Now, with this session of Congress drawing to an end, the chance of a hearing, consideration or a vote has dropped to just about zero.

Where’s The Note?

Sponsored by Rep. Marcy Kaptur (D-OH), the legislation would require lenders in a foreclosure situation to identify the actual owner of the mortgage note, the originating mortgage lender and all subsequent loan owners. In other words, in the same way a title search is used to assure that property owners actually have the right to sell a house, the Kaptur bill would require lenders to show they have title to a loan before they can foreclose — a requirement which is supposed to already be part of every foreclosure claim.

This should not be a big deal. After all, we plainly know who originated the mortgage — that would be the lender who sat with you at closing and collected a fee for their work.

And if the loan was sold then surely someone, somewhere has a record showing the date of sale and the purchase price each time the loan was sold and re-sold. After all, we know who owns 100 shares of IBM no matter how many times it has been traded.

Or maybe not. There was, after all, the New Jersey mortgage broker who allegedly took in $11 million by repeatedly selling the same loans to Wall Street.

Unfair Terms

The Kaptur legislation would require lenders to detail whether any terms of the mortgage were unfair or deceptive. That’s necessary because the Federal Reserve has the authority as a regulator serving the public to prohibit “unfair and deceptive acts or practices” under the Home Ownership Equity Protection Act of 1994. However, it did not bother to do so when option-ARMs and interest-only mortgages were first marketed. Such loans, of course, are at the heart of the mortgage meltdown, the foreclosure crisis and lender losses on Wall Street.

The Kaptur bill would also force lenders to state as part of the foreclosure process whether any material misrepresentations were made to borrowers when a loan was originated and whether borrowers actually benefited when refinancing in terms of a lower rate, smaller monthly costs or more stability, such as going from an ARM to a fixed-rate mortgage.

Subprime Borrowers Overqualified

The misrepresentation requirement is important because huge numbers of subprime borrowers — the borrowers with the steepest foreclosure rates — in fact qualified for conventional, FHA and VA financing. Conventional, FHA and VA mortgages are cheaper and less toxic than the subprime loans borrowers were sold, and traditional loans are not loaded with prepayment penalties, huge payment increases and other hazards. According to the Wall Street Journal, 55 percent of all subprime borrowers qualified for better financing in 2005, a figure which rose to 61 percent in 2006. (See: Subprime Debacle Traps Even Very Credit-Worthy, The Wall Street Journal, December 3, 2007)

Kaptur — a Democrat who swam against the Tea Party tidal wave and won re-election with 59 percent of the vote — can try again in the 112th Congress, which starts next year.

The mortgage foreclosure legislation Congress won’t touch is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For the moment and most-likely for a long time to come the answer is no. The problem is not one of technology — if you can order everything from shoes to software online then why not closing papers? — instead the barriers involve conflicting interests and long-time legal standings.

As an example, the HUD has announced that it would accept electronic signatures for FHA loans “on third party documents included in the case binder for mortgage insurance endorsement.”

Okay, so what’s a third-party document?

“Third party documents, says HUD, “are those that are originated and signed outside of the mortgagee’s control, such as a sales contract. An indication of the electronic signature and date should be clearly visible when viewed electronically and in a paper copy of the electronically signed document. Mortgagees must employ the same level of care and due diligence with electronically signed documents that they would for paper documents with ‘wet’ or ink signatures.”

Notice that HUD does NOT include a number of core documents where electronic signatures are permissible. According to HUD, mortgage documents — including the mortgage note — must have regular signatures. Also, the HUD-1 and the sale agreement must be signed by humans.

The reason electronic signatures are not allowed for mortgage documents is that they were created by the lender are the lender is not a third party.

Barriers

Okay, why not allow electronic signatures for all real estate paperwork?

The reason is to assure with total certainty that the buyer and seller really and truly saw the documents they signed, had an opportunity to read them and that no one other than the buyer and the seller signed the HUD-1, the sale agreement or the mortgage note — the central papers of most real estate transactions.

Will this change in the future? Not soon. The reason is that many different parties to the transaction — the buyer, seller, closing agent, lender and others all want documents with original signatures. So while some paperwork can be done electronically, some cannot.

For the latest information speak with local brokers, attorneys and closing agents in your community.

Can We Have A Paperless Real Estate Closing? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Jacksonville attorney Chip Parker in the video below explains how the lack of a note can be used to prevent foreclosures in Florida and perhaps workout a loan modification. While his discussion applies to the rules in one state, the general concept may work in others. For specifics you’ll need to speak with a foreclosure defense attorney in your community — they may be interested in Parker’s comments and they may also want to see what we have regarding the famous Boyko missing note decision.

