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Your Money or Your House

Does the bank foreclosing on your home own your promissory note? This question was once ridiculous, but in the face of securitized debt and asset-backed securities, it is, sadly, very relevant.

Lenders and debt buyers were (and I hope this isn’t news to anyone at this point) greedy and made money hand over fist for a while by selling mortgages and then moving them into loan trusts and then getting investors to buy stock in the trust funds. When the cycle of greed started to lose its spokes, the trust funds started to foreclose in huge numbers.

But the evidence that the trusts own the mortgages is often weak, and is sometimes a sham. The trust’s lawyer shows up a foreclosure hearing with an affidavit from the trust fund. The affidavit says that the trust owns the borrower’s promissory note. That’s it. In this seemingly alternate universe, I could walk into court tomorrow and swear that you owe me $100,000. And the court would allow me to take your home to pay myself. That’s all it takes. That’s all the proof necessary, at least in the clerk’s offices and courtrooms of North Carolina, to take someone’s home.

Now, you might think (if you’ve been sleeping Rip Van Winkle style) that the trust would only foreclose if it knew that it owned the promissory note. But you’d be wrong. Foreclosure proceedings were recently initiated by two DIFFERENT entities against a Florida woman; both entities claim to own the promissory note. There are plenty of local examples as well, but none that I know of have links to press coverage yet.

No entity or person should be permitted to foreclose on a home unless it can prove that the borrower actually owes it money.

3 Comments

  1. Barry J

    November 14, 2008 at 9:11 pm

    Glad to see you’ve started a blog, Sparky, though I think you’re barking up the wrong tree on the subject of notes. Fact is, the standard for proving up a lost note affidavit is considerably more strict than “walking into court and swearing that you owe me $100,000.” A pretty good discussion can be found here: http://calculatedrisk.blogspot.com/2008/02/lost-note-affidavits-skeletons-in.html (Calculated Risk, btw, is a great place to learn about the ins-and-outs of the mortgage business).

    You’re also more than a little off in your description of mortgage-backed securities, which are bonds (i.e. debt instruments), not stock, issued by special purpose trusts. It also bears mentioning that the fact that a defaulted mortgage is held by a trust has next to nothing to do with the foreclosure process, which is almost always triggered by a homeowner failing to make his mortgage payments for an extended period (often as much as a year).

    And while there’s no doubt that lenders and debt buyers were greedy, it’s not clear to me that they were any more greedy than someone who bought more house then they can afford and now expects “someone” (i.e. everybody who lives within their means) to bail them out.

  2. Adam Searing

    November 15, 2008 at 3:16 pm

    Despite all the fancy words in the comment above, I really don’t see this as a complicated issue. If you want to foreclose on a house – or any other asset for that matter – you should at the very least have a piece of paper that proves you own the mortgage or other asset.

    If you don’t have that piece of paper and can’t produce any other written evidence that you own the mortgage, then tough luck.

    And this is really the heart of the matter. Seems like folks buying and selling all these mortgages were making so much money they weren’t too careful about getting all the proper receipts and paperwork correct when they did these transactions.

    I wouldn’t have much sympathy for someone who bought a car without getting a proper title to the vehicle, and I don’t have much sympathy for someone who bought a mortgage without getting the proper paperwork either.

  3. Barry J

    November 15, 2008 at 4:08 pm

    Sorry about all of the fancy words, Adam, I’ll try to dumb it down for you.

    Under the rules that apply in federal courts (and similar rules that apply in every state that I’m aware of) you’re required to produce the original of most important documents you want the court to consider, if (and this is a big if) the original is available. If the original isn’t available, however, you can produce a copy if you can show (by sworn testimony, usually) that it is an authentic copy of the original. So when a lender shows up in court with a lost note affidavit and a copy of the note, they’re doing exactly what you’re asking, i.e. showing written evidence that they own the mortgage.

