Thinking About Closings

by Fred Cederholm
The mortgage processing system is broken. Many delinquent homeowners are taking advantage of the mess and living extended periods of time in the would-be foreclosed properties without paying a dime.

I’ve been thinking about closings. Actually I’ve been thinking about the housing mess, due diligence, the paperwork, “perfection,” mortgages, passing the BUCK(s), and the lengthening foreclosure timeframes. The US housing crisis is still with us. Homes are not selling. Many are NOT even being placed on the market. The inventories of unsold housing stock are growing by far much more than we TH*NK because we have NOT been told the whole story. I am NOT certain the story can be fully told to us at this point in time because the policy makers don’t even understand the breadth and depth of the problem. The normal rules of supply and demand in determining the price of homes no longer apply... well, in essence they do, but not for the reasons one might usually expect.

You see we are now getting deeper into “a blanket moratorium” on the flow of yet more available properties being offered for sale in the market. There is pretty much a nationwide freeze on foreclosures. A big number of homes are underwater... meaning more is owed on the mortgages than what the property is presently worth. Estimates are as high as 40% on homes with mortgages! Officially unemployment stands at 9.6%, but we know the real number is well more than double that. Despite the literal TRILLIONS of newly printed “bailout dollars,” new credit extensions to the general public have not increased – they have declined. For whatever the reason, money’s NOT available to make mortgage payments. Under normal circumstance when arrears go so far, the lender takes back (as in forecloses) on the property and re-offers it for sale. Problem now is who owns the mortgage?

When a property sale is made, the buyer and seller meet with their representatives at “a closing.”

Before this critical event, due diligence (or rather a verification of status) on the property is performed. Is the seller the rightful owner? Have the RE taxes been paid? Is any prior mortgage paid off (or will be paid off with checks at the closing? What, if any, outstanding liens remain in effect? Is there a title (insurance) policy in effect? Are there documents ready to replace any prior liens with updated ones for the appropriate authorities to reflect any change of ownership? This process is known as “perfection.” Remember also that when a mortgage is involved the purchaser is effectively “renting” the property from the lender for the term of the mortgage. The rent is the interest to be paid over the time of the mortgage. All this sounds simple enough... that is IF all the I’s are dotted and all the T’s crossed.

Over time it has become “the tradition” in RE transactions for the mortgages to be sold, re-sold, re-re-sold, and maybe even re-re-re-sold. Mortgages, in theory have value, and can be marketed to investors in the CDO’s (collateralized debt obligations) or MBS’s (mortgage backed securities). These are paper transactions, but each such sale/ flip/ syndication requires the seller of the “paper” to undergo a closing with the new “paper” buyer --- like the closing at the original closing when the real property changes hands. All requirements of the initial closing apply. Check. Check. Check. Check. And Check.

This should be straight forward IF all I’s are dotted and all T’s are crossed. But, if A sells to B, who sells to C, who sells to D, who may then sell to E; if there is an oversight (make that a mistake) made anywhere in this stream of transactions, a valid transfer of ownership has NOT taken place, and a provable claim against the property (make that a foreclosure) cannot be made. There has been no “perfection.” We are now learning that the appropriate due diligence on tens of thousands (maybe even hundreds of thousands) of delinquent mortgages was not done. Legal actions to foreclose are being thrown out of court because of the deficiencies. The bankers or the present “holders” of the so-called financing paper are out of luck in the foreclosure proceedings until they get all their ducks lined up and these ducks are quacking in full harmony. This is going to take time. This will take a lot of time.

Now we are beginning to see bunches of finger pointing and still more “passing of the BUCKs!” Was it fraud, incompetence, or greed that triggered the flood of systematic errors? I suspect some of each is at work here. The system is broken. Many delinquent homeowners are taking advantage of the mess and living extended periods of time in the would-be foreclosed properties without paying a dime. They don’t care about the broken system as long as they have a (temporarily free) roof over their head(s). Then too, they are seeking help and redress from the government. But... is THAT fair to those who are meeting their obligations, and never got overextended in the first place?

The expected foreclosure time frame has expanded from roughly a half year to well over a year-and-a-half (or longer). These homes are NOT presently considered in the market mix and will not be for quite some time. When they hit, they will further depress an already saturated housing market across the country, and selling prices will further decline. The real estate debacle is a central component of our current economic drama. Closing will not occur until we know of the full inventory of properties available in the market. These foreclosures, together with the new construction, the OREO’s (foreclosed real estate already held in inventory by landing institutions), and the normal body of properties offered for sale all hit the market at one time. Only then will we see a true valuation of the real estate, and the closure process for this huge segment of our ongoing malaise can begin in earnest.

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2010 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at

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This story was published on October 18, 2010.