With foreclosure sales steadily rising, four states are concerned that the use of the foreclosure sale prices in appraisals of neighboring homes is distorting the market.

Legislators in Illinois, Nevada, and Missouri have all proposed separate bills that would exclude or restrict foreclosure sales from being used as comparisons to determine the value of homes around them.

Maryland had proposed a similar bill, but withdrew the legislation on Tuesday.

Industry participants have expressed reservation at the idea of barring distressed sales from consideration when appraising properties, saying such actions would cause homes to be appraised for more than they are really worth.

According to the Appraisal Institute, “Elimination of foreclosures and short sales as comparables would result in an artificial market and would mislead lenders as to the true value of their mortgage collateral.”

Furthermore, the institute notes that under the Uniform Standards of Professional Appraisal Practice, all federally related transactions are required to consider all sales for appraisals, including short sales and other distressed sales. Most residential lending transactions fall into this category.

“In some markets, there are so many distressed sales that they are the market and must be considered. When there is a glut of distress sales in the marketplace, and those properties are truly comparable to the subject, it would be misleading not to use them as part, or in some cases all, of the basis for a value conclusion,” a representative of the institute said in an e-ma

Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.

U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”

Merscorp was created in 1995 to improve servicing after county offices couldn’t deal with the flood of mortgage transfers, Karmela Lejarde, a spokeswoman for MERS, said in an interview last year. The company tracks servicing rights and ownership interests in mortgage loans on its electronic registry, allowing banks to buy and sell the loans without having to record the transfer with the county. It played a major role in Wall Street’s ability to quickly bundle mortgages together in securitized trusts.

MERS was still reviewing Grossman’s decision and didn’t have an immediate comment, Lejarde said in an e-mail Feb. 11. Lejarde didn’t immediately respond to an e-mail seeking comment today.

Proper Status

“‘Don’t come around here no more,’ is basically the message to MERS,” said April Charney, a senior attorney with Jacksonville Area Legal Aid in Jacksonville, Florida. “The judge basically deconstructed MERS and said there’s no possible way in any case you can come in and show you have this appropriate proper status to transfer the note.”

“MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process,” Grossman wrote. “The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”

Automatic Shield

In the case Grossman ruled on, Credit Suisse Group AG’s Select Portfolio Servicing, a mortgage servicer, sought to bypass the automatic shield against legal claims triggered by Ferrel L. Agard’s filing for personal bankruptcy in September.

Select Portfolio wanted permission to foreclose on Agard’s home in Westbury, New York, on behalf of U.S. Bancorp’s U.S. Bank unit, the trustee for the mortgage-backed trust the home loan was in. The house is worth about $350,000 and the mortgage amount was $536,921, according to the decision.

Grossman ruled in favor of Select Portfolio because he couldn’t overrule a November 2008 foreclosure judgment the servicer won in state court, he said. Without that state-court ruling, Select Portfolio wouldn’t have had the right to bring its motion, Grossman said.

He then addressed whether a mortgage transfer by MERS is valid, because “MERS’s role in the ownership and transfer of real-property notes and mortgages is at issue in dozens of cases before this court,” including those where “there have been no prior dispositive state-court decisions,” he wrote.

Original Lender

Select Portfolio argued in part that MERS’s February 2008 assignment of the mortgage to U.S. Bank was valid because Agard agreed that MERS would hold title to it for the original lender, Bank of America Corp.’s First Franklin, and for whichever banks it was further assigned to. First Franklin transferred the promissory note the mortgage secured to Lehman Brothers Holdings Inc.’s Aurora Bank and Aurora to U.S. Bank, according to the decision.

“An adverse ruling regarding MERS’s authority to assign mortgages or act on behalf of its member/lenders could have a significant impact on MERS and upon the lenders which do business with MERS throughout the United States,” Grossman wrote. “It is up to the legislative branch, if it chooses, to amend the current statutes to confer upon MERS the requisite authority to assign mortgages under its current business practices.”

