New Ruling Means Banks Could Have Tough Time Foreclosing

There’s big ramifications to a federal court’s dismissal of 14 foreclosure cases because the bank couldn’t prove that they owned the mortgage note, reports NYT.

Part of the mortgage boom and bust was the mortgages getting chopped up, put into pools of thousands and then became investment vehicles that were sold to Wall Street. All of this financial three-card-monte means it’s hard to prove who owns the mortgage note at what time…

“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate,” wrote Judge Christopher A. Boyko in the decisive case.

If mortgage lawyers jump on this ruling and banks are forced to prove they actually own the note on the date of the foreclosure notice, a lot more people will get to keep sleeping under their own roofs.


Foreclosures Hit a Snag for Lenders
[NYT] (Thanks to Brandon!)
(Photo: zeorb)

Comments

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  1. DallasDMD says:

    Its pretty scary if courts were processing foreclosures without doing something so basic as confirming the claims of whoever shows up asking for a foreclosure.

  2. tomok97 says:

    So does this mean that if your loan is owned in such a fasion you could stop making payments and nothing would happen?

  3. starrion says:

    @tomok97:

    Let us know how that works out….

  4. blitzcat says:

    @tokok97 Possibly you get to keep the house, but they still get to wreck your credit. I suppose that could be worth it, as long as you are ok with high insurance/health care premiums and not being able to get a car loan for 7 years. Be careful though- most tax and insurance payments are rolled together in your monthly payment, and not paying those can also cost you the house. Let us know how it turns out.

  5. humphrmi says:

    First, let’s be clear, securitization of debt is something that has been going on in the financial services markets for a long time, and putting a cloud over the practice would put a lot more than the financial resources of mortgage companies at risk. Businesses small and large borrow money against their accounts receivable or other assets that gets shredded across securitized investments, they have been doing this long before the mortgage melt-down.

    In this particular case, Deutsche Bank probably didn’t keep good enough records. I hope that’s the case anyway, because if we all start cheering for losing securitized corporate bonds we will see a huge economic engine shut down. And this one affects everyone; if you work for a company that borrows money to grow, you could see their ability to borrow disappear along with that growth and your raises or job.

  6. tedyc03 says:

    @tomok97: Chances are good that they will find the records and win their case. Eventually. This judge basically told them that they HAD to prove it. No free ride.

    @DallasDMD: Most foreclosures are not contested. In those cases it’s actually a default judgement.

    @humphrmi: We’re not happy to see the mortgage companies go down in flames. We just want to make sure that everyone does everything by the books. You can’t just take people’s houses, unless you actually own them.

  7. thufir_hawat says:

    Mortgage holders (not always banks) have been sloppy in the past five-ten years. Liens are not filed, title companies are slow in recording, companies use secondary sources instead of running title reports, and debtors’ attorneys are loathe to call them on it. There is complicity and fault all around.

    It is a problem with documentation that can be fixed. It might cost the lender 60 days, but they will get what they need and eventually get the non-paying borrower out of the house.

    But . . . the kicker is that it is a problem that rarely gets checked. When I say rarely I mean that it is so seldom as a percentage of foreclosures that the money spent on fixing the screwups is wildly outpaced by the overall savings gained by cutting corners. Best case: borrower wins a couple of rent free months then still gets booted. Worst case: lender loses sixty days and still saves a boatload.

    A victory, but probably a pyrrhic one.

  8. humphrmi says:

    @tedyc03: Agreed 100%, I was just reacting more to a remark in the post than anything else – “Part of the mortgage boom and bust was the mortgages getting chopped up, put into pools of thousands and then became investment vehicles that were sold to Wall Street. All of this financial three-card-monte means it’s hard to prove who owns the mortgage note at what time…” Securitization does not mean there is not a clear record of ownership and is not the problem here, and calling debt securitization “financial three-card-monte” is, IMHO, pointing to the wrong culprit.

  9. Gari N. Corp says:

    Please read the excellent Calculated Risk for a little bit of inside knowledge of how the mortgage business works. This was likely a lax bit of recording, and will mean that banks in contested mortgages won’t be able to bluff their way through, but it probably does not mean holders of securitized debt are screwed.

  10. rodeobob says:

    Actually, “financial three-card-monte” is a pretty good descriptor of some of the underlying issues.

