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 . . .

>

Previously:
Mortgage Electronic Registration Systems Loses Legal Shield (September 23rd, 2009)

http://www.ritholtz.com/blog/2009/09/mortgage-electronic-registration-systems-loses-legal-shield/

The Mortgage Netherworld (April 2009)

http://www.ritholtz.com/blog/2009/04/the-mortgage-netherworld

Source:
If Lenders Say ‘The Dog Ate Your Mortgage’
Gretchen Morgenson
NYT, October 24, 2009

http://www.nytimes.com/2009/10/25/business/economy/25gret.html

Category: Bailouts, Credit, Legal, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “What a Tangled Web Mortgage Securitizers Weave…”

  1. nanka says:

    Hooray for the little guy…right now…So, if the banks can’t prove they own the property, can the squatting resident prove they own it? If not, how do you ever sell it? Apply to the DMV for a lost title? Or, does the wiping out of that debt allow the resident to get title?

  2. Make sure you save your paperwork — and open a safety deposit box at a bank different from where your mortgage is held.

  3. farmera1 says:

    Where financial engineering, the rule of law and anarchy (aka pathological deregulation) all meet.

    Rules we don’t need no stink’n rules to paraphrase a famous movie line.

    Me thinks this is just starting, maybe we’re in say the top of the second inning with one out and nobody on base.

  4. peep are going to get a, new?, education on http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Title+Insurance

    should be similiar to the one they received on http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=monoline+Insurers

    good thing ‘preparations’ are being made http://www.insidebayarea.com/dailyreview/localnews/ci_13620723?source=rss
    “…Romulad Muller, police attache with the French Embassy in Washington, D.C., who accompanied the team, described them as the French “Dream Team.” Members began training six months ago to learn how to combat the stress and fatigue they will face.
    All 27 teams will run through each of the 25 scenarios. About 3,000 people are involved in the $1 million event, the cost of which is covered by Homeland Security grants and corporate sponsorships…”

  5. Richard R says:

    Where does the MERS mess leave the title insurance companies? OK, so there is no clear title for foreclosed homes with securitized mortgages. That makes me wonder if there is clear title for homes with securitized mortgages that are not in foreclosure. Will a normal home sale transaction be jeopardized because of title problems? How many homes are there with suspect title?

  6. Transor Z says:

    Notes should also be recorded at your local registry of probate/deeds. Many counties have online registries you can download pdfs from for a nominal fee.

  7. Dan Duncan says:

    Barry writes: “More recently, we have learned that the bank was undeserving of that benefit. And, we have also learned that a good percentage of the ‘deadbeats’ had been defrauded — by mortgage brokers, by real estate agents, and by the banks themselves.”

    Anecdotal garbage.

    Obviously, the fraud issue is quite important to the overall mess. With that stated, could you at least give some support for the statement that a “good percentage” was defrauded. Is a “good percentage 1% or 51%?

    Then, while you’re at it–please clarify what is meant by “defrauded”? Are you using the term where ONLY the broker/lender committed the fraud? If so, what do you propose should be done where BOTH the lender and borrower committed fraud?

    [Take the standard "Liar Loan"...unless the mortgage broker went in and changed the borrower's stated income, unbeknownst to the borrower, then the borrower also lied too, no? So in this situation, both Lender and Borrower lied....Is this lying borrower also to be included in your "good percentage" of borrower's who were defrauded? ]

    What if it turns out that in this mortgage crisis, the most of the fraud is determined to have been committed by BOTH lender and borrower? In this case, the fraud definitely hurts innocent neighbors who didn’t participate. Should the not-so-innocent borrowers receive the $450,000 windfall of an eliminated mortgage because lenders did not validate chain of title? OK, fine, they should.

    Then what if innocent borrowers–who have been making payments–demand that the Servicer currently receiving his timely payments verify its legitimacy? Keep in mind, there’s no foreclosure, no bankruptcy proceeding…just a reasonable request from the responsible borrower to the Servicer: Authenticate your right to receive these payments.

    This sure is great…a whole lot of mortgages are going to be extinguished!!

    And if the bankruptcy of AIG was going to “take down the system”…what of this headline:

    “60% of All Mortgages Extinguished! ”

    It certainly would do wonders for the household balance sheet….

    Which would provide some solace as we lower the draft age to 15 and up it to 65 and head to war on 6 1/2 continents.

    The Rule of Law is a powerful concept…with A LOT of unintended consequences when it is ignored for 15 years. Where in the hell was Judge Robert Drain in the previous decade? And why didn’t he and other judges address this issue of authenticating title prior to now?

  8. alfred e says:

    @MEH: Interesting article about the Bay area test.

    Wasn’t about terrorists in the old sense.

    Was about the coming civil unrest the fascists will label terrorism.

    Homeland Security my ass.

