Securitization of Mortgages May Make Foreclosure Much More Difficult
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For those who are in any stage of foreclosure and need some more time to work it out, there may be a loophole that can help you save your house from foreclosure for a while and give you a chance to work things out another way. In the state of Ohio, a Federal Judge has thrown out 14 foreclosure requests by Deutsche Bank because they could not prove that they were the mortgage holder.
Over the past few years mortgages have changed hands regularly as they have been securitized and traded on Wall Street and other exchanges. One of the biggest problems we face is that homeowners can not track down their lenders when they are facing difficulties to work out their problems. Instead of going down to the bank where you made your loan and talk to a loan officer who can help, you are trying to track down an accountant in Germany from a large bank who owns your loan as part of a 500 million dollar security.
But now that the rabbit is out of the hat and things are changing. Homeowners facing foreclosure can now ask to see documentation that the agent who represents the lender prove that the loan is owned by the lender. With some levels of securitization, 2 or 3 funds may own part of the loan and documentation has turned into a digital record, not a deed.
Since this does not meet the letter of the law so the foreclosure action will be thrown out of court as it has happened in Ohio. If you are facing foreclosure but you think you may be in a position to get out of the home and sell it yourself or need more time, follow what is happening in Ohio. It just may give you hope.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.
But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.
Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose. via the New York Times.
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Comment by Mark Harrison on 15 November 2007:
That’s an interesting loophole.
Do you know what proportion of mortgages in the US are securitised?
Here in the UK, it’s still relatively rare - some mortgages are sold on as complete transactions to other lenders, but not many are securitised.
Mark in autumnul West Sussex, England
Comment by JKB on 15 November 2007:
Nothing new has been added to the process. In this case, the judge demanded to see the proof that the bank had standing, i.e., owned the notes, at the time of filing to sue for default. Turns out the bank didn’t have nice clean assignments, i.e., sloppy paperwork. Proof of ownership has always been required although apparently it became an informality of practice. With this order, more and more homeowner’s attorneys will push the issue of standing rather than simply acknowledge it. This will slow the process in the short term until the lenders clean up their assignments.
Tanta over at Calculated Risk has a good discussion of this issue. As she pointed out of more importance is; if the lenders have someone in the missing chain of assignments who has ceased operations, cleaning that up will be costly and lengthy since they can’t just go back and get the proper signatures.
Could the possibility of costly paperwork clean up cause investors, servicers, and lenders to be more amiable to modification rather than foreclosure? Who knows but it could be interesting. Problem is, the assignments have to be cleaned up one way or another.