MERS intervened in the case and argued that Agard’s mortgage, the terms of its membership agreement and New York state law gave it the authority to assign the mortgage. MERS says it holds title to mortgages for its members as both “nominee” and “mortgagee of record.”

Select Portfolio

Grossman said Select Portfolio had to show that U.S. Bank owned both the note and the mortgage, and there was no evidence that it held the note. The judge disagreed with Select Portfolio’s argument that U.S. Bank held the note because the note “follows” the mortgage, which it said U.S. Bank owned.

“By MERS’s own account, the note in this case was transferred among its members, while the mortgage remained in MERS’s name,” Grossman wrote. “MERS admits that the very foundation of its business model as described herein requires that the note and mortgage travel on divergent paths.”

The judge said that the membership agreement wasn’t enough to assign the mortgage and that to do so the lender would have to give power of attorney or similar authority to MERS.

MERS’s membership rules don’t create “an agency or nominee relationship” and don’t clearly grant MERS authority to take any action with respect to mortgages, including transferring them, Grossman wrote. Because the interests at issue concern “real property” -- land and buildings -- under state law, any transfer has to be in writing, which isn’t done under the MERS system, he said.

‘Nominee’ Status

“Without more, this court finds that MERS’s ‘nominee’ status and the rights bestowed upon MERS within the mortgage itself, are insufficient to empower MERS to effectuate a valid assignment of mortgage,” the judge wrote. “MERS’s position that it can be both the mortgagee and an agent of the mortgagee is absurd, at best.”

Grossman said parties coming to him to seek to lift the automatic ban on legal claims in cases involving MERS will have to show they own both the mortgage and the note.

Existing-home sales rose sharply in December, when sales increased for the fifth time in the past six months, according to the National Association of Realtors.

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, rose 12.3 percent to a seasonally adjusted annual rate of 5.28 million in December from an upwardly revised 4.70 million in November, but remain 2.9 percent below the 5.44 million pace in December 2009.

Lawrence Yun, NAR chief economist, said sales are on an uptrend. “December was a good finish to 2010, when sales fluctuate more than normal. The pattern over the past six months is clearly showing a recovery,” he said. “The December pace is near the volume we’re expecting for 2011, so the market is getting much closer to an adequate, sustainable level. The recovery will likely continue as job growth gains momentum and rising rents encourage more renters into ownership while exceptional affordability conditions remain.”

The national median existing-home price for all housing types was $168,800 in December, which is 1.0 percent below December 2009. Distressed homes rose to a 36 percent market share in December from 33 percent in November, and 32 percent in December 2009.

“The modest rise in distressed sales, which typically are discounted 10 to 15 percent relative to traditional homes, dampened the median price in December, but the flat price trend continues,” Yun explained.

Total housing inventory at the end of December fell 4.2 percent to 3.56 million existing homes available for sale, which represents an 8.1-month supply at the current sales pace, down from a 9.5-month supply in November.

NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said buyers are responding to very good affordability conditions despite tight mortgage credit. “Historically low mortgage interest rates, stable home prices, and pent-up demand are drawing home buyers into the market,” Phipps said. “Recent home buyers have been successful with very low default rates, given the outstanding performance for loans originated in 2009 and 2010.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 4.71 percent in December from 4.30 percent in November; the rate was 4.93 percent in December 2009.

A parallel NAR practitioner survey shows first-time buyers purchased 33 percent of homes in December, up from 32 percent in November, but are below a 43 percent share in December 2009.

Investors accounted for 20 percent of transactions in December, up from 19 percent in November and 15 percent in December 2009; the balance of sales were to repeat buyers. All-cash sales were at 29 percent in December, compared with 31 percent in November, but up from 22 percent a year ago. “All-cash sales have been consistently high at about 30 percent of the market over the past six months,” Yun said.

Single-family home sales jumped 11.8 percent to a seasonally adjusted annual rate of 4.64 million in December from 4.15 million in November, but are 2.5 percent below the 4.76 million level in December 2009. The median existing single-family home price was $169,300 in December, down 0.2 percent from a year ago.

