I caught sight of an interesting post on the Credit Slips blog earlier today. Law professor Nathalie Martin of the University of New Mexico reports that some lenders in her state may be trying to find a way out of the state’s strict judicial foreclosure laws.
The upshot is, she’s saying that some lenders in New Mexico have been having borrowers sign “deeds of trust” instead of traditional mortgages and the AG out there is looking into it. New Mexico is also a judicial state, like Connecticut. It appears that by using a deed of trust as your instrument instead of a mortgage you may be able to get around some of the usual judicial foreclosure requirements, though this has yet to be put to the test.
The lenders involved have apparently told the AG that the change in instrument wouldn’t affect consumer’s rights, but one wonders then why they’d bother changing to deeds of trust in the first place if they didn’t see some advantage in doing so.
I confess I’m not yet clear on how a deed of trust gives you a get-out-of-court free card — it appears that there are some important differences in how the sales itself works depending on which instrument you use. It may be as simple as the fact that state foreclosure laws are written as applying to mortgages, and not deeds of trust — e.g., law says if you want to foreclose on a mortgage, you have to do x, y, z and q; but deeds of trust may be handled like any other contract without involving the court system.
That’s going to have to be a question for my lawyer friends out there — have you ever heard of anyone using a “deed in trust” instead of a mortgage in Connecticut? Are there certain types of real estate loan or other type of loan where they’re the go-to as opposed to a mortgage — commercial transactions or something? Worth looking into further.
If there’s one thing that’s been made clear after the whole housing crash, it’s that the current judicial foreclosure systems is extremely inefficient — Connecticut has some of the longest foreclosure timelines in the country, with it typically taking more than a year to complete a foreclosure, and I’ve heard of cases from attorneys that took upwards of three or four years. It’s no wonder that lenders might want to find a way out.
On the other hand, finding clever legal loopholes which allow large banks to do an end run around state law requirements is how we got stuff like MERS, the robosigning scandal, and years and years of appeals court cases which to eventually come to the conclusion that, on the whole, banks should probably make sure they owned the mortgage before they try toforeclose on a house.
