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Foreclosure News: Who Gets to Decide Whether a State is a Judicial Foreclosure State or a Non-Judicial Foreclosure State, Legislatures or the Mortgage Industry?

posted by Nathalie Martin

Apparently some mortgage lenders feel they can make this change unilaterally. Big changes are afoot in the process of granting a home mortgage, which could have a significant impact on a homeowner’s ability to fight foreclosure. In many states in the Unites States (including but not limited to Connecticut, Delaware, Florida, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South Dakota, Vermont and Wisconsin), a lender must go to court and give the borrower a certain amount of notice before foreclosing on his or her home. Now the mortgage industry is quickly and quietly trying to change this, hoping no one will notice. The goal seems to be to avoid those annoying court processes and go right for the home without foreclosure procedures. This change is being attempted by some lenders simply by asking borrowers to sign deeds of trust rather than mortgages from now on.

Not long ago, Karen Myers, the head of the Consumer Protection Division of the New Mexico Attorney General’s Office, started noticing that some consumers were being given deeds of trust to sign rather than mortgages when obtaining a home loan. She wondered why this was being done and also how this change would affect consumers’ rights in foreclosure. When she asked lenders how this change in the instrument being signed would affect a consumer’s legal rights, she was told that the practice of having consumers sign deeds of trust rather than mortgages would not affect consumers’ rights in foreclosure at all. Being skeptical, she and others in her division dug further into this newfound practice to see if it was widespread or just a rare occurrence in the world of mortgage lending. Sure enough, mortgages had all but disappeared, being replaced with a deed of trust.

As a general matter, depending on the law in a state, a deed of trust can be foreclosed without a court’s involvement or any oversight at all. More specifically, the differences between judicial and non-judicial foreclosures are explained here in the four page document generated by the Mortgage Bankers’ Association.  It is not totally clear whether this change will affect the legal rights of borrowers in all judicial foreclosure states, but AGs around the country should start looking into this question. Lenders here in New Mexico insist that this change in practice will not affect substantive rights but if not, why the change?  The legal framework is vague and described briefly here.

Eleven lenders in New Mexico have been notified by the AG’s Office to stop marketing products as mortgages when, in fact, they are deeds of trust, according to Meyers and fellow Assistant Attorney General David Kramer. As a letter to lenders says: “It is apparent … that the wholesale use of deeds of trusts in lieu of mortgage instruments to secure home loans is intended to modify and abrogate the protections afforded a homeowner by the judicial foreclosure process and the [New Mexico] Home Loan Protection Act.”

 

Comments

It appears the lenders are already setting themselves up with ease-of-theft option already factored in for Housing Crisis Deux.

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