The Libertarian candidate for governor of Arizona, in response to a question by the editors of the Arizona Republic, said when asked what he would do to “help reignite Arizona’s economy,” that he would “immediately declare a moratorium on foreclosures and move to settle property claims by demanding strict adherence to chain-of-title laws and awarding clear title to Arizona homeowners where ‘lenders’ have evaded county filing fees by ‘registering’ titles out of state.”
If your reaction to that last part was, “huh?” you aren’t alone. That was my reaction, and I’ve been dealing with foreclosures and distressed property titles for my entire career. With a little help from my colleague Dick Yetwin, I realized that what the candidate was referring to is the practice, now widespread among residential mortgage lenders, of assigning the lender’s ownership of an individual home loan to the Mortgage Electronic Registration System (“MERS”), then selling that loan or pieces of it, along with hundreds or thousands of others, to investors in the form of the dreaded “mortgage-backed securities” there has been so much talk about. (I have just greatly over-simplified a very complex process, but I don’t have the space here, or the knowledge, to explain the intricacies of it).
I may not know all the ins and outs of it, but I can say that the candidate’s statement tells me that he didn’t know what he was talking about at all. Evading county filing fees is not the reason that MERS was created. Every mortgage (or deed of trust in Arizona) is recorded with the county recorder and names the lender who owns the loan. MERS was created by the lenders as part of a mechanism to allow large bundles of home mortgages to be “securitized” and sold to investors without having to record an assignment of each individual loan every time one of those securities is bought and sold. Whether that was good or bad, I can’t say, but I’m pretty certain that avoiding the $9 recording fee charged by the county recorder for recording an assignment of a mortgage or deed of trust was not the motive for creating MERS or the mortgage-backed securities that MERS facilitates.
So, what the candidate was really suggesting, I think, is this: if a lender has recorded a residential mortgage or deed of trust, or an assignment of a mortgage or deed of trust, naming MERS as the owner or beneficiary of the loan (I still don’t know what he was talking about when he referred to “registering titles out of state”) then the homeowner (also known as the borrower) should be” award[ed] clear title.” In other words, the borrower now GETS A FREE HOUSE.
What a great idea, eh? If your home mortgage lender used MERS, even though you had nothing to do with it (and probably didn’t really even know it was happening), your mortgage payments are over! Free houses for everyone!
But wait, what about the investors who bought those dreaded mortgage-backed securities? Well, their investments, totaling trillions of dollars, would have just disappeared, vaporized by governmental fiat. This would cause, instantaneously, a complete collapse of home mortgage lending as it is currently done in this country.
What is that going to do to the availability, and cost, of home mortgages? They might get just a little more expensive, and a little harder to obtain, don’t you think? Or maybe they would be prohibitively expensive and virtually impossible to obtain.
What will that, in turn, do to home values? Think the number of potential home buyers might drop just a bit, causing prices to sink even more, now that paying the entire purchase price in cash is going to be just about the only way to buy a house?
Perhaps I’m exaggerating, but not by too much. Why is it that people who think of these brilliant solutions to complex problems never recognize the unintended consequences? Like many other efforts to “protect the little guy,” this one would end up doing more harm than good, unless you think that a massive shift away from owner-occupied housing to rental housing is the way to “reignite” the economy.
IF YOU’VE HAD A FORECLOSURE, IS THE FORGIVEN DEBT TAXABLE INCOME?
It’s an obscure concept, and probably not one that most people need to worry about, but it is coming up fairly frequently these days: when a debt is forgiven or discharged, the debtor may have to report the amount of debt that was forgiven or discharged as income. So, to use a simple example, if a creditor decides to forgive a debt you owe them, the amount of the debt that is forgiven can be considered taxable income to you, the borrower. If there is collateral for the loan (such as a house) and that collateral is sold, the amount of debt forgiven is the difference between the amount of the debt and the value of the collateral.
The context in which this question is coming up these days is mortgage foreclosures and short sales. When a house is sold in a foreclosure or a short sale, the difference between the debt and the sale price of the house is considered a forgiven debt. The good news is that recent federal law keeps in place an income tax exclusion for forgiven debt of up to $2 million on a taxpayer’s main home (“qualified principal residence indebtedness”). That exclusion was set to expire at the end of 2009, but has been extended to the end of 2012.
This is a tricky area, so please seek expert advice if you think you might have a taxable forgiven debt (and if you get a form 1099-C from a lender, make sure you show it to your tax adviser). If you want to learn more, read IRS Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.