Arizona may become the first state to require lenders to prove they have the right to foreclose by providing a complete list of any previous owners of the mortgage, under a bill passed yesterday by its Senate.
The legislation, which is headed to the House after being approved 28-2 in the Republican-dominated Senate, would allow foreclosure sales to be voided if lenders that didn’t originate the loan can’t produce the full chain of title. Arizona permits nonjudicial foreclosures, meaning property can be seized from the homeowner without a court order.
Lawmakers in states including New York, Oregon and Virginia also have proposed legislation to address concerns among consumer advocates that lenders or mortgage servicers are using incomplete or false paperwork to repossess properties in default. The attorneys general of all 50 states are jointly investigating how the mortgage-servicing industry operates.
“If you foreclose on somebody you should have to tell them who owns the property,” Michele Reagan, who sponsored Senate Bill 1259, said in a telephone interview. “People have the right in this country to face their accusers.” The Republican lawmaker is in litigation with her mortgage servicer, which she said won’t identify the owner of the loan.
The bill is opposed by the Arizona Bankers Association; the Arizona Trustees Association, which represents the trustees that conduct foreclosure auctions on behalf of lenders; and Merscorp Inc., an industry-owned company that operates a database with more than half of all U.S. mortgages. Matthew Benson, a spokesman for Arizona Governor Jan Brewer, a Republican, said she doesn’t comment on legislation until it reaches her desk.
The bill would require lenders to provide a document attached to the notice of foreclosure sale with the name and address of every beneficial owner of the deed of trust in chronological order, along with the date, recordation number and a description of the instrument that “conveyed the interest of each beneficiary.”
Anyone with an interest in the property could file an action to void the sale for failure to comply and be entitled to an award of attorney fees and damages, according to the bill, which wouldn’t affect past foreclosures.
“If Arizona passes this, it will be the only state in the union that will require a production of chain of title,” said Paul Hickman, chief executive officer of the Arizona Bankers Association in Phoenix. “States that pass these types of laws will be riskier environments to lend in and more difficult environments to get a loan in.”
Arizona had a foreclosure filing rate of one in 175 households in January, the second-highest among states, according to RealtyTrac Inc., an Irvine, California-based seller of real estate data. Nationally, a record share of mortgages were in the foreclosure process at the end of 2010 as lenders such as Bank of America Corp. and JPMorgan Chase & Co. temporarily delayed seizures to review allegedly improper documents. The state attorneys general and federal regulators are investigating the practice of using assembly lines of employees to sign thousands of affidavits and other documents without reading them, a practice known as robo-signing.
The Arizona proposal was suggested to Reagan by her attorney, Beth Findsen, who said she also helped write the bill. Reagan and her husband, David Gulino, were sued by their servicer, Fort Worth, Texas-based Colonial Savings FA, after they told the bank in a July 2009 letter that they were rescinding the loan because it failed to disclose certain fees and that its underwriter inflated their income by 12 percent in violation of the federal Truth in Lending Act.
Colonial Savings asked the court to declare that the couple isn’t entitled to revoke the loan. Reagan and Gulino filed their own suit, arguing that they were steered to an adjustable-rate mortgage they didn’t need and that Colonial Savings won’t tell them who owns their loan. Janet Walter, a spokeswoman for Colonial Savings, declined to comment.
“It makes Michele mad that the bank servicers will not disclose to a borrower the true noteholders,” Findsen said. “She was taken aback that such basic information was not readily available.”
Reagan’s bill has both technical and conceptual problems, and could add to uncertainty over title in the state, said Richard Chambliss, president of the Arizona Trustees Association in Phoenix.
Lenders that don’t file mortgage assignments with county recorders offices could face borrower challenges if the bill passes, even though the assignments weren’t required by state law, Chambliss said. Banks using Reston, Virginia-based Merscorp’s database typically don’t file assignments because the ownership information is supposed be tracked electronically.
The trustees association has suggested an amendment to the bill that would instead require the owner to certify to the trustee that it has the legal right to foreclose. Under the amendment, which wasn’t taken up by the Senate, the lender could face perjury charges if the certification is found to be false.
“Is this bill intended to punish the lenders and screw up the process or address the problem that needs to be solved?” Chambliss said. “What is it accomplishing by requiring that the history from the birth of the deed of trust to 20 assignments down the road have to be fully identified?”
About two thirds of mortgages originated in the previous decade were bundled into securitized trusts and sold to investors. Loans were typically sold at least three times, and often many more, before reaching the trust.
The Arizona legislation would make it easier for borrowers to negotiate loan workouts, said Walter E. Moak, a bankruptcy attorney in Chandler, Arizona. Servicers often reject modification requests because the borrower doesn’t meet investor guidelines, even as they refuse to identify the investors, Moak said.
“The person who has decision-making power is not the servicer, it’s the investors,” he said.
Christopher L. Peterson, a law professor at the University of Utah in Salt Lake City, said the legislation will test the completeness and accuracy of bank records. The law could also have the unintended consequence of pushing more lenders to modify loans rather than face a voided sale.
“I like it because it forces the financial institution into providing information about who owns loans and rebuild transparency,” Peterson said. “It makes it significantly more difficult to foreclose if they don’t have good records of the history of ownership of the loan.”