Existing condominium and co-op sales surged 16.4 percent to a seasonally adjusted annual rate of 640,000 in December from 550,000 in November, but remain 5.2 percent below the 675,000-unit pace one year ago. The median existing condo price was $165,000 in December, which is 7.4 percent below December 2009.

Regionally, existing-home sales in the Northeast jumped 13.0 percent to an annual pace of 870,000 in December but are 5.4 percent below December 2009. The median price in the Northeast was $237,300, which is 1.4 percent below a year ago.

Existing-home sales in the Midwest rose 11.0 percent in December to a level of 1.11 million but are 4.3 percent below a year ago. The median price in the Midwest was $139,700, up 3.3 percent from December 2009.

In the South, existing-home sales increased 10.1 percent to an annual pace of 1.97 million in December but are 2.5 percent below December 2009. The median price in the South was $148,400, unchanged from a year ago.

Existing-home sales in the West surged 16.7 percent to an annual level of 1.33 million in December but remain 1.5 percent below December 2009. The median price in the West was $204,000, down 5.6 percent from a year ago.

The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders.

The bureau expects to award a contract to develop the form by the end of the month, making it one of the first projects of the new agency, according to a bidding document given to vendors in November and reviewed by Bloomberg News.

More concise disclosure is one of the main stated goals of Elizabeth Warren, the Obama administration adviser charged with setting up the agency established by the Dodd-Frank Act. Simpler forms that can be directly compared may make the market less lucrative for lenders such as Bank of America Corporation, Wells Fargo & Company, JP Morgan Chase & Co. and Citigroup Inc.

“If buyers are better informed and understand the financial commitments they are entering into, they will be better able to make comparisons among lenders and the market will be more competitive,” said Alex Pollock, a former banker who is a resident fellow at the American Enterprise Institute. “In competitive markets, profit margins are -- and should be -- driven down to the level of the cost of capital.”

Academic studies have shown that comparison shopping aided by the emergence of the Internet helped cut prices for consumer products including term life insurance in the 1990s. That squeezed profits, said Edward Graves, an associate professor of insurance at The American College in Bryn Mawr, Pennsylvania.

Lost Margins

“When you see what’s gone on in terms of prices, the insurers have lost a lot of margin in this product,” Graves said in an interview.

Bob Davis, an executive vice president at the American Bankers Association, said short disclosure forms might not simplify the process as much as Warren suggests, because of the “interconnected requirements” imposed by federal law.

“It’s not so simple as creating two pieces of paper,” Davis said in an interview. Bankers agree with Warren’s “starting point,” he said.

Warren has said she would like to see a standard document of one or two pages to replace about 80 percent of the mortgage disclosures mandated by the Truth In Lending Act and the Real Estate Settlement Procedures Act. The current “pile of papers” confuses consumers and is costly to business, Warren has said.

Smaller community banks might become more competitive with Wall Street if new regulations succeed in reducing costs, Davis added. “The compliance process lends itself to certain scale and big technology solutions,” Davis said.

Mortgage Unit Head

Along with the credit-card division, the new bureau’s mortgage unit may have the most immediate impact on consumer financial services. A candidate to run the mortgage section is Patricia McCoy, a University of Connecticut law professor who has been working with Warren part-time, according to a person briefed on the matter who spoke on condition of anonymity because the matter isn’t public.

McCoy, 56, is a former corporate litigator who was a partner at Mayer, Brown & Platt during the savings and loan crisis in the early 1990s. Based in Washington, she represented bank auditors and examined residential loans and underwriting standards. She co-wrote a book published this month on the subprime lending crash.

The contract to create a new disclosure form was advertised to selected vendors in November by the Bureau of Public Debt at the Treasury Department, where the consumer bureau is housed until it becomes an independent entity in July. It calls for firms to bid on providing “support services to assist with the design of a model disclosure form, including assessment of the form through consumer testing and revisions to the form resulting from the testing and public comments,” according to the copy obtained by Bloomberg News.