    By “chopping up, pooling, and reselling” mortgages, these was a seperation between the interests of the persons making the original mortgage, the persons charged with collecting payments on the mortgage, and the persons benefiting from the mortgage. When the creators & sellers of MBS’s are compensated on the sale of the MBS, rather than by collecting on the mortage itself, there’s less incentive to make good loans.

    When there’s a diffusion of ownership of mortgages by pooling & resale in the form of MBS’s, then it becomes difficult (if not impossible) for borrower to locate a stakeholder with sufficent authority to negotiate different payment options in leu of forcloseure.

    When one party makes the loan, another has the authority to collect on it, and third parties benefit from that collection, it scatters exactly who “holds the mortgage”.

  11. pyloff says:

    At least some people are realistic in this *spoiler* housing recession.

  12. pyloff says:

    I couldn’t resist. http://www.doctorhousingbubble.com

  13. cabedrgn says:

    I recently went through something similar with Option One/HSBC after refinancing my sub prime mortgage to a 30year fixed with AmSouth. About 3 months after the Refi, OO filed for foreclosure. I didn’t even need to hire a lawyer, I wrote a letter to the court explaining the situation with copies of my new mortgage with AmSouth to answer the summons (AmSouth even helped me answer the summons and provided the copies of the note), showed up in court about a month later and the case was dismissed.

    The judge wasn’t exactly happy about the whole situation and made a note of it, apparently this isn’t the first time this has happened and almost went through the roof when OO also had AmSouth as the defendant (in my opinion, it showed they knew that the note was not in their possession). OO’s lawyer probably figured it was a HLOC or something without doing their research though. The judge also chastised them for noting ‘lost note’ in their list of complaints against me.

    I probably could have sued for lost wages (one day worth) and whatever else but I really didn’t care that much, seeing them shut down in court was satisfaction enough. They still call though, I’m about to send them a nastygram and call a lawyer if they don’t stop. Every time I reach someone I tell them that I no longer have an account and the answer is always “wow, your right, I don’t know how that happened.”

  14. czarandy says:

    I don’t see how they are sleeping “under their own roofs” if they aren’t paying their mortgage.

  15. stinerman says:

    @blitzcat:
    Um…so I can still keep the house without paying? I’ll take a free house for any ding on my credit. If I need a new car, I’ll just pay cash.

  16. pyloff says:

    @stinerman I hope you are joking. If not you are total fucking moron.

  17. mantari says:

    @pyloff: Hey, if we’re offering houses without payments, I’ll take two, myself.

  18. tedyc03 says:

    @czarandy: Not paying your mortgage is certainly a bad thing. But consumers have a right to be protected from lawsuits by companies that lack standing. Before they can prove that a customer is not paying their mortgage, they have to prove that they own the mortgage not being paid (because that gives them the legal right to sue in court).

    Look at it from this perspective: if Cabedrgn’s former mortgage holder had been able to foreclose without proving they held the mortgage, he’d be on the street right now. The court’s ruling doesn’t prevent owners of mortgage securities from foreclosing on bad borrowers; it simply forces them to prove ownership of the bad loan. This judge, however, clearly told the mortgage companies that they cannot expect their complacency and typical experience where customers don’t contest the foreclosure to be legal compliance…and that while those who borrowed and defaulted may not be off the hook, they like anyone else are entitled to due process.

    I think that in this world where companies strip our rights with binding arbitration we can all agree that due process and judges who support it should be applauded.

  19. kc-guy says:

    The company processing the loan is rarely the same company that “holds that paper” and actually owns the mortgage. All the sub-prime loans are nothing new. Penny stocks. Buy it cheap and sell it fast: basic pump and dump.

    Didn’t last for Boiler Room, the dot-com-bubble, and surprise, the mortgage bubble burst too. Now the company processing the loan is scrambling to collect a loan payment on a loan they’ve sold long ago, or took a bad bet on.

    I don’t agree that a “homeowner” should get away with stealing a house they could never afford, but I can’t feel a lot of sympathy for a industry that collectively encouraged fraud in it’s documentation process to make a fast buck on a bad bet.

  20. Skankingmike says:

    I got a funny little story…. btw I am sure I’m messing some of my lingo up as I am not all that familiar with it, I am but a simple history major and artist so please have mercy

    My Aunt works for a Law firm that handles only Foreclosures proceeding’s and notes. She tells me stories and this and that and lately she works 12 + hours a day now that everybody and their mother is being foreclosed on (I personally blame both the banks and stupid people).

