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Milwaukee Journal/ sentinel 3/16/08

Technicality saves some homes from foreclosure
Lenders can't always prove they own debt
By BOB IVRY
Bloomberg News
Posted: March 15, 2008
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, Fla. 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.

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.

More than $2.1 trillion, or 19%, 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. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.

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 '06, 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."

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

"These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines," said Chris Geidner, an attorney in Dann's office

Who owns the loans?
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 in Florida.

Nobody knows how widespread the use of lost-note affidavits are, Charney said. She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80% 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."

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."

Increasing impatience
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, a Carlsbad, Calif., attorney.

In Ohio, where RealtyTrac reported an 88% jump in foreclosures last year, the attorney general is arguing 40 foreclosure cases that challenge ownership of mortgage notes, according to his office.

U.S. District Judge David D. Dowd Jr. in Ohio's northern district chastised Deutsche Bank National Trust Co. and Argent Mortgage Securities Inc. in October for what he called their "cavalier approach" toward proving ownership of the mortgage note in a foreclosure case.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.

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. About half of outstanding mortgages are registered with the company.

But for the other 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, Arnold said.

"A lot of companies say the note is lost when it's highly unlikely the note is lost. Saying a note is lost when it's not really lost is wrong."