Foreclosure Defense Attorney
How the Mortgage Process Works
It’s important to understand how the mortgage and real estate lending process functions in order to gain a better grasp of the potential defenses a homeowner might have in a foreclosure action. To help you with that process, we have compiled an overview of real estate transactions that involve financing in the paragraphs that follow.
If you or someone you know is facing foreclosure, the South Florida foreclosure defense attorneys at the Law Offices of Evan M. Rosen, can help. You are welcome to read more below about the mortgage process. However, for a FREE CONSULTATION with one of our experienced foreclosure defense attorneys, call us at 855-55-ROSEN or fill out our online form.
In all Florida real estate transactions that involve a loan, there is a note, which is signed by only the borrower, and a mortgage, that is signed by the borrower, two witnesses and is notarized. The note serves as documentation of the borrower’s specific promise to repay the sum loaned. It provides certain details, such as the interest rate, how long the repayment period lasts, where payments must be sent and what will happen if payments are late. Because anyone who signs a note could be legally responsible for the payment under its terms, no witness or notary will ever sign a note, only the borrower. Notes are supposed to be unconditional promises to pay, which makes them “negotiable instruments.” A true negotiable instrument can be freely transferred among other parties as long as certain legal requirements for “negotiation” are met. If a note is not a “negotiable instrument” any attempts to transfer without an agreement from all parties involved is invalid.
A mortgage is the collateral or security interest in which the buyer agrees to pledge the property as security for the loan. This allows the lender to foreclose if the buyer does not fulfill his or her obligations under the mortgage or the note. Mortgages typically contain a number of clauses that usually include provisions requiring the borrower to pay the taxes, maintain insurance, and keep the property in good condition. It also usually details what will happen if there is an early “pre-payment” or if the borrower fails to make payments, which is known as default.
Simply put, a note is an I.O.U. and a mortgage is a legal promise that says if “I,” the borrower, don’t pay “U,” the lender, then the lender can go to court and foreclose on the property. A mortgage is recorded in the county recorder’s office, but a note is not.
In terms of how the lender’s interest is applied to the subject property, Florida is a “lien theory” state. Most states fall into one of three categories — lien theory, title theory or intermediate theory. In lien theory states such as Florida, the lender acquires a “lien” or a security interest on the subject property. In states that operate under the title theory, the lender actually holds legal title to the property until the debt is paid off, while the borrower gets the right to possess the property. Under the intermediate theory, the borrower gets title to the property, but the lender does not have to go through a difficult foreclosure process to regain title if the borrower defaults.
Securitization of Mortgages and Secondary Markets
Notes and the related mortgages are frequently sold and resold on a secondary mortgage market. Such sales occasionally take place within minutes after the closing. In some instances, notes and mortgages will be “securitized” — a process where notes and mortgages are bundled together into a trust or other vehicle. Mortgage-backed securities (MBS) represent shares of ownership of the notes and mortgages. They are sold to investors either privately, or publicly on Wall Street. The trusts, if properly formed are classified as a specific legal entity known as a Real Estate Mortgage Investment Conduit (REMIC).
Mortgages are made into securities or REMICs for several reasons. One is that it gives lenders a way to sell their loans for cash, which they can then loan out again to more borrowers, which in turn allows the lender to make more money. This process continues today, not just for mortgages but for all kinds of consumer transactions, even though it was a major cause of the recent economic upheaval that, but for the bailouts, would have destroyed our economy and financial institutions as we know it. Another reason for mortgage securitization involves taxes. If REMICs are drawn up properly, they are tax exempt leaving only investors to pay taxes on their individual gains. A third reason is that the investors can become “bankruptcy remote” through the numerous complex transfers that are required in REMICs. In most situations, a corporation’s assets are subject to be sold if the corporation files for bankruptcy. If mortgage transfer into a REMIC was not done properly such that is cannot be declared a “true sale”, those mortgages and resulting securities would still be considered assets of the original lender, in the event that original lender filed for bankruptcy and those assets could then be sold by the trustee for the benefit of the bankruptcy estate and its creditors. So it is all the more important for investors and the trust seeking to foreclose on a property that the REMIC was formed properly so that if a originating lender goes bankrupt, as has very often been the case in recent years, the trust and investors do not have their mortgages and securities taken away from them by the trustee and sold in what’s known as a “claw back” lawsuit. Therefore, REMIC’s became extremely important for investors who wanted to invest in mortgages without having to be concerned with whether or not the originating lender became insolvent. We have developed a chart that provides a more in-depth explanation of how securitization is supposed to work.
These and other key issues surrounding why and how REMIC’s are properly created requires a dedicated foreclosure defense attorney to analyze numerous issues surrounding the formation of the trust. If any of the key provisions were not followed, the trust by its own agreement is invalid or the improperly transferred mortgage is declared not to be part of the trust. If the trust is also the plaintiff seeking to foreclose, this can make for very powerful foreclosure defense leverage in your case.
Contact Our Florida Foreclosure Defense Attorneys Today
The information provided above is intended to be an overview to help you understand how the mortgage process works and some of the resulting defenses that might be available depending on your specific situation.
To find out more about mortgages and foreclosures or to inquire about how our Florida foreclosure defense attorneys can help, contact us today for a FREE CONSULTATION at 855-55-ROSEN or through our online form.
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