The Legal Trump Card: Make Them Produce the Note
June 30th, 2008The firm externalized the financial risks of being in this business by selling all of the paper they generated into the secondary mortgage market at the end of every month. This is an institutional marketplace that trades in commoditized mortgages, “debt paper.” In other words, at the end of each month, the firm had none of the impossible-to-payback-negative-amoritization-no-money-down loans on their books!
—Inside a Wall Street Chop Shop
Via: Web of Debt:
A basic principle of contract law is that a plaintiff suing on a written contract must produce the signed contract proving he is entitled to relief. If there is no signed mortgage note or recorded assignment, foreclosure is barred. The defendant must normally raise this defense, and most defaulting homeowners, unaware of legal procedure and concerned about the expense of hiring an attorney, just let their homes go uncontested. But when the plaintiffs bringing subprime foreclosure actions have been challenged, in most cases they haven’t been able to produce the notes.
Why not? It appears to be more than just sloppy paperwork. The banks that originally entered into these risky subprime arrangements generally did so because they had no intention of holding the loans on their books. The mortgages were immediately sliced and diced, bundled up as mortgage-backed securities (MBS), and sold off to investors. Loan originators sold the mortgages to financial institutions or other banks, which then sold the rights to the monthly mortgage payment income to investors, while transferring the responsibility to collect these payments to specialized mortgage servicing companies. The result has been to slice up the mortgage contract, with no party really having ownership of the original paperwork. When foreclosure has been initiated, the servicer or trustee acting as plaintiff now has trouble proving that it originated the mortgage or owned the loan. In order for a second bank or financial institution to have standing to bring a foreclosure lawsuit in court, it must have been assigned the mortgage; and with the collapse of the housing market, many of the subprime lenders have gone out of business, making it impossible to contact the originating mortgage company. Other paperwork has just been lost in the shuffle.
Research Credit: JoKerHill
I call BS on this story and all of their like. These stories are being promoted by attorneys who have discovered that custodians became overburdened during the recent housing frenzy, and the mistakes made due to that mass of work means there are opportunities to generate a great deal of PR. The public is thrilled at the notion of a possible free lunch, and the press are too damn stupid to understand the processes and rules at work.
As such, when these attorneys are able to occasionally delay foreclosure due to clerical shortcomings on the part of loss mitigation departments (who are also buried with work), you see stories like this pop up. But the rulings do not mean the current occupant gets to keep their home–to the contrary. All it means is the foreclosure is *delayed* until the original note is in the possession of the party executing the foreclosure. However, it certainly is exciting given the theatrical settings typically involved (the drama of a courtroom with a heartless judge, an unscrupulous but well meaning “homeowner,” the valiant defense attorney . . . )
But that doesn’t change anything in the real world. I’d be very surprised if in one single instance the occupant does in fact end up keeping the property simply because the original note cannot be located. Ultimately, these articles are simply grandstanding by attorneys who otherwise spend their days as ambulance chasers.
A good, related and very substantive post on this very subject can be found here: http://calculatedrisk.blogspot.com/2008/02/lost-note-affidavits-skeletons-in.html
The article says, “In a non-judicial foreclosure state such as California, foreclosure is done by a trustee without a court hearing, so the procedure is a bit trickier; but standing to foreclose can still be challenged. If the homeowner has filed for bankruptcy, the proceedings are automatically stayed, requiring the lender to bring a motion for relief from stay before going forward. The debtor can then challenge the lender’s right to the security (the house) by demanding proof of a legal or equitable interest in it.8 A homeowner facing foreclosure can also get the matter before a court without filing for bankruptcy by filing a complaint and preliminary injunction staying the proceedings pending proof of standing to foreclose. A judge would then have to rule on the merits. A complaint for declaratory relief might also be brought against the trustee, seeking to have its rights declared invalid.”
I’m in a non-judicial foreclosure state, where the real estate loan is done with a Deed of Trust. The Deed of Trust is recorded at the office of the Recorder of Deeds.
What I’m wondering is, if no one can produce the note, and the judge threw out the foreclosure due to lack of standing to foreclose, where does this leave the buyer?
There would still be a Deed of Trust of record at the county courthouse. I wonder if the buyer would have to initiate a separate legal proceeding to have the Deed of Trust released.
Seems like if they could do this, the buyer would then own the property outright–since what you have in Deed of Trust loans is two transactions: one transaction transfers the property to the buyer, and a second transaction borrows the purchase price using the property as collateral. If the buyer can show that the second transaction–the part where the buyer borrows money using the property as collateral–never legally transpired, it seems like the first transaction–the property transfer from seller to buyer–would still stand, and the buyer would own the property outright. The seller got paid, of course. But the lender failed to draw up a legally binding loan agreement.
“The lender failed to draw up a legally binding loan agreement.” ? Sharon, you’re mixing concepts. “Losing a note” is a very different situation than failing to draw up a legally binding loan agreement.
There are several faulty assumptions at work in your scenario. The first is that “nobody can produce the note.” This situation does not happen. The note is where all of the value from the transaction is stored, where it is retained. And custodial facilities have been created specifically to ensure they are impossible to lose or damage. Assignments are executed sloppily, but that has nothing to do with the original notes themselves (and in the instance of the bankrupt companies mentioned above–the process of receivership ensures that all assets are liquidated to ensure the highest possible yield to investors–the highest value asset of any lender is their portfolio, and they do not go missing. Other banks and investors simply purchase those securities, or a trustee facility is set up to maintain the integrity of the portfolio). I would suggest it might be possible for a sloppy individual to lose the note (and to have failed to produce any copies), but even this is not going to relieve the buyer/borrower of their responsibilities.
The DOT ensures the investor does not lose all of his/her value; that is its sole purpose. In the instance where you have a lost note, evidence would be gathered to support the facts of the case, and in a worse case scenario, suit would be brought against the borrower. Typically, testimony in addition to cancelled checks along with the DOT (which records total indebtedness and the date of the recording) are sufficient to demonstrate the functioning of simple financial instruments, and that is enough to enforce the remainder of the term. On complex instruments where the testimony conflicts, you will see a more clouded judgment, but even then–enough variables are known that determining the terms to a reasonably high degree of certainty is not a difficult task, so lenders would likely find judgment at least close to their original terms. In any case, it is nearly *always* possible to determine at the very least, the remaining balance by applying the known terms of the note for the duration of time that has elapsed since the DOT’s recording. Is this a hassle? Yes. Do lenders enjoy this process? Of course not. And it has the potential to drag on for a very long time.
But DOT’s are not recorded on a whim, nor are they released as such. Western contract law has evolved over hundreds of years to take into account the cumulative experiences and unexpected situations that have arisen thus far. Due to the hundreds of millions of mortgage transactions executed at this point, real estate law is one of the most thoroughly vetted processes on the planet, and the laws that govern DOT’s provide ample opportunity for lenders/investors to recoup their capital–provisions are provided in DOT states for the instance of a lost note.
I doubt any of this means very much in terms of overall impact on the economy. You see, in a fiat money system, money is loaned into existence; and when a ridiculous amount of money has been loaned out to people who can’t possibly pay it back ever, as has been the case with the mortgage-mess, this process of creating money out of fantasy and thin air folds back in on itself. The new process is then money destruction and economic contraction. I fail to comprehend how a bunch of screwed-up paper-work problems changes any of that.