“The Dog Ate Your Mortgage”

That’s a great phrase that the NY Times headlined Gretchen Morgensen’s article about judges who are backing borrowers when the mortgage documentation is non-existent (and you heard it first from the Mad Biologist). I know I’m beating this to death (a bit, anyway), but the potential for billions, many billions of dollars of housing loans to disappear is gaining steam. Morgensen (italics mine):

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.
The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what….
More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.
The United States Trustee, a division of the Justice Department charged with monitoring the nation’s bankruptcy courts, has also taken an interest in the White Plains case. Its representative has attended hearings in the matter, and it has registered with the court as an interested party.

What could turn out to be a disaster for mortgage holders might have been nipped in the bud had they supported cramdown legislation. Right now, it’s desperate people–in this case, the laywer was only trying to get a better deal, not get the entire mortgage voided. And if you want to sell the house, as opposed to stay in it, it’s not clear what the status of the title is.
But, at some point, someone, and then many someones, is going to see if he can get out of paying back his mortgage, even though he can make the payment. That’s when this gets interesting–in the sense of “may you live in interesting times.”

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9 Responses to “The Dog Ate Your Mortgage”

  1. kevin says:

    This can’t last over the long term, can it? I mean, somebody holds the title legally — maybe the very first bank that originated mortgage in the first place. At some point, the originating bank is going to realize they still hold title to stuff they meant to sell.

  2. Ben says:

    Of course it cannot last. The tide will shift, and the phrase, “Judges don’t look kindly on that…” will no longer refer to banks who can’t come up with the paperwork. Rather, it will refer to opportunistic homeowners who just want to get out of paying for their houses.

  3. Eric Lund says:

    I mean, somebody holds the title legally
    And that person or entity still has the right to foreclose–if he/she/it knows it holds the title. But there are many cases where it’s not obvious just who that person or entity is. There are cases where originating bank A validly endorsed the loan to B, who may or may not have assigned their interest to C, who assigned what they thought was their interest to D. In order for D to foreclose, every step in this chain has to be valid–but if the paperwork was botched, was it at the B to C transfer or the C to D transfer? (I assume here that the transfer from A to B was duly recorded.) That determines whether it’s B or C who really has the right to foreclose, and D may actually not know which one it is (A would not know either, since they washed their hands of the thing when they endorsed their interest over to B). Chains like this are what make the question of who owns what a hard one.
    This precedent arguably does make things worse for the lenders. If Morgenson’s reporting is accurate, the judge threw out this mortgage entirely because the wrong entity tried to claim title to it. Under this precedent, that means that a valid foreclosure would require that the question of who owns the mortgage would have to be settled among the parties in the chain, and settled correctly, for anyone to be able to foreclose. And if it’s not the end party in the chain … IANAL, but we could be looking at misrepresentation/fraud claims by people who invested in MBSs and CDOs. As the old saying goes: “He who sells what isn’t his’n/Must buy it back or go to prison”.

  4. Scott says:

    It makes you wonder how often the reverse happens. A lender might falsely claim it has a right to the house due to delinquent payment. Considering how bad their paperwork is, it must happen from time to time.

  5. Tony P says:

    Just file a lien against the house. Can’t be sold by anyone until the lien is satisfied.

  6. This sort of thing is happening more than you could imagine.
    During the housing boom, lenders passed around mortgages as if they were whiskey bottles at a frat party. Notes were lost, destroyed, sold into multiple pools. Mortgages were not recorded and exorbitant fees were collected by the big firms on Wall Street.
    Now that the bubble has burst, “lenders” are trying to collect on loans they do not own, in most cases never lent a dime on the transaction, have no right to, or were paid 30 times over in bailouts, insurance, credit default swaps, etc.
    They are doing this because they can. They are steamrolling the courts rocket dockets because hardly anyone is contesting their foreclosures. Think about it. If you could go into a court and file thousands of foreclosures a week, and only a mere 10% challenged the authority of the foreclosing entity, what would you do if you were the greedy bankster?
    The crises is even worse in non judicial states…
    In almost every case these pretender lenders do not and did not own the loan. Almost all loans during the boom were securitized and it was investors that put up the money. Not the banks.
    Now these “pretender lenders” along with MERS are trying to steal the homes by filing fraudulent assignments, by the thousands, to process the foreclosures.
    Don’t believe me? See for you yourself.

  7. Drekab says:

    It won’t get really interesting until two lenders both try to forclose on the same house.

  8. Texas Reader says:

    A couple of years ago a judge in Ohio told some attorneys for lenders that he wouldn’t allow them to foreclose some homes because the lenders couldn’t show they held the actual promissory notes and that they had been properly assigned. The New York attornys unwisely tried to tell the judge that with these huge transactions with lots of notes it’s just not practical to have all the assignments executed and original notes transferred etc. The judge told them they were out of luck – eithe produce each note with the proper allonge or they wouldn’t be allowed to foreclose.

  9. Make sure you save your paperwork — and open a safety deposit box at a bank different from where your mortgage is held.

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