So, what’s up with these banks stopping foreclosures?  I’ve been asked that a lot lately since most people know that I’m in the mortgage business.  Well, let me try to explain it.

First what it’s not:  It’s not about mean, mean banks taking away people’s homes that have been making their payments.  Based on the way our current news business is run, you know that if there was even one family out there that was foreclosed upon while up-to-date on their payments, they would be on every new broadcast and in every newspaper in the country.  The reason you haven’t seen any of this is because the homes being foreclosed upon should be foreclosed upon.  In fact, the foreclosure backlog is so great that most loans are well over a year behind before any action is taken.

So what is it?  Well, basically it’s three problems – one very technical, one legal, and the other logistical.

The logistical one is getting the most press, so I’ll start with that one.  Simply put, there are too many foreclosures.  To understand this all you have to do is think of your industry, whatever it is, and imagine what would happen if in a 24 month period your business increased ten-fold.  Your grocery store had to sell 10 times as much food; the gas station had to pump 10 times as much gasoline; the restaurant had to serve 10 times as many meals.  You get the picture.  There are simply not enough people and enough infrastructure to handle the volume of work.  This causes people to take shortcuts, and inexperienced people to assume roles well beyond their ability. 

The legal one is a little more of a problem.  Basically many of the loan companies that did these loans didn’t know what they were doing (on many, many levels.)  So the deeds & mortgages were done wrong, or the paperwork was lost.  This is a problem.  Lenders are not supposed to foreclose if the paperwork is not in order.  Simply put, even thought the home is vacant and nobody has made a payment in two years, the lender cannot foreclose.  Given the way many of these lenders operated when they were doing loans, their solution to the problem should have been pretty predictable:  They just forged all the paperwork that they didn’t do correctly in the first place.  Yes, technically that’s a felony, but these lenders who invaded my industry were never that concerned in these technicalities, and evidently still aren’t today.

The last one is the technical one, so sorry if this isn’t as exciting.  In about 1995 Fannie Mae, Freddie Mac along with most of the large lenders in the country developed the Mortgage Electronic Registry System, or MERS.  Without going into the boring details, this was designed to allow mortgages to be more easily traded on the bond market along with other fixed income securities like US Treasury debt (bonds) and corporate debt (bonds.)  About 90% of all mortgages done in the last 10 years are MERS registered.  The problem came up when a judge decided that MERS, or its representatives do not own the mortgages, and therefore have no right to foreclose.  The judge further found that each transfer of the mortgage should have been recorded at the recorder’s office.  This is precisely what MERS was designed to avoid!  Basically if this stands, mortgage lenders will not be able to foreclose on any MERS loan without going back and recording each of the transfers.  Since many of the entities that owned these loans are long gone, this could be more than a little problem. In short, if this ruling stands it will shut down the mortgage industry cold.  Just imagine what would happen to the equities market if somehow every time a stock was bought or sold the sale had to be recorded.

Yes there are problems.  You don’t increase an industries workload ten-fold without major issues.  It’s also no surprise that the sub-prime lenders didn’t do the paperwork well, and then tried to fix the problem in less than legal ways.  Throw a legal challenge into the mix and you have a foreclosure trifecta.  The frustrating thing to me is that everyone looses.  The banks loose because they can’t get the bad assets off their books, the real estate industry looses because they can’t sell property, and most of all society looses not only because of the blight of vacant homes in our neighborhoods, but because we need a strong housing sector, and that is not going to happen until we get through these foreclosures.