January Contract

Bids had to be in by Dec. 14, and the contract will be awarded before the end of January, according to the proposal document. The vendor must complete the work by Jan. 15, 2012 or a year after the contract is awarded, whichever is earlier.

Dodd-Frank requires the bureau to propose regulations on mortgage disclosures for public comment by July 21, 2012. The bidding document indicates that the bureau intends to move more quickly, saying its goal is to issue proposed regulations “as soon after” July 21, 2011, “as possible.”

The bid request also emphasizes the role of field tests in the bureau’s decision-making, a point Warren raised at a Dec. 6 symposium at Treasury, according to one attendee, Ira Rheingold, executive director of the National Association of Consumer Advocates.

Warren told the audience that “we’re going to be data- driven. We’re going to test things, and figure out what people respond to,” Rheingold said in an interview.

‘Asking a Lot’

Not everyone studying the mortgage industry believes that simpler forms will translate into more comparison shopping by borrowers.

“It’s asking a lot for a piece of paper to change actual consumer behavior,” John Kozup, an associate professor of marketing at Villanova University and director of the Villanova Center for Marketing and Public Policy Research, said in an interview. “It could be a decision aid but that is it.”

Kozup, who also attended the Dec. 6 symposium, said that by the time applicants get a mortgage pre-approval and find a house, they “have a psychological commitment to a certain bank or broker, and no kind of disclosure is going to change that.”

To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net.

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.

CHARLENE PERRY's Blog ::

We are all familier with the current land title system wherein the individual States and their respective County clerks are responsible for "keeping the books" on the transfer of real estate in their respective jurisdictions.  

A recently introduced bill will require that HUD study a Federal Land Title System (HR 6460) sponsored by Mary Kaptur (D-OH) which would, if passed, pave the way for a National Torrens System.  The Torrens System is not commonly used in the United States but is used in may parts of Europe.  

What is the difference between the current land title system and the Torrens System? and Why do I Care?

The main difference between a common law title and a Torrens title is that a member of the general community, acting in good faith, can rely on the information on the land register as to the rights and interests of parties recorded there, and act on the basis of that information. A prospective purchaser, for example, is not required to look beyond that record. He or she does not need even to examine the Certificate of Title, the register information being paramount. This contrasts with a common-law title, which is based on the principle that a vendor cannot transfer to a purchaser a greater interest than he or she owns. As with a chain, the seller's title is as good as "the weakest link" of the chain of title. Accordingly, if a vendor's common-law title is defective in any way, so would be the purchaser's title. Hence, it is incumbent on the purchaser to ensure that the vendor's title is beyond question. This may involve both inquiries and an examination of the "chain of title."

After the real estate market freefall in 2008-when title insurance revenues fell sharply and most major title insurance underwriters posted net losses-operating results rebounded in 2009, although total industry written premiums declined from 2008 levels. During the first quarter of 2010, however, title insurance revenues-helped partly by federal policy and tax incentives-improved compared with the similar period in 2009.

While revenues were down in the second quarter of 2010, most major underwriters posted positive operating margins through the first six months of the year. Despite economic uncertainties and housing market challenges-particularly given recent foreclosure processing issues-A.M. Best Co. has revised its rating outlook for the title sector to stable from negative, given strengthened capitalization and improved operating performance trends.

Tomorrow is the day we've all been waiting for....

At 2:15pm, the Federal Open Market Committee (FOMC) will release their policy statement. At 2:15pm we find out if Quantitative Easing becomes a reality. At 2:15pm we find out if mortgage rates are destined to retest record lows.

Let's recap the "What If's" one more time...

 If you're still a passenger on the float boat, it's because you made a decision to pass on rates below 4.25% in favor of a chance to lock in a rate below 4.00%. It's because you decided to PLAY THE RANGE UNTIL BERNANKE PLAYED YOU

On November 3, 2010 I anticipate the Federal Reserve will announce another Quantitative Easing program. This event is expected to lead consumer borrowing costs back down to record lows, which means we should see mortgage rates dip below 4.00% with much more attractive float down structures (in terms of how long it will take to recover points paid at closing).

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