No Mortgage Note, No Foreclosure is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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At first this may seem unimportant. After all, when a home is financed doesn’t a lender own the loan? And if a borrower doesn’t pay shouldn’t the lender have a right to foreclose?

It turns out that the first question is not so simple. A large proportion of the institutions that we see as “lenders” don’t actually own the loans they make. Instead, they create loans and then sell them to issuers. The issuers package the loans to create mortgage-backed securities (MBS) and those securities are then sold to investors worldwide. The investors, in turn, are represented by a trustee.

That means, according to ruling by federal judge Christopher Boyko of the U.S. District Court in Ohio, that many foreclosures cannot proceed because the actual loan owners are not the lenders that originally issued the loans — even though the names of those original note holders continue to appear in official records.

Boyko 2007 Foreclosure Decision — Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227

Who Owns The Loan?

Before someone can lose their home in a foreclosure a plaintiff must prove that it’s actually the loan owner. In more than a dozen Ohio foreclosure cases Deutsche Bank said it owned various notes and mortgages. However, Boyko found in each case that the paperwork actually identified the original lenders as the loan owners and said nothing about Deutsche Bank.

The problem is that the original lenders who created the loans — the lenders listed as the loan owners in public records — were not seeking to foreclose. Instead, it was Deutsche Bank that was taking homeowners to court and Deutsche Bank, said Boyko, had no grounds to foreclose because it did not own the loans or have any authority to foreclose.

Given that borrowers make monthly payments and that the money ultimately goes to those who own the mortgages, the Boyko decision seems odd. Aren’t the loan owners the ones getting the monthly payments?

It used to be that if you wanted a mortgage you went to a local lender such as a savings & loan association or a commercial bank. The lender actually owned the loan.

The Secondary System

However, the system changed with the development of the “secondary” market. Now local lenders could sell their loans to investors around the country. Big institutions, such as Fannie Mae and Freddie Mac, would buy local loans, but only if those loans met certain standards. The loans that could readily be sold on the secondary market were called “conforming” mortgages because they conformed to the requirements established by Fannie Mae and Freddie Mac.

With the secondary system a local lender could make loans, sell those mortgages, replenish its capital with the money it got from selling, and then make more loans. More loans meant the lender could generate more fees and charges. More loans also meant more money was available for local loans, and that helped lubricate the local housing market.

Within the secondary market Fannie Mae, Freddie Mac and others would create securities backed by mortgages. Those securities would be sold to investors worldwide. The securities sold well because home mortgages were believed to represent little risk and because Fannie Mae and Freddie Mac made certain guarantees. Since Fannie Mae and Freddie Mac were “government-sponsored enterprises” that could borrow directly from the U.S. Treasury, many investors thought mortgage-backed securities were just about risk-free.

Fannie Mae and Freddie Mac are not the only ones packaging mortgages, however. Wall Street firms got into the act and began accepting loans that did not meet conforming loan standards — mortgages with little down, loans with “nontraditional” terms and supersized “jumbo” loans that neither Fannie Mae nor Freddie Mac would buy.

In the past few years it would not be uncommon for a lender to put up capital to fund a loan. The loan would be marketed to borrowers by a mortgage banker or a mortgage broker who, essentially, was a salesman for the lender. To borrowers, the mortgage broker or the mortgage banker was their “lender,” however that was not usually the case. Instead, the loan was typically sold by the original lender to an “issuer” and borrowers would make payments to a “servicer.”

The actual owner of the loan at this point was not the original lender, not the mortgage broker, not the mortgage banker nor the servicer or the issuer. Why? When the loan was sold to the issuer, the issuer took that one mortgage, packaged it with other loans, and created a private-label mortgage-backed security (MBS). In effect, the issuer sold the loan to the holders of the mortgage-backed security.

Equitable Interest

But those who invest in the MBS do not actually own the loan either. They have, perhaps, an “equitable interest” in the sense that they are entitled to interest from the mortgage payments and a return of their capital when the loan is sold, paid off or foreclosed.

However, it could be that a single loan might wind up in several loan pools, each with a different level of investor risk — more risk would hopefully produce a higher level of return. Or, it could be that a loan is in one pool today and another pool tomorrow.

In such circumstances, as lawyers might ask, who is the real party in interest, the party who actually owns the loan?

