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The Real Foreclosure Crisis: Who Owns the Mortgages?

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For all the headlines given to foreclosure affidavits and robo-signing virtually no one has mentioned the real point, the idea that the affidavits themselves may not prove loan ownership regardless of how they were signed.

For several years foreclosure defense attorneys have been telling anyone who would listen that the entire foreclosure process is flawed because you have to own a mortgage note before there can be a foreclose -- and several courts have found that the affidavits used in foreclosures do not prove ownership.

Go back to 2007. Federal judge Christopher Boyko of the U.S. District Court in Ohio -- a 2005 appointee of George W. Bush -- was asked to foreclose on 14 homeowners.

In a lot of courts the borrowers and their families would instantly be on the street but Judge Boyko said before there could be a foreclosure the lenders would first have to show that they owned the delinquent loans and therefore had the right to appear in court.

The problem was that public records showed the loans were owned by the local banks that originated the mortgages, not the big banks before the court. So, to foreclose, the big banks would first have to show ownership of the notes. How? By providing evidence of ownership such as a sworn affidavit.

Judge Boyko looked at the affidavits and made this ruling:

"The Court's Amended General Order No. 2006-16 requires Plaintiff to submit an affidavit along with the Complaint, which identifies Plaintiff either as the original mortgage holder, or as an assignee, trustee or successor-in-interest. Once again, the affidavits submitted in all these cases recite the averment that Plaintiff is the owner of the Note and Mortgage, without any mention of an assignment or trust or successor interest. Consequently, the very filings and submissions of the Plaintiff create a conflict. In every instance, then, Plaintiff has not satisfied its burden of demonstrating standing at the time of the filing of the Complaint."

Boyko 2007 Foreclosure Decision — Deutsche Bank Nat'l Trust Co. v. Steele, 2008 WL 111227

Why The Ownership Mess Matters

The Boyko decision arose because lenders wanted to have a way to quickly transfer loan ownership. This is necessary if you're going to electronically buy and sell mortgage-backed securities, essentially bonds secured with thousands of mortgages.

Before the computer era lenders would have to go down to the courthouse each time a mortgage was sold. The sale would be recorded in the public records and a new owner would be named. If the borrower defaulted the owner of the loan -- the party who had the right to go to court and foreclose -- was clear.

However, with the creation of mortgage-backed securities Wall Street needed a way to avoid the pesky and costly recordation system so it came up with MERS -- the Mortgage Electronic Registration System.

In general the MERS concept works like this: When a loan is originated and sold on Wall Street MERS would become the nominal owner. Loan ownership can then be transferred within MERS and without having to change the public record with every loan sale.

Not only was the MERS system a big time saver, it also saved lenders a bunch of money:

"Lenders save at least $25 for every new loan they register on the MERS System ," said Carson Mullen, Executive Vice President of the MERS Customer Division. "Since the beginning, MERS has saved the mortgage industry over $1 billion in unnecessary costs."

Other States

Challenges to the nominee system of ownership have now emerged in a number of states including Nevada, Missouri and Kansas.

According to the Kansas Supreme Court, "MERS did not demonstrate, in fact, did not attempt to demonstrate, that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgagor. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation. Having suffered no injury, it does not qualify for protection under the Due Process Clause of either the United States or the Kansas Constitutions."

"There is no evidence in the record or the pleadings," said the Missouri Court of Appeals, "that MERS held the promissory note or that BNC (the lender) gave MERS the authority to transfer the promissory note. MERS could not transfer the promissory note; therefore the language in the assignment of the deed of trust purporting to transfer the promissory note is ineffective." (Parenthesis mine)

What Next

If more courts agree that mortgage ownership cannot be proven then vast numbers of foreclosures can't occur until the actual loan owners go to court. At the same time, if loan ownership is unclear then what's the real market value of mortgages now on lender books or securities backed by bundles of mortgages? And what if a thorough audit shows mistakes such as the ownership of one mortgage by several lenders or mortgage-backed securities?

We may soon find ourselves in a financial environment where foreclosures are stalled, mortgage ownership is unclear, asset values are uncertain and the foreclosure problems of the past few years will be minor and minimal when compared with issues which lie ahead. In the meantime, massive new employment opportunities will open up in such fields as foreclosure defense law and mortgage ownership auditing.

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Posted originally with OurBroker.com, an indpendent source of real estate, mortgage and foreclosure news and information.