Yves Smith at naked Capitalism tells us of a case where Wells Fargo Bank (which acquired Wachovia 2 years ago), foreclosed and evicted a homeowner for failing to make payments. Then Wells sold the foreclosed house at auction to a new owner. Then Wells attempted to foreclose on the new owner for alleged failure to payoff the original first mortgage from the previous owner. How could this happen? It seems the mortgage Wells used to foreclose the first time was a second mortgage. Wells took the money from the auction sale and paid off the second mortgage without paying any money to the owner of the first mortgage, which has legal precedence. In fact, it didn’t even notify the owner of the first mortgage of the sale. It just took the money and ran. A gross violation of mortgage law. But it gets even more bizarre. Turns out Wells Fargo is also the servicer and the party leading the foreclosure effort on the first mortage.
How could this happen? Well, first off, this is the stuff that happens when mortgages (and transfers of mortgages) are not properly recorded publicly at the county and are instead kept in secret in bankers’-only databases like MERS. Second, it most likely amounts to attempted fraud and theft. See, Wells owned the second mortgage. House gets sold. Wells gets all it’s money back. But Wells Fargo is most likely only the servicer on the first mortgage. The first mortgage was most likely “securitized” and sold to the MBS trusts where ownership is by a host of bond holders. If Wells had sold the house and paid off the first mortgage, then the bond holders would have gotten their money back (as legally they should), Wells would only get a small fee, and Wells would be left with no money for the second mortgage. Wells Fargo most likely defrauded the bondholders. It’s Bankers FAIL again.
Yves Smith at Naked Capitalism tells the full story:
The Times has a completely different sort of account, with a headline that is remarkably blunt: “Avoid Foreclosure Market Until the Dust Settles.” This is the sort of article that gives industry lobbyists nightmares. And with good reason. It contains a horror story that is enough to scare lots of people who are thinking of buying properties out of foreclosure.
Just as the account of a man who had his house foreclosed upon when he has no mortgage persuade a lot of people that there could be real problems with foreclosures, this one illustrates how title has become a mess.
Todd Phelps and Paul Whitehead bought at a foreclosure auction. It turns out the lender who had seized the house was the second mortgage-holder; unbeknownst to them, the property had a large first mortgage outstanding, which meant it was now their obligation.
The buyers had asked their broker to check the records to make sure the title was clear; he appears not to have done so. The auction company would not refund their payment.
But the really nasty bit here is…both loans on the house were from the same bank, Wachovia, now part of Wells Fargo. The Times story does not draw out the implication: first, that the bank foreclosed on a second, rather than a first (is that a weird way to provide a data point to justify not writing all seconds down to zero? And the fact that the buyers were saddled with the first says, in effect, that Wells defrauded the first mortgage holders, presuming, as is likely, that the first mortgage was part of a securitization, as opposed to on Wells’ books. The proceeds of the foreclosure sale should have gone to the first lien holder, not the second.
The hapless buyers did get out whole; the inquiries of the reporter led Wells to reverse the deal. But anyone in that situation who didn’t get a big media outlet shining a bright light on the transaction would have been stuck. Caveat emptor indeed.