    Now, Rochelle’s right that in the past thirty years or so the mortgage market has change pretty dramatically. In the mid-seventies, when my parents bought their first home, one generally got a mortgage from a local bank, which held that note until it was paid off. In today’s market, one gets a mortgage from whatever bank is offering the best interest rates, and they sell the note to other investors for cash, giving them more money to lend to the next guy who wants a mortgage. In practical terms for a borrower, that means access to banks all across the nation–all of whom have to compete on price–which is why despite a few…err…blemishes…on my credit record I got a 6% rate on my mortgage in 2006 when my parents, who never paid a bill late in their lives, paid 12% for their mortgage in the 70s. On my $400,000 house, that works out to something like $1,800 a month difference in my house payment because I’m dealing with a big, liquid, national mortgage market rather than Joe the banker downtown.

    Alas, one of the prices of that big dollar savings, however, is that instead of dealing with Joe the banker, who knows the ins and outs of every loan he’s ever written by heart and keeps all of his records in a vault in the basement, a borrower is now dealing with a big, national (or international) establishment that doesn’t know him from Adam and is keeping track of millions of loan files that get bought and sold (and consequently moved around) pretty often. The result of all that moving around is that pieces of paper occasionally get lost, and for that matter, the entities involved sometimes get screwed up in figuring out whose responsibility it is to deal with people who don’t pay their mortgages.

    It’s not clear from your comment (or from Sparky’s post) what you think we ought to do about that problem, but I gather from your tone that you think that if a bank loses an original note (which is, after all, just a sheet or two of ordinary paper) the homeowner ought to be released from his mortgage. I suppose we could do that, but you really ought to think about the implications of what you’re suggesting. First, so far as I know, we’ve never, ever, ever done it that way. Even in the glory days of community banking, Joe the banker would occasionally spill coffee on a stack of notes, or have a fire in the vault, or whatever, and the courts would let him prove what people owed him by other means. If you stop and think for a minute, that’s just fair, since we let people prove that they’ve paid their mortgages by producing copies of cancelled checks, rather than the original.

    Second, such a policy would instantly make those scraps of paper worth whatever is outstanding on the mortgage–in some cases millions of dollars. If that happened, banks would be obliged to treat notes like cash. They’d have to move them around in armored cars, with armed guards and heavy security, instead of dropping them in FedEx for $14.95 like they do now. And since banks need to make a profit if they’re going to pay their depositors interest, they’ll need to tack the cost of all of those guards and armored cars and whatnot on to the cost of a mortgage.

    Third, even with all of that security, the banks would really have no choice but to insure the things. It costs me something on the order of $8,000 a year to insure my home. For the bank to insure my note, which is far more fragile than my house, but would be worth nearly as much, would cost at least as much. Guess how the bank is going to recoup that cost? Yep, they’ll tack in on to the mortgage.

    Now, it’s worth taking a look at the story Sparky posted. It describes a situation where two entities initiated foreclosure proceedings on some little old lady in Florida. Obvious screw-up, no doubt. One, Deutsche Bank, the trustee for a securitization trust (which probably owned the note) and the other was American Home Mortgage Servicing, which, although the article doesn’t say, is probably the company Deutsche Bank hired to “service” the loan. “Servicing” involves a lot of things, usually including collecting payments and initiating foreclosure proceedings if those payments don’t get made. So what you likely have here is DB initiating a foreclosure proceeding on its own behalf for a note it owns, and AHMS initiating a foreclosure proceeding as a servicer for DB for a note DB owns. Obviously there’s no reason for both proceedings, but on the other hand, it’s not as if anything nefarious is going on. DB and AHMS just need to work out whose job it is to deal with this foreclosure.

    But there’s another important point to note: there’s absolutely nothing in the article that suggests that our poor, little old lady in Florida had actually been making the payments on her mortgage. The complaints, filed in October, state that she hadn’t made a payment since March, on a loan that was signed on January 25. So this “victim” of the greedy banks borrowed $276,000, made exactly one payment a week later, and then never paid another dime. Call me crazy, but if there’s someone in this story who is being “greedy” I’ve gotta think it’s her.