Wednesday, March 21, 2012

Does slipshod paperwork provide legal grounds to overturn a foreclosure?

In Massachusetts, courts have said “yes” in two landmark cases upheld last year by the state’s highest tribunal, the Supreme Judicial Court. Judges in other states have ruled likewise.

But California courts have consistently refused to void foreclosures even when banks botched the process.

Now a case argued in an appeals court in San Francisco last week might get the California Supreme Court to weigh in. The case hinges on a single word in a civil statute written over a century ago.

If the court does follow Massachusetts’ lead – and that’s a big “if” – it could open the door to thousands of Californians who believe that their homes were illegally repossessed by parties with no right to do so.

Who owns the note?

Why does it matter who forecloses?

After all, banks argue, if homeowners clearly can’t make mortgage payments, they will lose the house no matter who owns the note.

But lawyers said it is crucial to avoid turning property rights into the Wild West – and to help some borrowers hang onto their houses.

“It’s important to the legal system that only the right parties can throw you out of your house, especially in states like California and Massachusetts where there is no judicial foreclosure,” said Elizabeth Renuart, an assistant professor of law at Albany (N.Y.) Law School. “If homeowners who are in default know who owns their loan, they may be able to work out a loan modification with that lender so they can … stay in the house.”

The robosigning scandal and February’s audit of San Francisco foreclosures by Assessor-Recorder Phil Ting bolstered arguments that resale of mortgages on Wall Street clouds the chain of title so no one can tell who really owns them, and that banks recklessly churned out foreclosure documents without verifying them. Many homeowners also assert that foreclosures by the Mortgage Electronic Registration System – the massive database banks use for rapid-fire buying and selling of mortgages – should be invalidated because MERS doesn’t record loan transfers.

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