The Case of the Missing Mortgage Documents

It seems that a lot of banks can't get their hands on the actual original mortgage documents. The problem is that a mortgage document is a bearer instrument that can be bought and sold. If a bank attempting to foreclose can't produce the actual mortgage document, they can't prove they have still own the rights to foreclose on the underlying real assets. See, the bank may have sold the loan to someone else, so that person has the rights. So if Bank 1 forecloses but had sold the note to Bank 2, they are stealing.

Feel bad for the banks? Remember they are the ones who wrote the laws. They wanted to be able to buy, bundle, subdivide, and resell the mortgages. And they made big Big BIG MONEY & PROFITS doing this over the past two decades. Now they need us to ignore their laws so they can foreclose on properties even though they can't locate the original mortgages. Remember, the mortgages are fungible as cash. I think they are classified under M3, the part of the money supply the Bush Administration decided that after 11/10/2005 they didn't need to track any more. They claimed the costs to collect M3 data outweighed the benefits the data provided (just like the 92 torture tapes).

But what is the fallout:

Deutsche Bank got a hard shock [in late 2007] when a judge in the state of Ohio in the USA made a ruling that the bank had no legal right to foreclose on 14 homes whose owners had failed to keep current in their monthly mortgage payments. The Judge asked DB to show documents proving legal title to the 14 homes. DB could not. All DB attorneys could show was a document showing only an “intent to convey the rights in the mortgages.” They could not produce the actual mortgage, the heart of Western property rights since the Magna Charta if not longer.... Banks live in the exotic new world of “global securitization”, where banks like DB or Citigroup buy tens of thousands of mortgages from small local lending banks, “bundle” them into Jumbo new securities which then are rated by Moody’s or Standard & Poors or Fitch, and sell them as bonds to pension funds or other banks or private investors who naively believed they were buying bonds rated AAA, the highest, and never realized that their “bundle” of say 1,000 different home mortgages, contained maybe 20% or 200 mortgages rated “sub-prime,” i.e. of dubious credit quality.

Now this same issue came up again in Ohio in 2009. A judge stopped foreclosure on 34 houses because no notes were produced.

And now, according to NPR:

Many mortgages are not held by banks, but by securitized trusts — complicated arrangements that involve many investors and byzantine legal documents. Homeowner advocates say they're finding a surprising number of improper mortgage documents and — in some cases — fraud that can delay foreclosure.

For years, lawyers defending homeowners against foreclosure had just one option: Convince lenders to re-negotiate the terms of their mortgage. Now they're taking their cases to court.

The 'Rocket Docket'
In Fort Myers, Fla., it's been called the "rocket docket" — a special court that hears — and clears — hundreds of foreclosures each day.

An average case takes just two to three minutes. State Circuit Judge James Thompson gets right to the point with homeowner Theresa Weber: "Miss Weber, it appears the bank has done what's necessary to get a judgment of foreclosure. Can you think of any legal reason why one should not take place?"

Like nearly all the other defendants, Weber answers, "No" and she gets what appears to be the standard judgment — 60 days to vacate the premises.

There are few tears in this court, mostly resignation.

In Miami-Dade County, across the state, Ana Fernandez says she thought that would be her fate as well.

Fernandez says she made a big mistake a few years ago when she refinanced her home. The new mortgage started with monthly payments of $1,200, but soon ballooned to $2,600 per month. "There was no way that I could afford paying that mortgage," she says.

Fernandez's home is a modest but recently updated three-bedroom house in Miami Gardens. She's lived here for 24 years.

When Fernandez contacted her lender, Chevy Chase Bank, she says the bank was no help: "They told me the best I could do was [get my payments] up to date and then start paying again, which would still leave me with the $2,600 [monthly payment]."

Fernandez learned firsthand how difficult it can be to convince lenders to negotiate terms that allow borrowers to remain in their homes.

Negotiating To Stay In Homes

When Fernandez's lawyer, Ray Garcia, took the case, he found that Chevy Chase Bank had no proof that it, in fact, owned her loan.

In a hearing, a lawyer representing the bank conceded that he did not have the original mortgage note — something that's required by law. What he did have was a copy.

Chevy Chase Bank bought Fernandez's loan from another institution. And, Garcia says, when he examined the copy, it showed ownership of the loan had never been assigned or transferred to Chevy Chase. In a recent interview in his office, he said: "As we sit here today, they haven't produced a note. They've produced absolutely no record evidence that Chevy Chase has a right to bring this action."

Chevy Chase was recently acquired by Capital One Bank. A Capital One spokeswoman maintains the company has filed the original note, but otherwise had no comment.

Producing The Mortgage Note

The demand that banks seeking foreclosure "produce the note" is a cry that's gotten attention from housing activists and real estate attorneys across the country.

For banks that own and service the loans they originate, finding the original paperwork is rarely a problem. But with loans that have been securitized — parceled with other mortgages and sold to investors — the original mortgage note can be elusive.

Lawyer April Charney, who works with Jacksonville Legal Services in Florida, has become well-known as an expert on defending homeowners against foreclosures. She says asking the bank to produce the paperwork is just the beginning.

She says lawyers who take the time to study the mortgage notes and the securitization agreements will almost always find deficiencies, and sometimes, fraud. "These loans are so tricked up by the Ponzi scheme that became the world of securitization and derivatives, that there is no owner to these loans," she says. "They just totally failed to comply with their contracts."

Charney has a full caseload and she's been working to train a small army of lawyers through seminars across the country.

The new world of securitized mortgages, she says, is layered and nuanced. Some courts, overwhelmed by a growing backlog of foreclosures, can even be hostile to attorneys who want to slow down the process.

But in some cases, it's the judges who are beginning to ask probing questions of plaintiffs seeking foreclosures. In California, federal bankruptcy judge Samuel Bufford has written about some of the new issues courts must consider in foreclosure cases. "One of the problems I see … is I don't seem to have the right parties before the court," he says. "I've taken testimony … and found out that the owner of the mortgage is somebody else who has not shown up in court at all."

A Changing Landscape

It's a still-developing area of law and it's one that could change abruptly with new federal legislation governing foreclosures.

Still, the growing number of legal challenges troubles Talcott Franklin, an attorney in Dallas and an expert on securitized mortgages.

He says mortgage-backed securities are an important part of a healthy housing market. If many of the legal challenges being mounted around the country are successful, he worries, that could undermine a vital financial tool.

"My big fear," Franklin says, "is that we'll get a series of decisions, based on not fully understood facts, which will prevent securitization from going forward in the future."

Franklin doesn't blame homeowners or their lawyers for bringing the challenges. He's more critical of lenders and their attorneys for not doing a better job understanding securitized mortgages and for not taking care of important legal matters before going to court to foreclose on a home.

So why are people just walking away when they could fight it out?