Whose Mortgage is it, Anyway?

[The Professor]

Interesting article I found online this morning.....

Daniel

FAIR GAME
Whose mortgage is it, anyway?
By Gretchen Morgenson
Published: March 1, 2009


NEW YORK: We are all learning, to our deep distress, how the perpetual pursuit of profits drove so many of the bad decisions that financial institutions made during the mortgage mania.

But while investors tally the losses that were generated by loose lending so far, the impact of another lax practice is only beginning to be seen. That is the big banks' minimalist approach to meeting legal requirements - bookkeeping matters, really - when pooling thousands of loans into securitization trusts.

Stated simply, the notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded.

But this seems not to have been a priority with many big banks. The result is that bankruptcy judges are finding that institutions claiming to hold the notes that back specific mortgages often cannot prove it.

On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.

With the sale set aside, Fernandez remains in the home. "We believe this loan was never assigned," said Ray G., the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.

A spokeswoman for Capital One, which is in the process of acquiring Chevy Chase, did not return a phone call on Friday seeking comment.

Ray has another case in which a borrower tried to sell his home but could not because the note underlying a $60,000 second mortgage could not be found. The statute of limitations on the matter will expire in October, he said, and if the note holder has not come forward by then, the borrower will be free of his obligation on the second mortgage.

No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.

If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.
But if the holder of the note is in doubt, how can these loans be modified?

Bookkeeping is such a bore, especially when there are billions to be made shoveling loans into trusts like coal into the Titanic's boilers. You can imagine the thought process: Assigning notes takes time and costs money, why bother? Who's going to ask for proof of ownership of these notes, anyhow?

But as the Fernandez case and others indicate, bankruptcy judges across the country are increasingly asking these pesky questions. Two judges in California - one in state court, another in federal court - issued temporary restraining orders last month stopping foreclosures because proper documentation was not produced by lenders or their representatives.

And in another California case, a borrower's lawyer was awarded $8,800 in fees relating to costs spent litigating against a lender that could not prove it had the right to foreclose.
California cases are especially interesting because foreclosures in that state can be conducted without the oversight of a judge. Borrowers who do not have a lawyer representing them can be turned out of their homes in four months.

Samuel Bufford, a federal bankruptcy judge in Los Angeles since 1985, has overseen about 100,000 bankruptcy cases. He said that in previous years, he rarely asked for documentation in a foreclosure case but that problems encountered in mortgage securitizations have made him become more demanding.

In a recent case, Bufford said, he asked a lender to produce the original of the note, and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. "They had no clue what happened after that," he said. "Now somebody's got to go find that note."

My guess is it's because in the secondary mortgage market they have been sloppy," Bufford added. "The people who put the deals together get paid for the deals, but they don't get paid for the paperwork."

A small but spirited group of consumer lawyers has argued for years that the process of pooling residential mortgages into securities has been so haphazard that proper documentation of the loans had never been made in many cases. Leading the brigade is April Charney, a foreclosure lawyer at Jacksonville Legal Aid in Florida; she now trains consumer lawyers around the country to litigate these cases.

Depending on the documentation defect, lawyers say, investors in the trust could try to force the institution that sold the loan to the trust to buy it back. Many of these institutions would be unable to do so, however, because they are defunct. In the meantime, when judges are not persuaded that the documentation is proper, troubled borrowers can remain in their homes even if they are delinquent.

The woes brought on by sloppy bookkeeping in securitizations will be on the agenda at the American Bankruptcy Institute's annual spring meeting on April 3. An article titled "Where's the Note, Who's the Holder?" co-written by Bufford and Glen Ayers, a former federal bankruptcy judge in Texas, will be the basis of a discussion at the meeting.

Ayers, who is a lawyer, said he expects that these documentation problems will halt a lot of foreclosures. That will mean pain for investors who hold the securities. The problem for those who expect to receive the benefit of the note, Ayers said, is that they "may not be able to show to the judge they have a right to foreclose."

"It's a huge problem," he added. "It's going to be expensive - I don't know how expensive - ultimately to the bondholders."

[Jumbo101]

FDIC chairwoman was talking about the same thing, I have called myself and been told it is a private investor. I wonder what my success would be in a modification if I could talk to "investor"

[susan spencer]

Professor Shays,

Thank you for posting this information!I have been following this topic which is getting more play in the news!

After reading the information and discussions to this regard, it brings up important questions that perhaps you can clarify.

Many of us have requested loan mod's and did not request the lender provide written proof of ownership of the debt and called to obtain this information by phone.

Many are also in default waiting to do some kind of work-out before a sale date. Requesting the note causes delays. Good as it gives you more time but not so good if your lender doesn't agree to halt a timeclock on foreclosure.

