Mortgage debt waived after bank can't find paperwork
Filed under: Banks, Real Estate, Refinancing
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.
Reader Comments (Page 1 of 7)
10-29-2009 @ 6:52AM
d a hud said...
will the bank honor the deed? if the bank don't have record of the home, how can they transfer a deed?
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10-29-2009 @ 10:14PM
CJ said...
That is precisely the point, d a hud. The bank can't produce records of the mortgage note, let alone a note that says THEY are the lender. The bank doesn't hold the deed, per se, and it's not up to them to "honor" the deed. The deed is recorded in the county in which the property lies, and is likely "in the name" of the homeowner. It is likely shown as collateral by the original lender because someone behind a desk didn't do their work correctly (properly transferring the mortgage note to the new lender and making sure the correct record was received in-house).
Also likely, the county will be ordered by the court to issue a quit-claim deed to the property in the consumers' name. THIS is exactly why people need a lawyer during these outrageous times, and is an awesome thing for the homeowner! The lender may or may not have other options, but for now, it seems, the homeowner gets the prize! Go Homeowner!
10-29-2009 @ 6:59AM
Alan said...
Then what happens a few years later when the homeowner wants to sell the property and has no proof of ownership ? I guess that you would not have to pay the property taxes also seeing that there is no clear owner.
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10-29-2009 @ 7:43PM
Kim said...
No i'm sorry to let you know, But you do have to pay your Taxes. If you don't ,the court house dose not have to look for anything, all houses of each area are on file by number and address. If taxes are not paid buy the 2nd year, your house will be listed in the news papers for sale. You will still have time to make a payment even after it's been listed. Taxes Trumps all.
10-29-2009 @ 7:43PM
Kim said...
1st why would you try to sell a house that you did not pay for in full?
You would be living in it for free to only pay taxes and do up keep, why would you want to sell it?
IMOP, if you did not work to pay it off just feel blessed that you got away with a flaw in the system.
10-29-2009 @ 7:08AM
Leslie said...
I am a paralegal and do titles for law firms, lending institutions, etc. My comment/question is that does the recorded mortgage in their respective county courthouses not stand as legal proof or do they have to produce the original note. In the three states I work in, a certified copy from the courthouse is just as good as the original. Just wondering???
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10-29-2009 @ 9:37AM
Val said...
Good question Leslie but wouldn't the paperwork filed with the town have the original lenders information? If you start out with a mortgage from ABC Bank and then it's sold to DEF Bank who eventually bundles it off and sells it to some huge securities conglomerate, it's lost in the sauce. As long as you keep paying your property taxes I don't think the town can do anything to you and when you go to sell the house the deed will be transfered to the new owners name. Maybe a future article will explain how the deed situation could be resolved. Seriously, though if the current mortgage holder can't find your paperwork and you do eventually pay off the house, somehow you get clear title.
10-29-2009 @ 9:52AM
Mark said...
Can't even keep track of where they put their papers...THIS is the banking industry our elected officials were convinced were too important to let fail, at the cost of billions of dollars in bail-out money? Good grief...
10-31-2009 @ 5:34PM
wl paradise said...
I think they didn't come to the court with all the documents of proof--- the judge didn't give them additional time to get it. Case dismissed.
I am dealing with Wells Fargo trying to get them just to lower my interest rate a little..........it has been going on for MONTHS-- almost a year.... They are doing NOTHING of value to help me. I am not behind on any property . All I asked for is an interest rate reduction. They are the WORST bank ever. SAXON mortgage called me directly and OFFERED a 4.99% rate for the next 5 years on another property I own..... I wasn't behind on my mortgage either.... Just smart banking. Way to go SAXON
10-29-2009 @ 7:43PM
Kim said...
I am sure you are right. The catch here is these banks are taking people to court Unprepared. They are ask to show who owns it and then it just becomes a he say she say. So in this case the Judge said in Laymen’s terms, to the bank you had your shot you wasted my time, and then tells the people to go about there life. The house will set in limb for many years to come unless the taxes are not paid or the people in it move out or die.
10-29-2009 @ 2:57PM
Judi said...
I work at a law firm in Massachusetts. The deed is in the person buying the house's name, not the bank. I believe they want the original note, not the mortgage. When they do a title exam, I would guess that it would show up as a blip on the title report, but as long as you keep all the court papers showing what happened, they would be able to sell the property and issue a clean title on it.
10-30-2009 @ 2:25AM
Sean said...
What do you think would happen if they find the paper at a later time? Wouldn't that mean that they can simply retry the case. If they can't get the deed back, they can still put the loan into collections, and put a lien on the assets of the 'owner'.
I personally think this is dishonorable for a person to take something like a simple technicality to screw the system. If they would screw a company that dropped over $400,000 on the table for the home they wanted, what kind of person might they be. I wouldn't trust them.
10-29-2009 @ 7:14AM
Joyce said...
I would think there would be no problem selling the house if the homeowner kept their closing papers. When you take out a mortgage, you have to carry title insurance (among other things) and that would assure you that the house is yours. Also, property deeds are recorded in the Records Department of the county you live in.
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10-29-2009 @ 7:20AM
scharabo said...
Excellent questions.
I suspect those using this loophole may have problems in selling the property.
And don't assume just because you financed with a local bank, versus a broker, they still held the mortgage. Many were sold to third parties. That's why mortgage rates aren't really tied to the prime interest rate, but rather to the secondary market for mortgages of that type.
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10-29-2009 @ 7:28AM
Coach said...
Just a small example as to how much bigger God is than your little problem. Thank you Jesus.
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10-29-2009 @ 8:47AM
Pat said...
Haha... Nice try with that one, but I'll give you credit for trying to stick that in there.
10-29-2009 @ 9:06AM
shannon said...
Hmmm...and where was your god when the person was not making money and forced to be disclosed on. this wasn't proof of god, this was a clerical error. Jeeze, some people
10-29-2009 @ 9:17AM
shannon said...
Ha, I was so angry about you trying to bring your fairy tale into this that I put disclosed instead of forclosed...
10-29-2009 @ 10:44AM
hilary said...
shannon.........Just cause God doesn't make things happen in your life the way you think is best doesn't mean God is working in your life. God has a plan thats better then anyones plan for their life. It just takes time to reveal itself.
10-29-2009 @ 10:27AM
Thepersonabovemeisanidiot said...
And then you typed "forclosed" instead of "foreclosed:. My God is clearly more powerful than your typing/spelling ability.