by Ruth Lee
Last week’s news out of Massachusetts is illustrative of what is becoming the normal climate for our industry. Our first read of the story came on Friday, January 7 from American Banker reporters Kate Berry and Jeff Horwitz.
According to that article, the Massachusetts Supreme Judicial Court rejected claims by two major banking institutions that they did not need to prove themselves the authorized mortgage holders at the time each foreclosed on properties in that state. Ironically, or perhaps for the Court’s purposes symbolically, the foreclosures considered were executed on the same day in the summer of 2007.
HousingWire’s Jacob Gaffney this week aptly examined investor and analyst responses to the ruling. I’d recommend reading it.
Nonetheless, while we tend to agree that the impact of the Massachusetts ruling on the securitization industry is likely negligible, we see other facets of portent to it. Admittedly preferring to read the tea leaves versus just drinking the brew, we see guidance from the Massachusetts court that can benefit mortgage lenders of every description.
We see three distinct messages:
- States and their multi-state initiatives have teeth they are ready to use in 2011;
- Best-effort mortgage documentation is just not good enough; and
- Timeliness of lending protocols will be scrutinized.
First, this ruling by a state court steeped in the tradition of protecting its citizens’ rights is a much-needed reminder that our industry is regulated both at the state and Federal level. Mortgage lenders of every breed – banks, mortgage bankers (retail, wholesale and correspondent alike) and mortgage brokers – are bound by the laws and interpretations of the states in which they do business.
This is especially germane for multi-state lenders operating under a complex matrix of regulation and scrutiny. Beginning in 2011, as we’ve said before [Read Here], multi-state lenders are subject to coordinated cross-jurisdictional audits. The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) hammered out the Nationwide Cooperative Agreement for Mortgage Supervision (NCA). NCA includes eExams for compliance checks with HMDA, TILA, HOEPA, RESPA, plus relevant high-cost, anti-predatory and consumer credit mandates.
Second, the Massachusetts ruling tells us that documentation matters. Not merely “best effort” documentation, but accurate, complete and timely documentation. The distinction is important, even though to us it reeks of common sense, because it appears from the unfolding of the Massachusetts’ scenarios that both banks, when given the opportunity to rectify title record on the properties in question, produced plenty of documentation.
None of it met the court’s standards because the documentation was irrelevant to its request that clear proof of authority related to the mortgages be established. Since it is highly (we pray) unlikely that banks of sophistication and reputation would purposefully attempt to mislead or skirt the intent of the court, we deduce that these institutions did not comprehend the incompleteness and inadequacy of their documents. In other words, business as usual would appear to be sloppy documentation.
State courts do not approve.
My third and final takeaway from the Massachusetts salvo to the mortgage industry is that timeliness in executing mortgage lending, mortgage assignments, mortgage securitization, mortgage servicing and mortgage foreclosure protocols (and business process management) will be taken seriously by state courts. Authority to take actions related to mortgage loans will be based on timeliness.
Although it sounds ludicrous to the average Jane, it appears that neither the banks, nor the servicer used by both, saw anything prohibitive or unusual in the fact that clear title to foreclosed properties had not been established according to state law. This says volumes about how far off the mark our industry can be in understanding the judicial system’s perspective.
Heretofore, our industry has tolerated a loose interpretation of timeliness throughout mortgage origination to closing to post-closing, secondary marketing and securitization to servicing. Henceforth, if you read the Massachusetts ruling the way we are inclined to, timeliness and accuracy will make or break mortgage lending practices.
