Last week the Massachusetts Supreme Court struck a blow to U.S. Bancorp, Wells Fargo & Co. and all other large banks when it affirmed a lower court ruling invalidating two mortgage foreclosure sales because the banks could not prove that they actually owned the mortgages at the time of foreclosure.
As many of you know, last year the banking industry came under sharp criticism for the manner in which many of the nation’s largest banks were handling foreclosures. With the revelation that low-level bank employees called “robo signers” rubber-stamped hundreds of foreclosure affidavits a day without verifying a single sentence, an opportunity for delinquent homeowners to challenge their foreclosure was created.
This is exactly what occurred in Massachusetts wherein a few homeowners challenged the bank’s ability to foreclose on their home without showing that they held the mortgages at the time of foreclosure. (These banks were not the original mortgagees because they purchased the mortgages some time ago.)
What does this mean to the industry? Essentially, any action initiated by a bank or trust to foreclose on a mortgage will be void if the bank or trust has not obtained a mortgage assignment that gives it the lawful right to do so.
What I find interesting about this situation is that the larger banks appear to be more willing to work with homeowners in default. I speak to people on a monthly basis who have an underwater investment property. Many of these people let the property go and the banks, for the most part, show no interest in seeking a deficiency judgment (this assumes it is available to the banks). However, when dealing with smaller community banks that provide portfolio lending it is often a different story.
When looking for a real estate investment loan small community banks are easier to work with and appear more willing to lend. However, when investors hit a bump in the road, these banks are also more aggressive. This week I spoke with a new client who had been sued for a deficiency judgment after foreclosure on a first mortgage loan issued by a community bank. I knew immediately when the client mentioned deficiency judgment that we were dealing with a small community bank. (In some cases I have found that the aggressors are actually investor groups that have bought bank assets.) I assume the smaller local banks are more aggressive because they hold portfolio loans and they represent a significant percentage of their assets. No matter the reason, the smaller the mortgage lender the greater the borrower’s exposure to personal liability from a strategic mortgage defaults.
Thus, to protect your other investments from these unfortunate circumstances it is imperative that you utilize LLCs for asset protection. Consider the client I spoke to this week who had the following situation:
Thankfully for this individual, all of his real estate was protected by various LLCs. If the bank obtains a judgment against this person his other 2 LLCs will be protected from the creditor bank. For the reasons I mentioned in last week’s post regarding “charging order protections”, the creditor bank can not take the other LLCs or levy on their assets. Had this individual delayed in creating his LLCs, then all bets would be off and any planning post notice of deficiency judgment could most likely be set aside as a fraudulent conveyance.
The lesson of this post is to plan early because you never know what life might throw at you and any delay is at your own peril.