Lowell Deeds

Last week I wrote a post about In re Giroux, a Bankruptcy Court case (District of Massachusetts) in which the judge held that a second mortgage on which the acknowledgement clause was incomplete (”. . . then personally appeared ____ and acknowledged the foregoing . . .”) was improperly recorded by the registry of deeds. The court held that for a document to be recordable, the acknowledgement clause had to be complete. Since then, we have come across numerous already recorded documents that suffer from this same defect. An attorney also contacted me to say he had discovered two such documents in the chain of title of a property he was examining.

I’m not really sure how we at the registry should react to this case. Our attitude, and the attitude of the Deed Indexing Standards, has been to liberally interpret that acknowledgement - if there’s something there that looks like an aknowledgement by a notary public, we’ll take the document. But this case suggests we must set the threshold for recording much higher; that we should closely examine the acknowledgement clause of each document and, if there are any departures from the standard wording, we should not record the document. I suspect that this is not the last time I’ll be writing something about this case.

A recent decision by the United States Bankruptcy Court for Massachusetts dealt with the sufficiency of the acknowledgement of a mortgage. The case is In re Giroux, a May of 2009 decision and the alleged defect occured when the notary public failed to insert the borrower’s name into the notary clause (”Then personally appeared ______________ and acknowledged the foregoing to be his free act and deed”). The court held that even though the notary signed the notary clause which was located on the same page as the borrower’s signature, the absence of the borrower’s name in the middle of the clause invalidated the acknowledgement. Consequently, according to the court, the registry of deeds should not have recorded the document. Since the mortgage was therefore void, the lender was left as an unsecured creditor of the bankruptcy estate.

Ironically, the court cited the Massachusetts Deed Indexing Standards as support for its holding. The intent of the Indexing Standards was to be fairly liberal about what constitutes a sufficient acknowledgement, so the holding in this decision was certainly unexpected. Over the coming days, we’ll read the decision more closely, as well as the cases and statutes cited, to see whether it will alter our own standards for accepting documents for recording.

Last week I commented on a story about the new reality of appraisals – that more and more often current valuations of properties are jeopardizing deals because the appraisal comes back for less than the agreed upon price. Now, another hindrance to the recovery of the real estate market has arisen. Mortgage interest rates have increased and are at their highest since last November. While rates are still low by historic standards, the increased amount of interest tends to increase the monthly payments to an amount high enough to disrupt deals. As fears of inflation continue to grow, it’s likely that interest rates will stay high or get higher. Of course, if potential buyers adopt the view that interest rates will only rise, that might be enough motivation to jump into the market and cause an increase in sales.

A recent story in the Globe detailed the negative influence that appraisals are having on the real estate market. Many sales and refinancings have been scuttled when the appraisal comes back and values the property at less than the agreed sales price or the amount needed to pay off the existing mortgage. This is not necessarily a bad thing, and if it had happened more often during the irrational run up to the peak of the real estate bubble, perhaps the severity of the present economic crisis would have been averted or lessened. Nevertheless, judging the value of real estate is an art not a science, so when an property with a P&S for $225,000 has an appraisal come back at $220,000 and thereby blow up the deal, it would be understandably frustrating for all involved. A number of factors are contributing to make the business of appraising properties tougher than ever: The slow market yields few comparable sales; Many comparable sales are of properties owned by lenders who gained title through foreclosure and who heavily discount the resale price and thereby artificially drive down values of like properties. And appraisers are naturally wary of setting a current value which, in a steadily declining market, might seem overpriced in just a few months. While this new diligence in valuing property will be beneficial in the long run (assuming the cautionary impulse continues with the return of rising prices), in the short term, it certainly is contributing to the persistent slowness of the real estate market.

Robert Shiller, a Yale economists, suggests that US housing prices will continue to decline for a long time. He cites the bursting of the Japanese real estate bubble in 1991 and the resulting 15 straight years of declining prices as one example. In the most recent US experience, the bursting of the real estate bubble in 1990-91, it was not until 1997 that US home prices began to rise again. Shiller says that real estate does not follow the traditional rules of economics. In that universe, when the value of an asset declines, owners of the asset tend to sell quickly which allows the bottom of the market and the subsequent rebound to occur in relatively short order. Real estate doesn’t follow this curve for a couple of reasons. Most folks don’t own homes as speculative investments, so it’s an easy jump from home owner to home renter. That kind of switch brings massive lifestyle changes and occurs not for investment reasons, but usually as a result of severe economic stress. Consequently, most people who contemplate selling their home also plan to buy a replacement - they’re not “getting out of the market” like someone who was dumping all of their stock, for example. While a declining market favors home buyers, the home buyer is also a home seller and is thereby punished by that same market. This combination results on a type of paralysis that makes the effects of a declining market linger.

