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Mortgage Note Issues Help Debtors Avoid Foreclosure
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Published: February 23, 2008
Updated: 02/22/2008 08:33 pm
Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.
That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton. The Seattle-based lender failed to prove that it owned Lents' mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.
"If you're going to take my house away from me, you better own the note," said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.
Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven't been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.
"I think it's going to become pretty hairy," said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. "Regulators appear to have ignored this, given the size and scope of the problem."
More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Md.-based industry newsletter. Those loans may be sold several times before they land in a security.
Shortcuts Taken With Paperwork
Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Ind.
"Loans were mass produced and short cuts were taken," White said. "A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren't around anymore."
More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.
The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime is at a four-year high, according to the mortgage bankers.
More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, Calif.-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.
Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.
"The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen," said Chris Geidner, a lawyer in Dann's office. "These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people."
When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what's called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid.
She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.
"They raise the issue of whether the trusts own the loans at all," Charney said. "Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule."
State laws make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.
"All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully," Saft said. "The lenders can't find the paper."
Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.
"It's a gigantic waste of time," Naimon said. "The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan."
Judges Helping 'The Little Guy'
Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, Calif.
Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November because of the inability of the trustee and the servicer to prove ownership of the mortgages.
Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.
"Judges are human beings," said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. "They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company."
Lents is former CEO of Investco Inc., a Boca Raton-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen.
"If the homeowner doesn't object to the lost-note affidavit, the judge rubber-stamps it," Lents said. "Is it oversight, or are they trying to get around the law?"
Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.
"I can't believe the handling of notes is worse than it was five years ago," said Guy Cecala, publisher of Inside Mortgage Finance. "What we didn't have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before."
American Home Mortgage Investment Corp., the Melville, N.Y.-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork.
The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It's run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Va.-based MERSCORP Inc., which is owned by mortgage companies.
MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company.
For about half of U.S. mortgages, there is no tracking mechanism.
MERS rules don't allow members to submit lost-note affidavits in place of mortgage notes, said R.K. Arnold, the company's CEO.
"A lot of companies say the note is lost when it's highly unlikely the note is lost," Arnold said. "Saying a note is lost when it's not really lost is wrong."
Lents' attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents' mortgage note.
"Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes," Raskin said. "As an officer of the court, I find it troubling that they've been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system."
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Reader Comments
Posted by ( blahdeeblah ) on February 27, 2008 at 9:57 a.m. ( Suggest removal )
There's some research missing from this article. Title is filed in the local hall of records, whether city hall or some other institution. Title will indicate the true owner of the property, and if a mortgage is owed, then mortgagee is listed. While the theme of the story is "can't find the paperwork" perhaps more detail on where/why title records are not produced in court?
Also, it's disingenuous of Lent's attorney to express shock, SHOCK! that lenders are saying they can't find the paperwork, when her client hasn't paid an installment in 6 years and - thanks to Boca's solid homesteading protection laws - still inhabits a house that he knows he owes money on. Pretty sneaky for someone who was censured and fined by the SEC for cheating the system, don't you think?
Mayhaps it's why he moved to Boca in the first place.
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Posted by ( ifonly ) on February 27, 2008 at 4:08 p.m.
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Posted by ( playerba1 ) on February 27, 2008 at 10 p.m.
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Posted by ( ifonly ) on February 28, 2008 at 7:30 a.m.
(This comment was removed by the site staff.)
Posted by ( playerba1 ) on February 28, 2008 at 9:17 a.m.
(This comment was removed by the site staff.)
Posted by ( ifonly ) on February 28, 2008 at 11:19 a.m.
(This comment was removed by the site staff.)
Posted by ( moman ) on February 28, 2008 at 3:37 p.m. ( Suggest removal )
Disclaimer: I am not in the real estate biz, but my wife is a real estate attorney - development & land use, not residential stuff. I find this interesting on many levels, but the bottom line is that there is obviously a breach here- but the injured party (note holder) has to prove he's legit & if the court wants more than an affidavit, i think that's a good thing. Notwithstanding the fact the Mr. Lents seems to be a bit of a scalawag, the fact is that many loans were made that shouldn't have been & sold down the pipeline. Now his note ends up at WAMU, without proper docs & WAMU wants relief? Ooops. Here's the bag, hold it!
