What happens when mortgage lenders lose proof of a mortgage?
That question gets addressed in a must read article in the Sunday NYT by Gretchen Morgenson: If Lenders Say ‘The Dog Ate Your Mortgage’.
Gretchen begins with a little history: Over the past decades, the banks and their lawyers have held the cards in litigation. Even with the institutional advantages they held, Banks were given the benefit of the doubt against the “deadbeat mortgage delinquents.”
More recently, we have learned that the bank was undeserving of that. And, we have also learned that a goodly percentage of the “deadbeats” had been defrauded — by mortgage brokers, by real estate agents, and by extension, the banks themselves.
Throw in the securitization process, rife with legal shortcuts that made attempts by good faith borrowers to work out of their delinquency problems all but impossible. Hence, you end up with a judiciary that has become increasingly infuriated with bankers.
There is usually the tendency for judges to have a hands off approach to business issues, and to leave things to the legislature to either modify or pass new laws to resolve dramatic injustices.
At a certain point, the Judiciary will act as a check against excesses and insane outcomes, and “in the furtherance of Justice” step in to correct absurdities. After a few years, a few million foreclosures, and some truly insane claims by securitized investors, courts are now forcing lenders to demonstrate they actually own the mortgages they claim in foreclsoure actions.
The bankers’ benefit of the doubt has been lost, and hilarity ensued:
“Even so, banks and borrowers still do battle over foreclosures on an unlevel playing field that exists in far too many courtrooms. But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
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.
In the case discussed above, the lawyer for the homeowner filed bankruptcy hoping to “persuade PHH to modify his client’s loan.” But after PHH jerked him around for a few months, he got pissed, and asked for proof of PHH’s standing in the case. They failed to produce it, and the judge kicked their asses to the curb.
There is an obvious unjust enrichment claim by the homeowner — If I were the bank, I would offer to reissue a new $200k mortgage to the owner, remove any marks on their credit record, and move forward. Otherwise, a precedent gets set that the banks and securitizers will rue.
The last of the “landed gentry” in America are trial judges — smart litigants learn never to piss them off . . .
Mortgage Electronic Registration Systems Loses Legal Shield (September 23rd, 2009)
The Mortgage Netherworld (April 2009)
If Lenders Say ‘The Dog Ate Your Mortgage’
NYT, October 24, 2009