Sometimes I wonder if I live in a semi-state of confusion. This morning while imbibing my first cup of coffee I heard a news report that grab my attention…
(I paraphrase) According to 90% of the economist polled the recession will end by the end of this year.
Wow, what great news…how these economist know this is far beyond my elementary understanding of supply and demand. Needless to say, I finished my first cup of coffee with a huge smile on my face. The country is back!..But things changed rapidly during my second my second cup of coffee.
While sipping away I began reading the online version of the New York Times…
Here is the first headline I saw “U.S. Home Sales Remain Sluggish as Supply Soars”…
Hold on, this can’t be the case. I just read the opposite…remember 90% of the economist think the recession will be over in six months…
And more from the article “Sales of previously owned homes picked up last month, an industry group reported on Wednesday, as buyers went looking for bargains and lower –priced houses”.
What do you mean? Bargains? Lower priced houses? What about the end of the recession? …
Again from the article “But economists and housing specialists worry that foreclosures will continue to grow, swamping the market, as unemployment rises”…
these can’t be the same economist that think the recession is almost over…Or can they be?
Welcome to my semi-state of confusion.

A recent New York Times article described how the “third wave” of foreclosures was now arriving around the country, especially in regions that have sustained the highest increase in unemployment. The “first wave” were the riskiest subprime mortgages that failed almost immediately. The “second wave” were adjustable rate mortgages that had articificially low monthly payments for the first year or two but would then spike dramatically upward, a process that left many borrowers unable to keep up with the new, higher payments. This “third wave” is mostly prime mortgages, those granted to folks with the best credit. But as the rest of the economy stalls and these homeowners lose jobs or have overtime cut or fulltime positions shifted to parttime, many more homeowners are falling behind on their mortgage payments.

The foreclosure statistics here at Middlesex North do not yet show this trend. The number of foreclosure deeds recorded to date during this May (20 for entire district, 10 of which are for Lowell) is down dramatically from the same period in 2008 (60 for entire district, 37 of which were from Lowell). Hopefully this is a sign that the foreclosure crisis has hit bottom and not the calm before a rising unemployment driven surge in foreclosures.

In a past life I sold real estate… in those days the Multiple Listing Service was the Holy Grail of the business. Real Estate office managers taught agents to never, never give out an address to a phone inquiry about a property…rather, politely nudge the customer into making an appointment to see the property. Wow, have things changed since those days. Today the Internet gushes information out about every topic imaginable…including real estate. Sunday the New York Times ran an article about a couple that found their dream home by surfing the web. “Increasingly, virtual shopping especially during the early stages of looking for a home, is a major component in the real estate business. Buyers, sellers and agents are using social networking sites like YouTube and Facebook, online classifieds like Criagslist and enhanced real estate sites like Listingbook”. Agents are using the Internet and electronic devises like the Blackberry and iPhone to provide pictures, listing information, comparables and more to potential buyers. Of course, the MLS still exists and probably will for a long time, but today the name of the game in real estate is getting as much information to buyers as quickly as possible and in as many ways as possible. This I am sure is only the beginning.

The New York Times reports that the two month old Federal home loan modification program, designed to help homeowners avoid foreclosure, is only just getting off the ground. Two big stumbling blocks – how to deal with the many second mortgages out there and providing protection investor lawsuits against mortgage servicers who modify loans – have taken this much time to resolve. However, another factor that many deem critical – a provision that would allow Bankruptcy Court judges to reduce the amount of principal owed on mortgages – was recently defeated in the Senate and is no longer an option. The inability to reduce principal owed is a major obstacle to any recovery. More than 20% of the owners of single family homes in America owe more on their mortgages than their houses are worth. Even if their monthly payments are reduced through reduced interest rates or extending the term of the loan, any kind of disruption of income flowing into such a household sentences that family to foreclosure since they would be able to sell or refinance given their negative equity in the home.

Still, it is anticipated that up to 4 million American homeowners will be able to take advantage of this program. When it finally kicks into gear, we can expect a wave of refinancing to hit the registry and a resulting spike in our level of recording activity, a development that would be welcomed by everyone.

