Judge Dismisses Foreclosures because Banks couldn’t Prove They Owned the Mortgage

In the murky world of packaging and reselling mortgage loans, where is the paper trail?

December 8, 2007 – Palm Coast, FL – Investors holding mortgage backed securities increasingly face losses due to foreclosures. Now they face a new problem. In November, an Ohio federal judge dismissed 14 foreclosure cases because the mortgage investors were unable to prove that they owned the mortgages underlying the foreclosed properties.

Mortgage pooling, or securitization, has gained in popularity. A home mortgage is originated by a mortgage broker or a bank. They, in turn, sell the loan to a Wall Street firm that “pools” it with thousands of other loans. Loans are grouped based on risk and resold to large investors. A bank, acting in a trustee capacity, administers the pool of loans on behalf of the investors. The loan transfers are done electronically while the paper documentation is stored in a separate document repository. While this method is cheaper and faster, it disconnects the paperwork from the owner of the note.

Loans sometimes change hands several times, making it difficult for borrowers to contact the holder of a loan to work out payment problems. Now, the lenders themselves are suffering from a situation of their own making. The problem had not surfaced earlier since most foreclosures are uncontested. However, in the Ohio case, lenders’ representatives were ordered to provide proof that the lenders were the owners of mortgages at the time the foreclosure was filed. They were unable to do so and the foreclosures were dismissed.

Trust that lawyers representing borrowers in trouble will pick up on this ruling. The result may be a greater willingness for lenders to actually work with borrowers. It will certainly be used to buy borrowers more time. At the end of 2006, there was approximately $6.5 trillion of securitized mortgage debt.

How long will it take private mortgage insurance (PMI) companies to seize the opportunity to use the same strategy to avoid paying claims on foreclosed mortgages by forcing the claimant (lender) to prove they were the holder of both the mortgage note and the mortgage insurance policy at the time of foreclosure?