“This court acknowledges the right of banks, holding valid mortgages, to receive timely payments,” said Boyko. “And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes — seeking foreclosure on the property securing the notes. Yet, this court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary mortgage market, nor monetary or economic considerations of the parties, nor the convenience of the litigants supersede those obligations.”

In other words, a borrower can only be foreclosed when the actual owner of the loan goes to court. In the cases seen by Boyko, the paperwork said the loan owners were various banks, not the trustee for the owners of a mortgage-backed security.

What does it all mean?

First, the Boyko decision could be stayed or over-turned by higher courts. It may have no standing in other districts. It could also be voided with new laws from Congress.

While no one can predict how courts may rule, help for lenders, trustees and MBS investors from Washington is unlikely. The politics of the time — with an estimated two million homeowners facing foreclosure this year — make assistance from Capitol Hill improbable, regardless of PAC contributions.

Second, Judge Boyko asked a simple question: If a borrower fails to pay their mortgage then who is hurt? It’s not the original lender because they sold the loan. It’s not servicers because they do not have title to the mortgage. It may not be an individual trustee if a single mortgage has been used to support several mortgage-backed securities. Lastly, since mortgage-backed securities can be sold with electronic speed, it may not be the investor who held a stake in one particular MBS 10 minutes ago.

If the Boyko decision spreads to other districts and courtrooms, then issuers will have to tie specific loans to particular mortgage-backed securities. In the same way that real estate titles are recorded in official records, a similar system will be needed for loan documents. Such a system will support investor claims when borrowers default, but at the same time such a system will also prevent unjustified foreclosures and forfeitures.

“Given the huge stakes in this matter, everyone benefits by knowing who actually owns individual loans,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “There’s no doubt that some foreclosures can be avoided if only borrowers and loan owners communicated at the earliest possible moment. For such a situation to arise the name of the loan owner has to be disclosed in a way that’s easily accessible to borrowers, disclosure which is not common today.”

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Published originally by RealtyTrac.com during November 2007 and posted with permission.

Judge To Lenders: Show Me The Note is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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To make a balloon note we could keep the same loan amount and require that same monthly payment, but also cut the term of the loan. If the loan lasts five years, then the amount due at the end of the loan term would total a mere $93,610.81. Or, if the loan lasts seven years, then only $90,416.01 would be due.

For most people $90,000 or more is not pocket change. It’s big money and so at the end of the loan term, several things might happen.

• Uncle Wilbur dies and leaves you $90,000 and change.
• You refinance the loan at the rates and terms available in a few years.
• You live like a financial hermit, save money, eat beans, and pay the debt in full and on time.

Most of us can probably eliminate the Uncle Wilbur option, and an increase in the financial hermit population seems unlikely in a country with a minimal savings rate. This means the most likely way to avoid foreclosure is by refinancing the balloon payment.

But, alas, things don’t always work out as planned. What happens in five or seven years if rates rise but your income doesn’t and you no longer qualify for financing? Or, what happens if property values decline and lenders will not provide a loan big enough to cover the balloon payment?

At this point someone might mention that balloon financing is often available at somewhat lower rates than competing 15- or 30-year loan products. Freddie Mac points out that in a market where a typical 30-year loan is priced at 7.58 percent interest, a five-year balloon note might be available for 7.02 percent.

But interest is not the only cost faced by borrowers. There is a cost to close, and if you refinance there is likely to be a need for a new settlement, complete with title searches, surveys, tax payments, legal fees, and other expenses. While additional closings may not be “interest,” they are surely an expense which reduces checking account balances and personal wealth.

Some balloon programs allow borrowers to avoid refinancing costs, continue the loan and convert or re-set the loan’s interest rate. That may be a better deal than refinancing — if the new interest rate is competitive, if qualification standards allow for continuation, and if the lender does not have a right to unilaterally decline the loan. But why have a mortgage with so many future “ifs” when assured 30-year ARM financing is available?

For most people, balloon notes represent too much cost and too little security. The public understands such factors, the reason balloon notes represent a tiny part of the mortgage marketplace.

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Published originally by Realty Times on August 24, 1999 and posted with permission.

Savvy Consumers Deflate Balloon Note Options is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For example. You have a $50,000 loan at 8 percent interest. You make principal and interest payments on the schedule that would pay off the loan in 30 years. But, this is a five-year balloon note. At the end of five years you would owe $47,535.

Be aware that balloon notes are a wonderful way to go bankrupt or to be foreclosed if the amount due cannot be paid by savings, refinancing, selling, etc.

Because of the financial dangers they represent, short-term balloon notes — say those less than five to 10 years in length — should be avoided.

What’s A Balloon Note? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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