Mortgage Holders may not be able to Foreclose Without Proof they Own the Note and Mortgage

Bankrupt mortgage companies may stand in the way of documentation trail.

February 11, 2008 – Palm Coast, FL – In early December, an Ohio judge threw out some foreclosure actions because the plaintiffs could not prove that they owned the note and mortgage underlying the foreclosure. I suggested then that this might be the tip of the iceberg. A story today by Associated Press indicates that I was right. A major mortgage company, American Home Mortgage Investment Corp., while dealing with their own bankruptcy, is in the middle of a dispute over mortgage documentation.

At the heart of the matter is the audit trail following loans which commonly pass from the loan originator to Wall Street investment firms that repackage and sell them to investors as mortgage backed securities. These securities may be bought and sold several times. When a buyer borrows money to purchase property, they sign two very important documents, a note which documents the loan as well as a promise to repay and a mortgage, which pledges a specific asset (in this case, real estate) as collateral for the loan in the event of default. The original documents are stored at a document storage facility. All further transfers of the loans are electronic, usually in large batches.

In the Ohio case, the plaintiffs in foreclosure were unable to prove that they actually owned the note and mortgage. Hence, the judge found that they had no standing to file the foreclosure. With all the securitized mortgages and the multiple transfers, some audit trails are bound to go cold. The result could be a lottery for borrowers facing foreclosure. If the ownership of the note and mortgage cannot be established, to whom should the homeowner be sending their monthly check? Or, for that matter, why?

Concerned investment banks, hedge funds, and pension funds want the original documents of 490,000 home loans from American Home Mortgage. American Home, in an effort to save money as they work through their own bankruptcy, wants to destroy the documents in order to save the $45,000 monthly storage charge. Investors, however, need the documents to substantiate their ownership and to protect their right to foreclose. It’s very complicated because American Home Mortgage has legitimate privacy concerns. They are reluctant to give documents to just anybody. American Home has suggested they provide the documents, but that investors will have to prove ownership of the mortgage and note as well as pay substantial handling fees. And American Home wants to established a March 14 deadline for requests. The case will be heard by the U.S. Bankruptcy Court in Wilmington, Del.

Stay tuned. This story thread is just beginning.