About Me 0098: foreclosure investing

In a decision that jeopardizes potentially thousands of completed foreclosures in Massachusetts, the state's Supreme Judicial Court affirmed the fundamental and long-established idea that a bank must own the mortgage it's foreclosing on before it forecloses. In this case, because both Wells Fargo (WFC) and US Bancorp (USB) could not prove they owned the mortgages when they foreclosed on two homes, the court held that the foreclosures did not give the banks clear title to the properties.

Moreover, since the legal principles involved were so well established, the court refused to limit its ruling to future foreclosures only. That means all completed foreclosures that had similar flaws also failed to give good title.

How many is that? It'll take a while to figure out, but for the reasons below, it may include any foreclosure of a Massachusetts mortgage securitized in the last several years, which would be thousands. The only sure thing right now is that Massachusetts real estate ownership is a mess, and title companies that have insured the sales of foreclosed properties in Massachusetts might see a flood of claims.

Investors were quick to react: In afternoon trading, the S&P 500's financial sector was off 1.8% vs. a decline of 0.9% for the broader index. In addition to Wells (down nearly 4%) and US Bancorp (down 1.5%) , the biggest losers were JPMorgan Chase (JPM), Travelers (TRV) and Bank of America (BAC).

Banks Couldn't Prove Ownership of Mortgages

As "proof" of their ownership, the banks gave the court three types of unacceptable evidence: documents dated after the foreclosure was done that claimed to transfer the mortgage to the foreclosing bank (something that has been done nationally); a very incomplete set of documents from the securitization of the mortgages that purportedly gave the mortgages to the securitization trust (something that I've heard of happening elsewhere); and assignments of the mortgages "in blank," that is, not naming the person the documents were assigned to.

The court rejected the idea that a mortgage could be foreclosed on first and acquired by the foreclosing bank second. That ruling alone jeopardizes thousands of foreclosures because apparently this was standard practice in Massachusetts. The court also explained why the incomplete securitization docs were insufficient. For example, the banks submitted unsigned copies of key contracts, failed to submit other relevant contracts and generally omitted the attachments to those contracts that would prove the mortgages were governed by those contracts even if the contracts had been signed and otherwise complete.

This failure to submit key documents seems inexplicable -- unless the banks really don't have them -- because at the initial trial the judge allowed the banks a special, extra opportunity to submit the documents.

Assignments "In Blank" Don't Cut It

But perhaps this difficulty in getting complete signed copies of all the deal documents for the securitizations at issue is relatively limited. That is, each securitization deal theoretically is memorialized in a "closing set," binders holding complete sets of all the deal contracts, which are hiding out in law firms' record departments.

James Altucher is a columnist for DailyFinance. He writes for The Wall Street Journal, was the founder of StockPickr, and formerly wrote and appeared in videos at TheStreet.com. He is the author of numerous investment books, including Trade Like A Hedge Fund and Trade Like Warren Buffett.

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Thursday, January 13, 2011

foreclosure investing

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