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Palm Coast Thursday, Jan. 27, 2011 8 years ago

No easy fix to foreclosures

by: Toby Tobin Contributing Writer

Nationally, distressed sales (lender-owned via foreclosure and short sales) represent about one-third of all existing home sales. In Flagler County, the percentage has ranged between 50% and 60% for two years; not surprising, given the level of speculative buying during the boom years when Flagler was the fastest growing county in the country two years in a row.

Our high unemployment rate doesn’t signal a rapid recovery, either. What should we expect in the upcoming year? To understand the answer, one has to understand the problem.

The lenders and investment banks are at the heart of the current mess. During the boom years, mortgages were initiated with little or no scrutiny. Originating lenders quickly sold their loans to Wall Street investment banks, where they were repackaged, sold and resold, often several times. Each transaction generated a fee for the banks. More transactions, more fees.

Silly old things like laws and regulations got in the way of the flood of paperwork. Actually endorsing each loan to the subsequent buyer and registering the endorsement with the local county clerk would have been too time consuming and expensive. There wouldn’t have been enough money left for fees.

To streamline the buying and selling process, banks created the Mortgage Electronic Registration System. MERS allowed financial institutions to buy and sell millions of mortgage loans electronically, without cumbersome paperwork or filing costs. As long as everything flowed uphill, there was no problem.

But when the toxic subprime loans began to default, parties that owned the mortgage loans began to foreclose. Then those pesky laws and regulations got in the way again. To foreclose, lenders and servicers must be able to prove they actually own the mortgage note with real endorsements, which MERS cannot provide.

The chain of title is at the heart of real estate law. MERS broke that chain.

Even if foreclosures are warranted, they should be done legally, but many lenders and foreclosure-mill law firms were caught doctoring documentation. The overloaded judicial system allowed many of these tainted foreclosures to be processed.

The cure could be as messy as the cause.

Already a few judges have sent a strong signal to lenders by awarding homes to owners, precluding any future action by the lenders. Increased scrutiny will slow things down and increase lenders’ foreclosing costs. Lenders will likely look more favorably toward short sales. It’s going to take a couple of years to move the load of distressed properties coming onto the market. At least Palm Coast’s quality of life continues to attract buyers.

TOBY TOBIN publishes real estate news at

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