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Paper Chase
Friday June 1, 12:42 pm ET
By Bernard Condon
You're in luck. Your mortgage lender has flipped, sliced and diced your loan--and now no one knows who holds it. In 2006 Michelle Tucker, a 35-year-old UPS package processor and mother of two, was hit by a one-two punch. Her husband had surgery on his shoulder and was forced to stop taking construction jobs around town that helped pay the bills. Worse, the adjustable mortgage with the low teaser rate she took out on her three-bedroom home in Jacksonville, Fla. adjusted, now to 10%, nearly double her old rate. She defaulted. Soon after, the lender filed suit to foreclose.Then a stroke of luck: A Legal Aid lawyer, April Charney, got the foreclosure withdrawn after discovering that the company that filed to foreclose didn't own the Tuckers' loan. The owner was actually a securitized pool of loans overseen by Deutsche Bank (NYSE:DB - News). And Charney has documents showing the pool bought the loan after the Tuckers defaulted--an illegal purchase for most pools, including this one. That means a court might refuse to recognize it owns the loan. Charney is arguing it should do just that.
"I buy time, then get lenders to cut interest rates and fees," says Charney, who claims she's stopped dozens of foreclosures over ownership issues. Other lawyers are making similar moves in Maryland, New York, Massachusetts, Ohio, Kansas and Washington State--often forcing sloppy lenders to offer generous terms to avoid litigation.
Talk about shooting yourself in the foot. These days just about every mortgage is flipped by a lender to another one or sliced up into pools of securitized packages that are sold on Wall Street. The financial engineering helped oil the housing boom by making credit more available. But stalled housing prices and rising defaults have revealed a mess: In the rush to flip paper, lots of the new lenders or pools don't have the proper paperwork to show they even hold the mortgage.
There is a case in Kansas with no documents to show a bank owns the loan it says it does. In another, ownership of a loan was recorded on a single date in the name of two different lenders. In March last year Deutsche Bank filed to foreclose on a seven-bedroom home in Worcester, Mass. owned by Sima Shwartz. But it came out that Deutsche was assigned the loan in May or June--that is, after the foreclosure filing. A U.S. bankruptcy court judge in April slammed Deutsche for its "jumble of documents" and ruled the bank could not evict Shwartz.
This sloppiness offers glorious reprieves for some defaulted homeowners but just headaches for lenders. One Maryland man, holding documents suggesting his loan was held simultaneously by a pool of loans and a bank, is still in his home--five years after foreclosure was filed.
Charney, the Tuckers' lawyer in Jacksonville, stumbled upon the industry's paperwork problem two years ago after noticing that nearly all lenders seeking to foreclose against clients were filing "affidavits of lost notes"--essentially requests that a judge assume they own the loan since no proof is at hand. She eventually took on a prominent foreclosure filer--Mortgage Electronic Registration Systems, a Vienna, Va. company whose name is on 30% of the mortgages in county clerk offices around the country. Earlier this year mers, which represented banks and pools in at least 20,000 foreclosure filings in Florida since 2001, suspended lenders from filing in its name. It says that with two recent court decisions in its favor it may lift the moratorium soon.
For the lenders, a possibly bigger threat on the horizon is that homeowners' lawyers will bust up the "holder in due course" doctrine that makes it easier for subsequent owners of an IOU to collect. This doctrine says that certain defenses the evictee can use against the original lender (such as predatory lending) cannot be used against an innocent purchaser of the mortgage. The rule is enshrined in many federal and state statutes, but a judge could nonetheless find a way to side with the homeowner, particularly if a loan is purchased after it goes into default.
"It's clearly the direction to go," says Ohio Attorney General Marc Dann. He recently announced he'll amend his suit against defunct lender New Century to possibly list as defendants the banks overseeing pools that bought its loans. "These pools are more than innocent holders."
Paper Chase
Friday June 1, 12:42 pm ET
By Bernard Condon
"I buy time, then get lenders to cut interest rates and fees," says Charney, who claims she's stopped dozens of foreclosures over ownership issues. Other lawyers are making similar moves in Maryland, New York, Massachusetts, Ohio, Kansas and Washington State--often forcing sloppy lenders to offer generous terms to avoid litigation.
Talk about shooting yourself in the foot. These days just about every mortgage is flipped by a lender to another one or sliced up into pools of securitized packages that are sold on Wall Street. The financial engineering helped oil the housing boom by making credit more available. But stalled housing prices and rising defaults have revealed a mess: In the rush to flip paper, lots of the new lenders or pools don't have the proper paperwork to show they even hold the mortgage.
There is a case in Kansas with no documents to show a bank owns the loan it says it does. In another, ownership of a loan was recorded on a single date in the name of two different lenders. In March last year Deutsche Bank filed to foreclose on a seven-bedroom home in Worcester, Mass. owned by Sima Shwartz. But it came out that Deutsche was assigned the loan in May or June--that is, after the foreclosure filing. A U.S. bankruptcy court judge in April slammed Deutsche for its "jumble of documents" and ruled the bank could not evict Shwartz.
This sloppiness offers glorious reprieves for some defaulted homeowners but just headaches for lenders. One Maryland man, holding documents suggesting his loan was held simultaneously by a pool of loans and a bank, is still in his home--five years after foreclosure was filed.
Charney, the Tuckers' lawyer in Jacksonville, stumbled upon the industry's paperwork problem two years ago after noticing that nearly all lenders seeking to foreclose against clients were filing "affidavits of lost notes"--essentially requests that a judge assume they own the loan since no proof is at hand. She eventually took on a prominent foreclosure filer--Mortgage Electronic Registration Systems, a Vienna, Va. company whose name is on 30% of the mortgages in county clerk offices around the country. Earlier this year mers, which represented banks and pools in at least 20,000 foreclosure filings in Florida since 2001, suspended lenders from filing in its name. It says that with two recent court decisions in its favor it may lift the moratorium soon.
For the lenders, a possibly bigger threat on the horizon is that homeowners' lawyers will bust up the "holder in due course" doctrine that makes it easier for subsequent owners of an IOU to collect. This doctrine says that certain defenses the evictee can use against the original lender (such as predatory lending) cannot be used against an innocent purchaser of the mortgage. The rule is enshrined in many federal and state statutes, but a judge could nonetheless find a way to side with the homeowner, particularly if a loan is purchased after it goes into default.
"It's clearly the direction to go," says Ohio Attorney General Marc Dann. He recently announced he'll amend his suit against defunct lender New Century to possibly list as defendants the banks overseeing pools that bought its loans. "These pools are more than innocent holders."
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