Score: Little guy, 1; bank, 0. It’s a nice change. Two weeks ago, a bankruptcy court in suburban New York did the formerly unthinkable: It waived a homeowner’s mortgage debt after the bank trying to foreclose on the home couldn’t submit any proof that it actually had a claim on the property.
According to the New York Times, when lender PHH Mortgage was asked to provide proof that it actually held the deed for the $461,263 mortgage, it couldn’t give the judge any records. Operating on the entirely reasonable principal that someone who claims to possess a piece of paper that gives them ownership to a nearly half-million dollar house should actually have that piece of paper, the judge slapped a stiff and possibly game-changing punishment on the disorganized lender.
Real estate experts say this is a more common occurrence than many people realize, and the potential implications are huge. During the go-go mortgage boom years, millions of loans were bundled into financial instruments called securities and sold to investors. They, in turn, often turned around and sold those securities to other investors. Making money hand over fist was the priority; keeping good records of who actually owned which mortgage wasn’t. The shambles that many banks’ mortgage records are in today could cost them big — and keep potentially thousands upon thousands of people from losing their homes.
The idea that banks should have to prove that they actually own the mortgage that gives them the right to foreclose if the homeowner falls behind on their payments isn’t new. A group called Consumer Warning Network has been advocating for homeowners who feel railroaded into foreclosure by the lending industry by advising them to ask the lender to “produce the note” in court during foreclosure proceedings.
Good Morning America covered this tactic last spring. At the time, though, the advice was just intended to help beleageured homeowners buy some time to get their mortgage modified or find another way to come up with the money they owed. It was assumed that the banks had the proof of their claim buried in a filing cabinet somewhere. Now, though, it’s clear that some lenders don’t have proof that they have the right to foreclose on a home, and at least one judge has put his foot down and refused to let the lender take the home without that proof.
It’s a small step so far, but it’s one that could have far-reaching implications because of the large number of mortgages that were repackaged and resold many times over earlier this decade. Of course, if a homeowner is in foreclosure, he or she will still lose the house if the bank has all the proper documentation. But if the bank can’t produce the documentation, it’s comforting to think that a judge won’t let them put a family on the street just on that lender’s say-so that they have the proof… somewhere
In answer, Mr. Shaev received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool. But U.S. Bank was not a party to the action.
Mr. Shaev then asked for proof that U.S. Bank was indeed the holder of the note. All that was provided, however, was an affidavit from Tracy Johnson, a vice president at PHH Mortgage, saying that PHH was the servicer and U.S. Bank the holder.
Among the filings supplied to support Ms. Johnson’s assertion was a copy of the assignment of the mortgage. But this, too, was signed by Ms. Johnson, only this time she was identified as an assistant vice president of MERS, the Mortgage Electronic Registration System. This bank-owned registry eliminates the need to record changes in property ownership in local land records.
Another problem was that the document showed the note was assigned on March 26, 2009, well after the bankruptcy had been filed.
Mr. Shaev’s questions about ownership also led to an admission by PHH that, along the way, it had levied an improper $450 foreclosure fee on the borrower and had overcharged interest by an unstated amount.
John DiCaro, a lawyer representing PHH at the hearing, was in the uncomfortable position of having to explain why there was no documentation of an assignment to U.S. Bank. He did not return a phone call seeking comment last week. Ms. Johnson, who couldn’t be reached for comment, did not attend the hearing.
According to a transcript of the Sept. 29 hearing, Mr. DiCaro said: “In the secondary market, there are many cases where assignment of mortgages, assignment of notes, don’t happen at the time they should. It was standard operating procedure for many years.”
Judge Drain rejected that argument, concluding that what had been presented to the court just did not add up. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” he said. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”
Mr. Shaev said he was shocked when the judge expunged the mortgage debt.
“We are in uncharted territory,” he said. “Right now I am in bankruptcy court with a house that has no discernible debt on it, yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it.”
Among the next steps Mr. Shaev said he would take is to file an amended plan or sue to try to get clear title to the property.
Late last week, PHH appealed the judge’s ruling. But Mr. DiCaro and PHH are in something of a bind. Either they will return to court with a clear claim on the property — including all the transfers and sales that are necessary in the securitization process — or they won’t be able to produce that documentation. If they do produce it, they will then have to explain why they didn’t produce it before.
Oh, what a tangled web these mortgage lenders weave.
Published by: GRETCHEN MORGENSON Published: October 24, 2009
Filed under: News | Tagged: debt, foreclosure, lost, mortgage, new york times, note, paperwork, PHH, waived