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Posted by ( rckmajs ) on February 28, 2008 at 4:32 p.m. ( Suggest removal )
ifonly...I think you lose on the qualifications battle with playerba1. Last I heard...you guys (appraisers) put the values on the homes that allowed the banks to approve the mortgages. Think you might have some fault in this? Just an uneducated observation and question.
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Posted by ( ifonly ) on February 28, 2008 at 5:24 p.m.
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Posted by ( Exothermicus ) on February 29, 2008 at 3:07 a.m. ( Suggest removal )
INAL: the thing that you are forgetting is the signed loan paperwork is a contract between the original lender and the borrower. Despite any power of attorney clause that may or may not have been present in the paperwork; the claimed lien on the property by the new mortgage holder can only be validated if there is a proper paper trail documenting the transfer of the title. Otherwise, we would have all of the identity thieves, pulling property theft scams. This is the dirty little secret with third party collections agencies, 99% have not done their due diligence and cannot prove the legitimacy of the original debt. People have been lazy about challenging their claims, and now they are lazy about ensuring they have the paper work proving their claims. If the Title that is filed with your clerks office has not been updated and your were not required to sign anything, always challenge their claims and tell them to stuff it if that cannot.
Exo
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Posted by ( SecretAgentMan ) on March 10, 2008 at 11:21 p.m. ( Suggest removal )
I am a professional, but not in the real estate business (ditto for my wife). I have dealt with contracts, however, and understand the applicable area of the Uniform Commercial Code that applies here. It is the right only of the "holder in due course" (holder of the note) to enforce its rights on that note. If WaMu claims to be authorized to foreclose on a note, then it has to be the holder in due course. If it does not have the *original* note in its possession and makes a claim that causes injury (loss) to the mortgagee, what is to prevent the *true* holder of the note from attempting to do the same thing at a later date? The Uniform Commercial Code is written to protect each party from the indiscretions (or outright fraudulent intent) of the other. Banks and mortgage companies are not, and should not be, immune from its requirements.
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Posted by ( Ihateregisteringtocomment ) on March 19, 2008 at 9:51 p.m. ( Suggest removal )
Ifonly - so you have no use for agents, which I am, but take offense to people who lay blame on appraisers for allowing the prices to go through. You actually said that you were swayed by lenders and owners. Didn't you say that you friends with a fraud investigator and that the story above was about ethics.
Oddly, I signed up just to comment on you and between then and now, all of your comments say "removed by staff".
Since the majority of the bad loans were 100% it does fall on appraisers. And how exactly did we get 25% appreciation in one year if you didn't allow it to happen.
I told my clients houses were overpriced but they wanted to buy anyway. At first I expected appraisals not to come in but they did. Thanks guys.
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Posted by ( terryleelawson ) on April 3, 2008 at 11:51 a.m. ( Suggest removal )
I tried to work with the USDA-RH but they just give me the run around. I want to keep my home but no one wants to help. Dose anyone know where we can get some help???
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Posted by ( REindexDotCom ) on May 2, 2008 at 11:35 a.m. ( Suggest removal )
I am a real estate broker and have written loans and had a title company. The public record in registry of deeds disappears into things like MERS. The servicer then only knows who it is told to pay, it has no verifcation of loan ownership. And investors like FannieMae don't negotiate on individual loans that they have bundled into mortgage backed securities. But to workout a loan you have to be able to work with the owner, not the owners representative.
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Posted by ( annabelle ) on May 4, 2008 at 10:05 a.m. ( Suggest removal )
There is a way to find out who owns one's note. Under TILA 1641 (f) (2) the loan servicer has to disclose who owns the note or is is the master servicer of the trust the loan is in.
I did it. I ended up having to go to court the get the lender to comply. Countrywide just got slammed by a judge for refusing to comply to a borrower who requested the info under 1641 (f) (2).
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