assets.You should not take the advice of a loan servicing employee that recommends that you stop or reduce your mortgage payments while your modification request is pending. The default will trigger late fees and other charges to the Servicer and your payments will be diverted to a suspense account held by the servicer and charged for these fees. They also are able to lend these funds in what are called “overnight loans” for huge profits. The lender will never see the money.

[1] Which is highly profitable and an industry which has come under considerable criticism for its questionable tactics which many say amount to fraud.  Expect more disclosures to surface in this area of the industry.
[2] The assignments were generally not legal under most jurisdictions as these notes are negotiable instruments and need to be endorsed and physically delivered to the endorsee to transfer ownership.  Most of these notes ended up in New York trusts which were used as bankruptcy remote entities to securitize the notes as mortgage backed securities.
[3] The legal process has been sloppy at best as large volumes of cases are handled by a few overworked lawyers that share legal fees (questionable ethics practice) with LPS for the case referrals.  The sloppiness is cause by the system that rates that lawyers based on the volume of documents filed with the courts.