Wednesday, July 20, 2011




The Free House Myth
posted by Katie Porter

As challenges to whether a “bank” (usually actually a securitized
trust) has the right to foreclose because it owns the note and
mortgage become more common, rumors swirl about the ability to use
such tactics to get a “free house.” There are a few instances of
consumer getting a free house, see here and here, for examples, but
these are extreme situations not premised on ownership, but on a more
fundamental flaw with the mortgage. In general, the idea that even a
successful ownership challenge will create a free house to the
borrower is an urban myth. I’ll explain why below, but there is a
policy point here. The myth of the free house drives policymakers to
complain about the moral hazard risks of holding mortgage companies to
the law and tries to set up homeowners who are paying their mortgages
against those who are not. It serves the banks’ political agenda to be
able to point to the “free house” as an obviously unacceptable
alternative of consumers winning legal challenges. It’s key then to
understand that the “free house” is largely a creature of consumers’
and banks’ over-active imaginations.
In sorting out why even a successful ownership challenge does not give
homeowners a free house, it is helpful to parse some key concepts. The
first one is standing, which is the right of a party to ask a court
for the relief it seeks. This comes in different flavors, including
constitutional standing, but in the foreclosure context, usually boils
down to whether the moving party is the “real party in interest.” In
re Veal, the recent decision from the 9th Circuit BAP authored by
Judge Bruce Markell, mentioned previously on Credit Slips , contains a
discussion of standing in the foreclosure context. At least in part,
the concern of the real party in interest doctrine is to make sure
that the plaintiff is the right person to get legal relief in order to
protect the defendant from a later action by the person truly entitled
to relief. Note that standing is a concept that only applies in court;
here that means in judicial foreclosures. In states that allow
non-judicial foreclosure, the issue is slightly different. Does the
party initiating the non-judicial foreclosure have the authority to do
so under the state statute authorizing the sale? For example, cases
such as In re Salazar discuss whether a recorded assignment of the
mortgage is needed, as opposed to an unrecorded assignment, to
initiate a foreclosure. Under either standing or statutory authority,
a “win” by the homeowner leads to the same result. The foreclosure
cannot proceed.
But this win is not the same as a free house. Just because a party
lacked standing or statutory authority does not mean that there is not
some party out there that does have the authority to foreclosure. Nor
does a win on standing mean that there cannot be action taken to give
the initial foreclosing party the authority that they need, which
might occur by transferring possession of the note or by executing a
series of assignments, to foreclose at a later date. Unless other
problems exist, there is still a valid note that obligates the
homeowner to pay money due and there is still a mortgage encumbering
the house. The homeowner does not get a free house. Rather, the
homeowner just doesn’t lose her house today to foreclosure. These are
pretty different outcomes!
This doesn’t mean that I think the standing/ownership issue is
inconsequential. For homeowners, a successful challenge that results
in the dismissal of a foreclosure can lead to a loan modification or
the delay itself can give the homeowner the time to find another
solution. For investors in mortgage-backed securities, the problems
with paperwork likely increase their loss severities in foreclosure,
both because of increased litigation costs and because of delay in
correcting problems. (And there may be even more serious problems for
investors relating to whether the transfers even succeeded in putting
the homes in the trust.) But we shouldn’t confuse these issues with
the idea that what is at stake in sorting out this mess is giving a
“free house” to some Americans, despite the lamentations of this
LaSalle Bank lawyer after a judge ruled that LaSalle as trustee lacked
standing to foreclose. A fruitful discussion of these issues needs to
begin with a clear understanding of the consequences of the problem,
as well as empirical evidence on how widespread these problems are.
The free house is political handwringing, not legal reality.
July 18, 2011 at 4:22 AM in 
Mortgage Debt & Home Equity
It’s certainly not a “free” house. I think it’ll be a nightmare for
homeowners who prevail in one of these actions to try and sell their
homes. Just because party X can’t foreclose doesn’t mean that there
isn’t a valid mortgage still on the property. No buyer is going to
want to buy (and no title insurer will want to insure) unless that
mortgage is paid off. And that means determining who is the mortgagee.
Adverse possession and/or quiet title actions might help solve some of
this, but they are not self-executing solutions. Homeowners will have
to go to court and litigate. That’s expensive and it takes time. So,
at best, these homeowners are getting not “free” houses but houses
with a severely depressed value.
Posted by: Adam Levitin | July 18, 2011 at 06:46 AM
The author skims the surface of the latte and finds after skimming the
surface there is no more cream. Duh.
The Banks are often appearing as trustees on behalf of NY Trusts most
of which died on or about 2008. If the trusts are dead than who has
the right to appear in court? Nemo est hires viventis. No one is the
heir of a living person and I would suggest, no one is the a trustee
able to act on behalf of a dead trust. If the paper was successfully
transferred to the trust, then perhaps the thousands of suckers who
bought a RMBS are the owners. But if the paper was never successfully
transferred, then the trusts and the trustees are certainly not the
owners with standing. The original lenders might be but after phony
documents have been created assigning the note and the mortgage to
dead trusts, how could they possibly have the right of ownership?
The “myth” of the free houses was created not by consumers “oy!!” but
by the very Banks who are picking up “free” houses every day by
pretending to be trustees acting on behalf of dead trusts or trusts
that never properly held the mortgages and notes. It is very much like
Ronald Reagan calling a nuclear submarine the Corpus Christie or
calling armed combatants “peacekeepers.” The “free house” was the
Orwellian double speak created by Bankers for Bankers and their
judicial minions and hand maidens have adopted their language very
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3 Responses

  1. If fraudsters pay other fraudsters for forged titles and then Fidelity National Title, as part of the scam issues title insurance why is the land registrars allowing them to record these forged deeds?
  2. Well i did not expect to get free houses, but to litigate a the matter where both parties are amicable with the solution. We know the banisters will always prevail. but as homeowners we have to get knowledgeable lawyers to litigate these matters
  3. “The Banks are often appearing as trustees on behalf of NY Trusts most of which died on or about 2008.”
    Can someone please explain this briefly and in ‘for dummy’ terms?

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