  9. torrie-amos says:

    IMHO, you gotta realize who owns all the mortgage BS, it was sold to large pensions or whatever, they were not all in, lets say they had 10% in that game, they have probably written it off as bad luck and are holding or have already sold, thus they dont give a rat’s ass at this point, it is continuing and mounting money drain on banks who service and still own there piece of the pie, and as more defaults come in next year, which surpasses this years it’s banks tier 1 that is crushed, not some pension fund who’s already written it off as a bad trade that sits on there balance sheet………ben said, you take care of homes, i’ll take care of the rest, and what did banks do, traded for profits and banked coin and won’t lend, hmmm, wonder why, could it be since they handled the crap they are the only ones who know the details, like simple stuff like legally you have to have a chanin of evidence on paperwork, which they don’t have, i’m sure no one has ever been put in charge of cleaning up a mess in your company only to find out, you are screwed cause all the files are not even anywhere nears close to what everyone SAID AND PROCLAMED THEY WERE VERBALLY, and thus u got no legs

  10. Dan Duncan:
    Do you work for Lawrence Yun?

  11. During the housing boom, lenders passed around mortgages as if they were whiskey bottles at a frat party. Notes were lost, destroyed, sold into multiple pools. Mortgages were not recorded and exorbitant fees were collected by the big firms on Wall Street.

    Now that the bubble has burst, “lenders” are trying to collect on loans they do not own, in most cases never lent a dime on the transaction, have no right to, or were paid 30 times over in bailouts, insurance, credit default swaps, etc.

    They are doing this because they can. They are steamrolling the courts rocket dockets because hardly anyone is contesting their foreclosures. Think about it. If you could go into a court and file thousands of foreclosures a week, and only a mere 10% challenged the authority of the foreclosing entity, what would you do if you were the greedy bankster?

    The crises is even worse in non judicial states…

    In almost every case these pretender lenders do not and did not own the loan. Almost all loans during the boom were securitized and it was investors that put up the money. Not the banks.

    Now these “pretender lenders” along with MERS are trying to steal the homes by filing fraudulent assignments, by the thousands, to process the foreclosures.

    Don’t believe me? See for you yourself.

    http://4closurefraud.wordpress.com/

    4closureFraud

  12. Space_Cowboy_NW says:

    And so it goes…..What’s next?

    That the police/law enforcement will no longer gets the universal pass (wink, wink, nod, nod…)
    when someone takes them to task for abuse? Oh my, perish the thought of accountability….nest thing
    you will attempt to convey is that the SEC is doing real work. Not just perp walk photo opps.

    Btw ..”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 bank(s) behaviour reminds me of the song (Great White?): ‘Once bitten, twice shy’

    I perceive their (the banks) mindset is of a fluke….until the next awakening!

  13. Space_Cowboy,

    w/this: “That the police/law enforcement will no longer gets the universal pass..”
    hmm, maybe..

    see: “VALHALLA, N.Y. — Former New York Police Commissioner Bernard Kerik is now just another number in the county jail.
    Westchester County jail spokesman Justin Pruyne (PRYN’) says Kerik was given the number 210717 and a single-bed cell when he arrived Tuesday afternoon.

    Kerik is awaiting a federal trial on corruption charges. He had his $500,000 bail revoked for disclosing secret pretrial information.
    Pruyne says the 54-year-old Kerik was processed like any other incoming inmate but was segregated from the general jail population because of his background in law enforcement.
    Kerik won glowing reviews for his leadership after the Sept. 11 attacks. He was later nominated to lead the federal Homeland Security agency but withdrew as corruption allegations mounted…”
    http://www.truthistreason.net/former-nyc-top-cop-is-now-an-inmate
    http://www.policeone.com/chiefs-sheriffs/articles/1957086-Former-NYC-top-cop-is-now-an-inmate/#
    http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Guiliani+is+a+Criminal
    though something about Justice delayed… sticks out..

  14. Winston Munn says:

    @ Dan Duncan,

    “The Rule of Law is a powerful concept…”

    You are confusing present-day America with pre-Oligarch America.

  15. Transor Z says:

    I guess a few people here have already forgotten what CDSs are for. It stands for “Cash Deposited to Sachs.”

  16. ironman says:

    Problem, meet potential solution.

  17. Chief Tomahawk says:

    I’m sure the banks are already on the phone to their lobbyists in D.C. to take care of it. The taxpayer will once again foot the bill.

    By the way, has the “government regulation stiffles business growth and efficiency crowd” received it’s comeuppence yet? Seeing as how they ultimately needed a government bailout because self-regulation failed, evidently the private sector doesn’t always deploy resources efficiently.

  18. Space_Cowboy_NW says:

    Mark E Hoffer Says:

    “though something about Justice delayed… sticks out..”

    Humm, the only bad apple in the barrel (within the big apple)?

    Not to worry if local LEO is not upto the task (budget cuts from reduced tax revenue)
    http://www.armytimes.com/…/ap_army_rucker_shootings_response_101909/

    which has not escaped attention by various (cash strapped) cities/counties
    nyletterpress.wordpress.com/…/new-york-town-considers-martial-law-troops-patrol-in-alabama/ -

    As always, your mileage may vary…….