You would think that this information would be common knowledge after going through an escrow and that we wouldn't have to be hunting it down like bloodhounds.

Thank you for clarification on this article as to how this might apply in dealing with re-working loans with uncertain outcomes.

[The Professor]

I view this "whose mortgage is it" as a delay tactic for borrowers facing judicial foreclosure. In the case of non-judicial foreclosures it is not as helpful, since there isn't the same sort of oversight available through a court supervised process like a lawsuit.

About the only way a borrower facing non-judicial foreclosure can I suspect raise this issue is by seeking a Court issued injunction, and that requires the commencement of a lawsuit and potentially having to file a bond to provide the lender with a recovery source to compensate them for losses associated with delaying the foreclosure.

Daniel

[Enough Already]

Interesting article, Prof Shays. Another good reason to hire an attorney in a judicial foreclosure situation.

[The Professor]

I would agree, with the understanding that such an effort may result in a financial backfire. This is for two reasons. First, as this market continues to decline, the actual deficiency will increase. Think about people who have been in a residential real estate holding pattern for the past three (3) years. Had they disposed of their holdings back in 2005-06, I think it is fair to say they would be in substantially better financial shape today (unless they invested their gains in something like AIG stock).

Additionally debt instruments typically contain an "attorney fee" provision. The costs associated with meeting this "whose mortgage is it" defense may eventually be shouldered by the borrower via this "attorney fee" provision as the amount of the deficiency judgment will grow through increased attorneys fees incurred by the lender in completing its judicial foreclosure.

On a side note, I found the story below containing an appropriate warning for those on this forum contracting with a "foreclosure services company." The legislature here in California recognized the pitfalls associated with this business the last financial downturn ('89-'94). It passed California Civil Code 2945, et seq. The quoted portion of that law below explains the rationale for the passage of this consumer legislation.

The Legislature finds and declares that homeowners whose
residences are in foreclosure are subject to fraud, deception,
harassment, and unfair dealing by foreclosure consultants from the
time a Notice of Default is recorded pursuant to Section 2924 until
the time surplus funds from any foreclosure sale are distributed to
the homeowner or his or her successor. Foreclosure consultants
represent that they can assist homeowners who have defaulted on
obligations secured by their residences. These foreclosure
consultants, however, often charge high fees, the payment of which is
often secured by a deed of trust on the residence to be saved, and
perform no service or essentially a worthless service. Homeowners,
relying on the foreclosure consultants' promises of help, take no
other action, are diverted from lawful businesses which could render
beneficial services, and often lose their homes, sometimes to the
foreclosure consultants who purchase homes at a fraction of their
value before the sale. Vulnerable homeowners are increasingly
relying on the services of foreclosure consultants who advise the
homeowner that the foreclosure consultant can obtain the remaining
funds from the foreclosure sale if the homeowner executes an
assignment of the surplus, a deed, or a power of attorney in favor of
the foreclosure consultant. This results in the homeowner paying an
exorbitant fee for a service when the homeowner could have obtained
the remaining funds from the trustee's sale from the trustee directly
for minimal cost if the homeowner had consulted legal counsel or had
sufficient time to receive notices from the trustee pursuant to
Section 2924j regarding how and where to make a claim for excess
proceeds.

Know that if the claims of so-called professionals sound to good to be true (in terms of successes), or provide unrealistic warranties of service, you should be suspect and investigate before paying. A perfect example of what I'm talking about is the following excerpt from a news article that appeared in a newspaper yesterday (see below).

Daniel


“It was $3,500 Nickie Struthers couldn’t afford — but desperate to stave off foreclosure, the 45-year-old and her fiance, a surgeon, scribbled their signatures on the check they thought would yield salvation. She handed the check to someone she’d done business with in the past, a mortgage broker-turned-foreclosure rescuer. But months went by, and the broker seemed to disappear. He had promised to modify her loan, she said, ‘but he wouldn’t take our phone calls, e-mails, nothing. I never thought this would happen.’”

“She admitted that the Bradenton McMansion she and her fiance purchased at the peak of the market in the summer of 2005 was overpriced, and that they were underfunded. Shuffling through her papers, Struthers said her neighbor’s home recently sold for half the purchase price of their home, $817,000. Her home is now worth $465,000, she estimated, and she and Howard owe more than $800,000 on it.”

“But the man who admits he accepted Struthers’ check, Chris Campbell of the company Lionstar LLP, insisted he is not a scammer. Rather, he said he believes he may have been scammed by a subcontractor to which he passed along the money, which in turn was supposed to deal with Wachovia. ‘I think they deserve their money back and I will try to make it up to them,’ Campbell said. ‘I’m not a con artist. I’m just a former mortgage guy. I tried to find an alternative for them. It backfired on me.’”