Good news is on the horizon for homeowners facing foreclosures. But the origin of the glad tidings is curious, to put it mildly.
What's emerging is that financial institutions in their race to rack up ever increasing profits neglected the most basic bookkeeping tasks.
As reported in the New York Times: "notes that underlie mortgages placed in securitization trusts must be assigned to those trusts soon after the firms create them. And any transfers of these notes must also be recorded." [Guess What Got Lost in the Loan Pool, by Gretchen Morganson, New York Times, February 28, 2009]
In comparison with bilking the public out of billions, formally recording a change in ownership is tedious and time consuming—stuff for the grunts to do.
But suddenly, for those who didn't bother, it looms as a huge problem.
For institutions too lax to tend to details, and bankruptcy courts are discovering many that did not, it means that if they cannot prove they own your mortgage, they can't throw you out.
Think of it this way. A borrower in arrears on his payments gets a letter from the ABC Bank saying it's foreclosing and he has 90 days to vacate. But he replies: "Who are you? I got my loan from XYZ Bank. Prove to me that you hold my mortgage."
Here's an example given by the Times.
On February 11th, a Miami-Dade circuit court judge set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and then repurchased on January 21st by Chevy Chase Bank, the institution claiming to hold the note.
But Chevy Chase couldn't produce evidence that the original lender had assigned the $225,000 note to it.
As a result, Fernandez remains in her home.
The potential for chaos is enormous.
According to Inside Mortgage Finance, during 2005 and 2006, eight million sub prime mortgages with an aggregate value of $1.6 trillion were put into securities pools for resale to investors. Even if only a small percentage has incomplete documentation, endless litigation could result.
Adding to the probability of increased lawsuits is growing group of consumer attorneys who have argued for years that the process of pooling residential mortgages into securities is too haphazard to be reliable. Those lawyers now train their peers nationwide to alert them to the litigation possibilities.
Careless bookkeeping is on the American Bankruptcy Institute's annual spring meeting agenda beginning on April 3.
A paper titled "Where's the Note, Who's the Holder: Enforcement of Promissory Note Secured by Real Estate," [DOC | HTML]co-written by the Honorable Samuel Bufford and R. Glen Ayers, a former federal bankruptcy judge in Texas, analyzes the problem in more detail
Ayers, a lawyer at Langley & Banack in San Antonio, said documentation problems will prevent a lot of foreclosures.
The report cites another expert who estimates that as many as one-third of "securitized" notes have been lost or destroyed.
In such cases, those who may claim to hold the note but cannot prove it therefore do not have the right to foreclose.
In the meantime, when the court is not convinced that the documentation is proper, delinquent borrowers can remain in their homes.
I asked Ayers exactly how long a person caught up in these strange circumstances might expect to stay.
Ayers replied: "If a lender goes to a court to foreclose by judicial foreclosure and cannot prove that he/she/it owns the note or is an authorized agent of the note holder, and the case is dismissed, I think that the land owner continues to occupy the property and makes no payments to anyone until someone comes along with the right evidence."
In what would be an amazing twist of fate instead of being foreclosed upon, the homeowner stays put—possibly indefinitely and rent free—until someone can produce the note.
For the luckiest of them, that day will never come.
Joe Guzzardi [email him] is a California native who recently fled the state because of over-immigration, over-population and a rapidly deteriorating quality of life. He has moved to Pittsburgh, PA where the air is clean and the growth rate stable. A long-time instructor in English at the Lodi Adult School, Guzzardi has been writing a weekly column since 1988. It currently appears in the Lodi News-Sentinel.