The Supreme Court of Massachusetts upheld a ruling of a lower court, siding with the homeowners that financial institutions Wells Fargo and U.S. Bancorp did not have the proper documents to foreclose on the homes.
The missing paperwork in question is the “note” to the loan. The “note” is to the mortgage what the “pink sheet” is to the car. It is proof of ownership to that debt. One might ask why a financial institution would miss this crucial document that was signed by the homeowner when the mortgage was taken out to finance the home purchase or refinance an existing loan at better terms. The answer to that question lies in the complexity of the mortgage securitization process and the fact that loans have been bundled and sold to investors numerous times. In the process financial institutions have lost track, or at the very least, temporarily misplaced some of those crucial documents. Despite not receiving payments from the homeowners, the court has ruled that without the “note”, the financial institutions have no right to foreclose and those foreclosures should be void.
While we do not disagree with the court that the foreclosing entities should have proof of ownership over the financial debt, the inability to present the notes is another crisis in the making. Since the MA Supreme Court has ruled against the financial institutions, it will provide incentive for millions of homeowners across the Nation to halt their foreclosures in an attempt to delay the inevitable or reverse the foreclosure altogether.
How will this affect the Real Estate market?
Contributors to various blogs already suggest individuals stop making payments with the hope that the owner of their mortgage lost documentation of ownership for that debt. There’s no doubt that this ruling will delay existing foreclosure proceedings and consequently further skew the demand-supply variables of real estate economics. The change in accounting regulations from mark-to-market to mark-to-bubble already manipulates these variables as financial institutions opt to not foreclose on delinquent loans in order to avoid realizing losses across their entire mortgage portfolio. The addition of this ruling further eliminates foreclosures and acts as another artificial mean to support home prices. The Massachusetts Court ruled against the banks but the outcome might very well serve the interest of the banks’ inflated balance sheet.