  19. farmera1 says:

    “By the way, has the “government regulation stiffles business growth and efficiency crowd” received it’s comeuppence yet?”

    Not really, they have a tremendous advantage in the propaganda machine. Just listen to Fox or late night radio if you want to really understand the causes of the economic mess. Of course the “real” blame belongs to social engineering efforts(FANNIE AND FREDDIE), or as I often hear from the bankers , it is all social engineering’s fault. The bankers were forced to make bad loans by the big bad government. (You know the whole problem was caused by all those poor people, if they would just go away there wouldn’t be an economic problem.)

  20. ella says:

    Also see this article “New Shockwaves From Courts and Accounting Board
    The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures” By PAM MARTENS who worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire.

    http://www.counterpunch.org/martens10212009.html

  21. Incidentally, if one were to end up with a “free house” as a result of lender incompetence, would that be counted as a windfall by the IRS?

  22. bergsten says:

    @BR – “Make sure you save your paperwork — and open a safety deposit box at a bank different from where your mortgage is held.

    Wow. That’s exquisite paranoia — I am impressed. I’ll try to do you one better.

    You pay off your mortgage, and (hopefully) some official-looking, stamped paperwork eventually turns up in the mail. How do you know it’s legit? I assume Title Insurance covers the lender, not the owner… What if the bank simply refuses (or delays indefinitely) to sign over title? Who wants to wait 30 years to find out they’ve been screwed from day one?

    I’m even scaring myself!

  23. TakBak04 says:

    The National Academy of Sciences has issued its own estimates of the number of Americans in poverty, and yes, it’s much worse than the official statistics have been telling us for the past decade. The new NAS formula estimates nearly 1 in 6 Americans, 15.8 percent, are living below the poverty line. That’s 48 million Americans.

    By comparison, the latest official Census Bureau statistics are that 13.2 percent of Americans, or 39.8 million, are impoverished. It should be noted that the Census Bureau is reportedly cooperating with the National Academy of Sciences to get this information out as quickly as possible.

    According to the Associated Press, the NAS took into consideration the rising costs of medical care, transportation, child care, as well as geographical variations in living costs. Unbelievably, the Census Bureau calculations never accounted for these costs, since they were first used in 1955. My guess is that this was a convenient way to hide the destruction of the working class beginning with the oil price shocks and Volcker interest rate shock of the 1970s, and horrific human impacts of the de-industrialization of the U.S. economy that was rapidly accelerated by the usury and speculation unleashed by Ronald Reagan’s deregulation mania. Not to mention the vicious attack on organized labor initiated by Reagan’s destruction of the air traffic controllers union.

    Particularly troubling is the NAS’s finding that poverty among elderly Americans is actually twice what the official figure is. The NAS finds that 18.7 percent of Americans 65 and older – nearly 7.1 million – are in poverty. The traditional Census Bureau measure is 9.7 percent, or 3.7 million, elderly Americans in poverty. The Associated Press notes that the dramatic doubling of this statistics under the NAS measure is attributed to the NAS taking into account rising Medicare premiums, deductibles and the coverage gap in the prescription drug benefit.

    ———
    http://www.economicpopulist.org/content/yes-poverty-worse-they-ever-admitted

  24. @bergsten – “Wow. That’s exquisite paranoia — I am impressed. I’ll try to do you one better.”

    I’ll try to do you one better…

    http://4closurefraud.wordpress.com/2009/10/25/i-am-an-attorney-so-i-decided-to-sue-my-lender/

    4closurefraud

  25. GeorgeBurnsWasRight says:

    Let’s follow the logical progression of malfeasance/fraud:
    Goal: securitize and sell as many mortgages as possible.
    Phase 1. Greatly reduce underwriting standards to get more mortgages to securitize
    Phase 2. Abandon underwriting standards (aka Liar Loans) to get more mortgages to securitize
    Phase 3. Issue mortgages to phony or non-existent people to get more mortgages to securitize
    Phase 4. Issue securitized packages with significant percentages of non-existent mortgages and/or assign the same mortgage to more than one package, to get more mortgages to securitize
    We know that phases 1 through 3 happened, to varying extents. Anyone heard any evidence of phase 4?

  26. hue says:

    title insurance covers the lender, making sure the liens are cleared for the lender, not borrower. but often if not always charged to borrower at closing.

  27. hue says:

    as a former mortgage broker, i should know better. the borrower can also buy title insurance, but most people don’t. the lender requires title insurance.

  28. ToNYC says:

    No free lunch here either, chumps! The title will attract liens like a cat attracts fleas. The bill will accrue for as long as the free-loader thinks they get a free pass, and will lead to re-losing the free house. The mortgage will turn up having been bought by clever sleuthing and that hard work won’t be a free lunch either. Doesn’t anyone play chess in the financial services industry and think a few moves ahead?
    There is nothing new under the sun, which is the only free lunch there is.