Mortgage investors may not have a legal right to foreclose on property.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
You think CDOs are crap now? If lending institutions assume this ruling will be upheld on appeal, they’re going to go right in the toilet.
Writer Gretchen Morgenson notes this has been a common practice for years, letting holders of mortgage security notes foreclose, but it had never been legally challenged.
The increased slicing-and-dicing of CDOs was making mortgage securities-based foreclosures more difficult anyway.
More below the fold.
Here’s how the judge’s decision came down:
On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.
Here’s how the mortgage security process starts, without including the part of different slices, or tranches, being mixed together into CDOs, which would make the picture below even more complicated:
The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.
Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership.
About 40 percent? Do you hear the wheels of the foreclosure machine grinding to a halt?
And here’s why the situation exists:
When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.
In other words, another corner gets cut. And when securities holders bitched, Boyko told them where to get off:
e plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.”
The article goes on to say that the cases can be refiled in state court, whether or not a federal appeal is being pursued. But, I’m betting attornies for debtors block that, depending on where either the putative note-holders, or the actual note-holder is, on interstate commerce grounds.
I’m surprised that word of this ruling hasn’t spread more, and thus become even more of a downer on mortgage brokerages and other financial institutions.