Today’s New York Times reports that regions of the country hit earliest and hardest by the collapse of the real estate market (Florida and California in particular) are showing the signs of a rebound in sales and prices. Of course, what passes for good news - “a period of price stagnation would boost spirits” - is still pretty pathetic. One interesting note was that the first indicator of a turnaround, or at least a slowing of the decline, is a drop in the number of foreclosures. If this is true, it’s good news for Lowell where the number of foreclosures seen in April 2009 was 46% less than the number seen last April.

Each month we compare the number of various documents recorded during that month with the same month during the prior year. Here’s what we found for April for the entire registry district:

Entire District

In April 2009, there were 383 deeds recorded, a 14% decline from the 447 recorded in April 2008.

In April 2009, there were 1374 mortgages recorded, a 14% increase from the 1206 recorded in April 2008.

In April 2009, there were 29 foreclosure deeds recorded, a 57% decline from the 67 recorded in April 2008.

Lowell

In April 2009, there were 106 deeds recorded, a 30% decline from the 151 recorded in April 2008.

In April 2009, there were 237 mortgages recorded, a 7% decline from the 254 recorded in April 2008

In April 2009, there were 20 foreclosure deeds recorded, a 46% decline from the 37 recorded in April 2008.

Several people have asked me what has happened to all the properties in Lowell that experienced foreclosure auctions during the past few years. In almost all cases, the buyer at the auction is also the foreclosing lender, so that entity becomes the owner of the property until it can be sold to a third party. Our initial investigation reveals that these properties take on average 29 weeks after the foreclosure to be resold and that the resale price is a startling 36% lower than the owner who lost the property to foreclosure paid for it in the first place. While the lenders selling these properties might have a variety of motives to discount the price and move the properties off their books quickly, such low sales prices will undoubtedly have a detrimental impact on non-distressed sales.

A decision issued by the Land Court on March 26, 2009 has thrown into question the quality of many property titles that were derived from recent foreclosures. This issue in the case, US Bank NA v Ibanez, was whether a Notice of Mortgagee’s Sale of Real Estate published and a subsequent auction conducted prior to the mortgage actually being assigned to the purported mortgagee conducting the foreclosure complied with G.L. c.244, s.14 and thus conveyed good title as a result of the foreclosure auction. The court ruled that where an assignment had not been executed prior to the first publication of the notice of mortgagee’s sale, the subsequent foreclosure auction was invalid. The court reasoned that given the potential difficulty in obtaining proper assignments in this world of the rapid transfer of mortgage loans amongst financial institutions, failure of the mortgagee to have actual possession of the assignment at the time the notice of sale was first published, and certainly when the auction occurred, would cause potential bidders to avoid participating in the sale or at least diminish their bid for the property, all to the detriment of the mortgagor’s interest (and subsequent liability for any deficiency). Given the turbulent nature of the mortgage industry over the past six years and the lack of diligence involved in executing and recording assignments, this decision could throw the validity of many foreclosed properties. Here’s an online copy of the Land Court’s decision.

A couple of cases decided last fall by the Bankruptcy Court for Massachusetts recently came to my attention. In both cases, lenders seeking to foreclose mortgages who had filed motions for relief from the automatic stay imposed when a debtor files bankruptcy had their motions denied because they (the lenders) could not prove to the court that they were the record holders of the mortgages sought to be foreclosed. Reading between the lines, it looks like the lenders adopted a position that essentially said “we’re in high finance and shouldn’t have to waste time with trivial documents like mortgage assignments” to which the Bankruptcy Court replied (and I’m paraphrasing) “don’t give us that high finance stuff; this is all about your sloppiness and lack of attention to important details.” Needless to say, the courts won out and the ability of the lenders to foreclose was thrown into question until the precise ownership record of the mortgages was established. Both of these cases are better described in these newsletters, one from Edwards Angell, the other from Crowell Moring.

An article in today’s Globe suggest that first time buyers are driving any revival of the long-sagging real estate market. Citing low interest rates, dropping prices, and a Federal income tax credit, the story lays out a compelling case that now is the time to buy a home. The problem is that such a window of opportunity is available almost exclusively to folks who don’t already own a home. Those who do tend to be encumbered by a mortgage obtained at a time when the home’s value was at its hyper-inflated peak and therefore lack sufficient equity to be able to refinance or sell under normal circumstances.