Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish
Joe Lents hasnt made a payment on
his $1.5 million mortgage since 2002.
Thats when Washington Mutual Inc. first tried to foreclose
on his home in Boca Raton, Florida. The Seattle-based lender
failed to prove that it owned Lentss mortgage note and dropped
attempts to take his house. Subsequent efforts to foreclose have
stalled because no one has produced the paperwork.
“If youre 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
havent 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 its going to become pretty hairy, said Josh
Rosner, managing director at the New York-based investment
research firm Graham Fisher %26amp; 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, Maryland-based
industry newsletter. Those loans may be sold several times
before they land in a security. Mortgage servicers, who collect
monthly payments and distribute them to securities investors,
can buy and sell the home loans many times.
Housing Boom
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 wasnt always
properly completed, said Alan White, assistant professor at
Valparaiso University School of Law in Valparaiso, Indiana.
“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 arent 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 borrowers, who have bad or incomplete credit and whose
mortgages typically are securitized by private banks rather than
government-sponsored entities Fannie Mae and Freddie Mac, is at
a four-year high, according to the mortgage bankers.
750,000 Homeowners
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, California-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, an attorney in Danns office. “These trusts
are purchasing these notes, and before they even get the
paperwork, they foreclose on people. They become foreclosure
machines.
Lost-Note Affidavits
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 whats called a lost-note
affidavit, said April Charney, a lawyer at Jacksonville Area
Legal Aid in Florida.
Nobody knows how widespread the use of lost-note affidavits
are, Charney said. Shes 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 generally 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 %26amp; 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 cant find the paper.
Were dealing with a lot of paper produced in a mortgage
closing.
`Waste of Time
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.
“Its a gigantic waste of time, Naimon said. “The
mortgage may have transferred five, six, eight times. Its
possible that you dont have all the pieces of paper, but it was
enough to convince the next guy in the chain. Theres no true
controversy over whether the owner owns the loan.
Judges are becoming increasingly impatient with plaintiffs
who produce no more proof of ownership than a lost-note
affidavit or a copy of the note, said Michael Doan, an attorney
at Doan Law Firm LLP in Carlsbad, California.
“Things are heating up, Doan said.
In Ohio, where RealtyTrac reported an 88 percent jump in
foreclosures last year, Dann, the attorney general, is now
arguing 40 foreclosure cases that challenge ownership of
mortgage notes, according to his office.
`Cavalier Approach
U.S. District Judge David D. Dowd Jr. in Ohios northern
district chastised Deutsche Bank National Trust Co. and Argent
Mortgage Securities Inc. in October for what he called their
“cavalier approach and “take my word for it attitude
toward proving ownership of the mortgage note in a foreclosure
case.
John Gallagher, a spokesman for Frankfurt-based Deutsche
Bank AG, said the bank had no comment.
Federal District Judge Christopher Boyko dismissed 14
foreclosure cases in Cleveland in November due to 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 %26amp; 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.
Warning Plaintiffs
U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles
issued a notice last month warning plaintiffs in foreclosure
cases to bring the mortgage notes to court and not submit
copies.
“This requirement will apply because developments in the
secondary market for mortgages and other security interests
cause the court to lack confidence that presenting a copy of a
promissory note is sufficient to show that movant has a right to
enforce the note or that it qualifies as a real party in
interest, the notice said.
Quick foreclosures benefit communities because properties
in default lose value and homeowners in financial distress dont
maintain their houses or pay real estate taxes, said Saft of
Dewey %26amp; Leboeuf.
Painted as the Enemy
“When banks originally made the loans they used peoples
money from pension funds and savings accounts and they should be
allowed to foreclose the loan as quickly as possible before the
property depreciates in value any more, Saft said. “The
mortgage industry has been painted as the enemy when all they
did was make loans to enable people to buy homes. Now theres
less money available for new borrowers to buy homes and thats
whats causing the value of homes to go down.
Lents is former CEO of Investco Inc., a Boca Raton,
Florida-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. Thats the
reason he couldnt pay his mortgage, he said.
“If the homeowner doesnt 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.
Looking for Loopholes
“I cant believe the handling of notes is worse than it
was five years ago, said Guy Cecala, publisher of Inside
Mortgage Finance. “What we didnt 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, New
York-based lender that filed for bankruptcy last August, said it
was paying $45,000 a month to store loan paperwork and
petitioned U.S. Bankruptcy Judge Christopher Sontchi in
Wilmington, Delaware, for the right to toss it all. Sontchi
ruled last week that American Home Mortgage could charge banks
from $3 to $13 a file to retrieve documents.
The home-loan industry has had a central electronic
database since 1997 to track mortgages as they are bought and
sold. Its run by Mortgage Electronic Registration System, or
MERS, a subsidiary of Vienna, Virginia-based MERSCORP Inc.,
which is owned by mortgage companies.
No Tracking Mechanism
MERS has 3,246 member companies and about half of
outstanding mortgages are registered with the company, including
loans purchased by government-sponsored entities Fannie Mae,
Freddie Mac and Ginnie Mae, said R.K. Arnold, the companys CEO.
For about half of U.S. mortgages, there is no tracking
mechanism.
MERS rules dont allow members to submit lost-note
affidavits in place of mortgage notes, Arnold said.
“A lot of companies say the note is lost when its highly
unlikely the note is lost, Arnold said. “Saying a note is
lost when its not really lost is wrong.
Lentss attorney, Jane Raskin of Raskin %26amp; Raskin in Miami,
said she has no idea who owns Lentss 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 theyve been going in and saying we lost the
note, and because nobody is challenging it, the foreclosures are
pushed through the system.
