This is probably my fourth post on the tangled web woven by securitization, which puts a considerable distance between home owners and mortgagees which own a mortgage. The issue is causing huge problems in bankruptcy and foreclosure in courts around the U.S.
This morning, Gretchen Morgenson has another good piece out describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage.
The debtors’ revolt is on.
For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
I see this as a watershed case in jurisprudence surrounding mortgage-related bankruptcies and foreclosures. The reason this is huge is that it echoes the case in Kansas I have written about in two previous posts:
- “Why mortgages aren’t modified and what a ruling stopping foreclosures means”
- “What are the legal rights of lenders and homeowners in foreclosure?”)
At issue is the question of what legal rights do lenders or their agents have in foreclosure in the new byzantine world of securitized mortgages. In the New York case the judge nixed the entire claim as the mortgagee could not prove it had legal claim to the mortgage note. With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free, Morgenson attests. That’s huge – and we should definitely expect an appeal.
In the Kansas case, MERS, a mortgage registrar, and a second-mortgage mortgagee were not informed of the homeowners bankruptcy and disposition of assets and claims before judgment was made. Nevertheless, the district court, the appeals court AND the Kansas supreme court all upheld the original summary judgment arguing that MERS was not contingently necessary. While I would expect this case to be appealed because of the precedent it could set, I don’t see how it can be overturned after affirmation in every court – that is except through a politicization of the verdict.
Notice how PHH and MERS, the two lender agents in each cases, are not the actual owners of the mortgages. They are the servicers of the mortgages. This is why these cases have a lot to do with securitization
See also: How much money is Wells Fargo really making? for how some of this affects earnings at money center banks.
Morgenson had another article of merit on this topic last week. See her piece The Mortgage Machine Backfires. This could get interesting.