Understanding the Mortgage Process
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 financed real estate transactions in the paragraphs that follow.
If you or someone you know is facing foreclosure, the 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 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 only by the borrower. There is also a mortgage that is signed by the borrower, anyone who has a legal interest in the property, two witnesses, and a notary. The note serves as documentation of a borrower’s specific promise to repay the money lent. 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," it still may be transferred but the process is different. In some instances, non-negotiable instruments may not be transferred.
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 "U" can go to court and take my 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.
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. Some closings show an original lender as one entity, even though the money is really coming from another. This is called "table funding" and it is done for a number of different reasons.
In many instances, notes and mortgages are “securitized.” This is a process in which notes and mortgages are bundled together into a trust or other investment "vehicle." Mortgage-backed securities ("MBS") represent shares of ownership of the notes and mortgages in those "vehicles." The shares 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, so they can loan out more money to more borrowers. This enable lenders to make more money. This process continues today, not just for mortgages but for all kinds of consumer transactions. Even utility payments and rents can be securitized. This paradigm was a major part of the "mortgage foreclosure crisis" that is still affecting so many. But for the bailouts, the crisis would have destroyed our economic system as we know it. But securitization continues.
Another reason for mortgage securitization involves taxes. If REMICs are drawn up properly, they are tax exempt. Investors only pay taxes on their individual gains. The REMIC does not pay any tax.
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 transfers into a REMIC were not done properly — such that it cannot be declared a “true sale” — those mortgages and resulting securities could still be considered assets of the original lender. Or, they could be subject to the bankruptcy estate's claims. In the event that original lender filed for bankruptcy, those assets could then be sold by the bankruptcy trustee for the benefit of the bankruptcy estate and its creditors. So, it is extremely important for investors that a REMIC be properly formed and that all transfers of assets be the result of a "true sale." If set up right, a originating lender can go bankrupt, as has very often been the case in recent years, and the assets of the trust will remain "bankruptcy remote." This means that bankruptcy trustees cannot sue investors and the trust, in what is known as a "claw back suit" to take away the mortgages and securities. For these reasons, 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. Often times bank rely on the documents that form the REMIC to prove their case. This often consists of a "pooling and servicing agreement" and a "mortgage loan schedule." If the documents that the bank uses to make its claim do not support that claim, the foreclosure will be denied. These documents can consist of thousands of pages. Discovering problems within those pages is not easy. But, we are extremely experienced in finding issues and when found, those issues can create leverage to strike a fair deal to resolve your mortgage problems.
The information provided 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 consultation at 855-55-ROSEN or through our online form.
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