Weekend Economists Ring in the New! New Year 2015

[Demeter]

17. A New Mortgage Trap

http://takingnote.blogs.nytimes.com/2014/12/31/a-new-mortgage-trap/?_r=0

Attention state attorneys general: The mortgage industry may be about to make fools of you, and dupes of homebuyers whose legal rights you are supposed to protect.

In a $26 billion deal in 2012, five of the biggest banks settled with state and federal officials over allegations of widespread foreclosure abuse. The deal, along with other post-financial crisis reforms, was supposed to bring some order, fairness and transparency to the foreclosure process.

Mortgage lenders, however, may have figured out a way around all of that by changing the legal paperwork involved in buying a home.

Foreclosing on a mortgage in many states requires a lender to go to court and give the borrower a certain amount of notice. Not so with a deed of trust, which generally can be foreclosed upon without a court’s involvement or any oversight at all (with variations on that theme depending on state law). So instead of having borrowers sign mortgages when they take out home loans, some lenders are now having them sign deeds of trust.

The details of the shift are laid out by Nathalie Martin, a bankruptcy attorney and professor at the University of New Mexico School of Law, who contributes to the blog Credit Slips, a forum for bankruptcy experts.

It’s easy to see why banks and other players in the mortgage chain would want to avoid the courts in foreclosure cases and simply grab homes instead. It was the banks’ widespread violation of borrowers’ legal rights, which came to light in 2010, that led to the mortgage settlement in 2012 and subsequent reforms.

According to Professor Martin’s blog, the use of trust deeds instead of mortgages was first spotted by Karen Myers, the head of the Consumer Protection Division of the New Mexico Attorney General’s Office. When Ms. Myers investigated the new practice further, she found it had become widespread.

Lenders in New Mexico have insisted that using deeds of trust instead of mortgages will not affect borrowers’ rights in foreclosure, but the attorney general’s office in New Mexico disagrees. It has told 11 lenders in writing to stop marketing their wares as mortgages when they are actually deeds in trust. The letter calls the shift an attempt “to modify and abrogate the protections afforded a homeowner” by the courts and state consumer protection law.

Attorneys general around the country should now follow up with their own investigations.