Muddled Foreclosures: Whose Home is it Anyway?
Sharon L. Secor
December 10, 2007
As foreclosure cases clog the dockets of courts around the country, a variety of interesting details about the dealings of the mortgage industry have begun to come to light. One legality in particular has been the source of debate and delay in a growing number of foreclosure actions, centering around debt ownership and mortgage investment practices. It seems that many foreclosure proceedings may not be the cut-and-dried cases that creditors expect when they take distressed homeowners to court, thanks to a complex web of mortgage note sales and investment that has been constructed in today's financial markets.
For about two decades now, most mortgage loans taken by consumers have been packaged or pooled for sale as securities investments. In many cases, mortgage notes are sold before the ink is dry on the paperwork, with the first sale of the debt arranged even before the loan has been officially closed. With outstanding securitized mortgage debt reaching a figure of more than $6.5-trillion by the end of 2006, this practice has increased the liquidity in the market, providing a steady stream of funds for new loans to be made. However, it has also complicated matters, often making it difficult to determine who actually holds legal claim to the outstanding debt as loans are sold over and over again.
In an increasing number of cases around the country, plaintiffs who have initiated foreclosure proceedings against delinquent homeowners have run into an unwelcome surprise. The root of their problem seems to be in the filing of paperwork, or lack of it, as mortgages are transferred during the loan pooling process. As each loan is sold, a document, called a loan assignment, is required to show that the debt and any collateral attached to it has been transferred to the purchaser. In recent years, this step has been skipped by investors and trusts in order avoid the need to file separate paperwork on each of thousands of loan transactions, relying instead on a blanket contract that details the arrangements for all of the loans in a pool. In a recent study done by Katherine M. Porter, an associate professor of law at the University of Iowa, examination of 1,733 foreclosures showed that 40 percent of them had been sold in this manner, without the necessary paperwork filed to establish ownership. When put to the test in foreclosure proceedings, these contracts have not had the same legal standing as traditional assignments in the eyes of the court.
For example, in an October 2007 decision, Ohio Federal District Court Judge Christopher A. Boyko dismissed 14 foreclosure cases brought in front of the court on behalf of investors, due to insufficient proof that these investors owned the mortgages in question. Deutsche Bank National Trust Company, a trustee for securitization pools, was ordered to file copies of loan assignments to show ownership of the note and mortgage on each of the 14 properties as of the foreclosure filing date. The lender was unable to produce these documents, instead offering the court documents showing just the intent to convey legal rights in these mortgages, a substitute that Judge Boyko did not find to be acceptable under the law. Since this decision, dozens more foreclosure cases have been dismissed on the same grounds in Ohio, along with cases in New York, Florida, and Massachusetts.
Since these these dismissals have been without prejudice, meaning that lenders who can find the relevant paperwork can file the cases again, the relief for the homeowners is temporary. However, many lenders may become more willing to make arrangements with borrowers to avoid the foreclosure process due to these dismissals, saving themselves the legal entanglements involved. Also, the numbers of cases dismissed on such grounds is quite likely to multiply with so many loans on the market without proper paperwork, and more defendants beginning to challenge foreclosures on the basis of murky ownership records.
So, it seems that the complex web of mortgage and financial markets has entangled not just the borrower, but lenders and investors as well. Corners cut in the rush to profit have cast long shadows over the lives of home buyers and the investment markets, creating a mess that may take years to sort out. Restoring order and consumer confidence in the American economy may be a challenge that has been vastly underestimated by those financial experts who predicted a soft landing and quick recovery.
For about two decades now, most mortgage loans taken by consumers have been packaged or pooled for sale as securities investments. In many cases, mortgage notes are sold before the ink is dry on the paperwork, with the first sale of the debt arranged even before the loan has been officially closed. With outstanding securitized mortgage debt reaching a figure of more than $6.5-trillion by the end of 2006, this practice has increased the liquidity in the market, providing a steady stream of funds for new loans to be made. However, it has also complicated matters, often making it difficult to determine who actually holds legal claim to the outstanding debt as loans are sold over and over again.
In an increasing number of cases around the country, plaintiffs who have initiated foreclosure proceedings against delinquent homeowners have run into an unwelcome surprise. The root of their problem seems to be in the filing of paperwork, or lack of it, as mortgages are transferred during the loan pooling process. As each loan is sold, a document, called a loan assignment, is required to show that the debt and any collateral attached to it has been transferred to the purchaser. In recent years, this step has been skipped by investors and trusts in order avoid the need to file separate paperwork on each of thousands of loan transactions, relying instead on a blanket contract that details the arrangements for all of the loans in a pool. In a recent study done by Katherine M. Porter, an associate professor of law at the University of Iowa, examination of 1,733 foreclosures showed that 40 percent of them had been sold in this manner, without the necessary paperwork filed to establish ownership. When put to the test in foreclosure proceedings, these contracts have not had the same legal standing as traditional assignments in the eyes of the court.
For example, in an October 2007 decision, Ohio Federal District Court Judge Christopher A. Boyko dismissed 14 foreclosure cases brought in front of the court on behalf of investors, due to insufficient proof that these investors owned the mortgages in question. Deutsche Bank National Trust Company, a trustee for securitization pools, was ordered to file copies of loan assignments to show ownership of the note and mortgage on each of the 14 properties as of the foreclosure filing date. The lender was unable to produce these documents, instead offering the court documents showing just the intent to convey legal rights in these mortgages, a substitute that Judge Boyko did not find to be acceptable under the law. Since this decision, dozens more foreclosure cases have been dismissed on the same grounds in Ohio, along with cases in New York, Florida, and Massachusetts.
Since these these dismissals have been without prejudice, meaning that lenders who can find the relevant paperwork can file the cases again, the relief for the homeowners is temporary. However, many lenders may become more willing to make arrangements with borrowers to avoid the foreclosure process due to these dismissals, saving themselves the legal entanglements involved. Also, the numbers of cases dismissed on such grounds is quite likely to multiply with so many loans on the market without proper paperwork, and more defendants beginning to challenge foreclosures on the basis of murky ownership records.
So, it seems that the complex web of mortgage and financial markets has entangled not just the borrower, but lenders and investors as well. Corners cut in the rush to profit have cast long shadows over the lives of home buyers and the investment markets, creating a mess that may take years to sort out. Restoring order and consumer confidence in the American economy may be a challenge that has been vastly underestimated by those financial experts who predicted a soft landing and quick recovery.