    Anyway, she told me of a scam that some people run.

    Most people know that Banks are way to quick to give you a loan on a house. Problem number one. Problem number two is that most Loan officers (though required by law) hardly check to see if there are any other loans on a house before issuing their companies loan to the borrower.

    What some people were doing (and successfully) Is they would by a house for say 400,000. Now when you buy a house and get a loan it takes time for that loan to get through the proper channels so that other banks know (hey these people have a mortgage already) These people knew that and so went to other mortgage places and found overzealous Loan Officers to issue them loans knowing they wouldn’t do a thorough check on them both financially and to see if there was another bank that already owned it.

    Then the people with the loan would go to as many banks as they can often times going into the 4 or 5 range, Now they have close to 2 million, to which they then leave the country with (often times they were Chinese not being racists they were seriously not from this country which also made what they did easier as they could not be tracked).

    SO when my Aunt’s company went to go take their note to court they now had to show which bank called on that house first. Which when you’re dealing with the Courts never meant a guarantee.

    So not only do you have a house that has upwards of 4 or 5 mortgages out on it you also have 4 or 5 different banks all claiming to own the note on that property. Who ever is the quickest at the sheriff’s auction to put forth the note on the house is the winner.

    Needless to say, I’m really not all that surprised by the current state of affairs when it comes to this Sub Prime melt down.

  21. Trojan69 says:

    This is beyond tremendous. I love it.

    Question – assuming my mortgage is sold to another entity, but I keep making payments just as I had before, how does the true entity receive my payments? If I actually stop paying the mortgage, how does anyone know what happens to any proceeds of the foreclosure/resale?

  22. iamme99 says:

    I wonder if all the new paperwork that may be required of companies buying & selling mortgages could increase their costs enough to make securitization not worth the effort in the future. Perhaps this portends a return to a bank actually holding the paper they write? Of course, were this to happen it would put a huge dent in the direction that wall street and the credit markets have been going over the years.

  23. Red_Eye says:

    @humphrmi: “we will see a huge economic engine shut down.”

    Umm yeah let me direct your attention to this little mortgage fiasco where banks are winding up with billions in foreclosed property that wont sell for near what its worth..

  24. humphrmi says:

    @Red_Eye: That’s pittance compared to what would happen if the securitized corporate paper market shut down. We’re talking economic armageddon.

  25. mexifelio says:

    If mortgage lawyers jump on this ruling and banks are forced to prove they actually own the note on the date of the foreclosure notice, a lot more people will get to keep sleeping under their own roofs.

    Technically the roofs aren’t really their’s if they have a mortgage out on it.

  26. legalreader says:

    when you sign the note with the “lender”, that lender hold the note and has the legal standing to enforce the note. when the note is sold to another entity, the actual note is supposed to be conveyed. If it is not in the possession of the next entity, that entity is only a “holder in due course”. That entitled the entity to collect monies due and “enforce the note”. Thats in quotes for a reason. The enforcement is based upon the knowledge that most people now nothing about the subject. If you are foreclosed upon, you generally don’t have the legal balls to challenge the holder to produce the note. Technically the entity must have the signed copy to enforce the foreclosure.
    There have been situation where a person has paid off the note and not received the paid note back. That is because the entity is not in possession. For you to record your mortgage as paid you need the paid original back. If you challenge in court and they cannot produce, they have nothing to prove they can foreclose or even that you have a mortgage. That is what happened in this case. Institutions bought slices of notes and tried to foreclose and never held the note, just the right to collect. Thats about what I remember from my legal reading. I hope it makes you think about thinks and do your own research.

  27. humphrmi says:

    @legalreader: Actually what happend in this case is the holder sold the notes to DB without a “successor or assigns” clause that they could prove in the note. Go read your mortgage, it’s there. Then the holder who sold the notes to DB promptly went out of business and left DB holding notes that didn’t have an apparent reassignment clause. DB was asked to provide an affidavit of said clause, and didn’t produce it in time for the hearing. The mortgagees still owe the money, and in time they will have to pay. It has nothing to do with slicing, dicing, or otherwise securitizing mortgages.

  28. legalreader says:

    I apoligize if I mixed other practices into what DB did. Here is a link to an article that in interesting on the subject: [money.cnn.com]