Toward a More Equitable Balance : Homeowner and Purchaser Tensions in Non-Judicial Foreclosure States

We are now facing the fifth year of the fallout from the subprime mortgage meltdown. The economic crisis gripping the United States began when large numbers of homeowners defaulted on poorly underwritten subprime mortgage loans. Through securitization, the process of utilizing mortgage loans to back investment instruments, Wall Street funded subprime originations in excess of $480 billion in each of the peak years — 2005 and 2006, thereby fueling the potential hazards should the underlying loans tank.There is growing evidence that the parties to securitization deals handle and transfer the legally important documents that secure the resulting investments — the loan notes and mortgages — in a careless and, at times, fraudulent manner. Consequently, the foreclosing parties frequently do not possess the right to foreclose and the resulting sales may be unlawful. Defective sales harm homeowners when they lose their homes to the wrong party. Moreover, they could use the extra time afforded by a delayed or jettisoned foreclosure to find another solution, such as a loan modification or short sale. Wrongful foreclosures affect another important group, the purchasers. If title to the property is flawed as a result, those parties potentially buy nothing and can transfer nothing. Clear title to real property in the United States may be in jeopardy. The problem is most acute in non-judicial foreclosure states because doctrines of finality do not apply and state law may permit post-sale challenges.In another article, Property Title Trouble in Non-Judicial Foreclosure States: The Ibanez Time Bomb?, 4 Wm. & Mary Bus. L. Rev. (2013) (forthcoming), available at http://ssrn.com/abstract=1968504, I analyzed recent decisions from the Massachusetts Supreme Judicial Court in which the court voided sales where the foreclosing party did not possess a valid assignment of the mortgage. I summarized the foreclosure law of Massachusetts and compared it to the law in four other non-judicial foreclosure states to assess whether these opinions might be persuasive to courts in those states. I then drew conclusions as to the probability of post-sale title defects and challenges to title that purchasers could face.In this article, I continue that discussion by exploring the rights and interests of homeowners and purchasers. I suggest specific legislative solutions that more evenly balance the interests of homeowners, purchasers, and the property recordation system