Foreclosure Challenges Raise Questions About Judicial Role

A group of state and federal judges presiding over foreclosures are wiping away borrowers’ mortgage debt, invalidating foreclosure sales and even barring some foreclosures outright.

The decisions in recent months by a handful of judges in states including Massachusetts, New York and Texas mark a new phase in the judiciary’s battle to stem the rising tide of foreclosures by punishing mortgage companies for paperwork mistakes and alleged mistreatment of borrowers.

The number of judges taking such action remains small, and most foreclosures go through without a challenge . . . but the growing number of rulings against lenders’ claims is raising questions among some legal experts about judges’ impartiality . . .

As early as 18 months ago, several judges in California, New York, Ohio and elsewhere would dismiss foreclosure cases if they could find reason to do so . . . Now, after the country has been mired in a housing crisis for more than two years, more judges are calling these companies on their paperwork glitches, and in some cases going much further in their efforts to help homeowners.

It makes sense for judges to demand that mortgage companies follow the rules to the letter if they want to win foreclosure cases in court, says Raymond Brescia, an assistant professor at Albany Law School who has written about the role of the courts in the financial crisis. “I don’t think that’s a crazy idea,” he says. “To expect plaintiffs to prove their case is what the judicial system is founded on.”

But if judges decide to help borrowers in ways that overlook the merits of individual cases, Mr. Brescia adds, that would “undermine the integrity of the judiciary, and that’s not going to help anybody.” Instead, he says, it might trigger a backlash from legislators or regulators to rein in activist jurists.

At the heart of some of the court rulings is what became a common practice among mortgage companies: filing a foreclosure claim without showing proof that they actually own the mortgage and have the right to foreclose. This occurs in part because mortgages change hands multiple times after the original loan is made, but the mortgage documents and the contracts between borrowers and lenders are never altered to reflect those changes. Years later, it can be difficult to verify who is the owner of the mortgage.

That played a key role in a ruling in October by Keith Long, a state-court judge in Massachusetts. He invalidated two foreclosure sales that had occurred more than two years ago. The judge affirmed his own prior ruling that said units of U.S. Bancorp and Wells Fargo & Co. never had the right to sell the homes.

Judge Long ruled that even though the companies physically held the relevant mortgage documents, the mortgages were never legally assigned to them and recorded with the state.

“They’re selling something they don’t own,” says attorney Paul Collier, who began representing the borrowers in the case last year.

Walter H. Porr, a lawyer for the companies, which are appealing the ruling, says his clients “operated in what had been an accepted industry fashion for the better part of 15 or 20 years.” He adds: “We owned those mortgages.”

In October, a federal bankruptcy judge in White Plains, N.Y., rejected a claim by a mortgage company that the debtor owed $460,000. The judge, Robert D. Drain, said the company, PHH Mortgage Corp., couldn’t prove it owned the debt . . .

And in a prominent case in New York’s Suffolk County on Long Island, Jeffrey Spinner, a state-court judge, canceled $292,000 in mortgage debt after he ruled the borrowers were mistreated by IndyMac Bank (which) displayed “harsh, repugnant, shocking and repulsive” behavior by making no attempt to negotiate a settlement with Diane Yano-Horoski after she and her husband fell behind on payments, despite a state law requiring the company to try . . .

The full story from the Wall St. Journal

Too many homeowners face lenders that resist all efforts to work out a payment structure to keep them in their homes. Many homeowners just want these lenders to give them reasonable terms on their mortgages, and help them work through economic hardships.

The following is from LoanSafe.org:

From what I’ve been reading, a COPY of the note is not going to be good enough for the court for the plaintiff to prove that they have the right to foreclose on the borrower. It has to be the ORIGINAL blue ink copy–no electronic copies; it has to be the original and the original only.

This strategy does not require an attorney. All you have to do is fill out the form and file it with the court clerk in your county and they will serve it on the plaintiff’s attorney.

“Produce the Note” is not a technicality that should be treated lightly by the lender or by the Court. When a lender can’t “produce the note,” allowing a foreclosure to proceed puts the homeowner at risk of owing that debt again to another party.

Let’s start with the basics. If a lender wants to foreclose on a property, it has to be able to show that it is, in fact, the appropriate person to whom the money is owed. That right to foreclose belongs ONLY to the person who has legitimate POSSESSION OF THE ORIGINAL NOTE – not a copy, not an electronic entry, but the original note itself with the signature of the person who allegedly owes the money.

So if you are faced with a foreclosure, you have every right to demand that the person trying to take your property, first, prove to the Court that it has possession of the original promissory note.

What often happens, however, is that the lender claims it doesn’t have the original note, because that note has been lost or destroyed. What does the law require the lender to prove?

The “Uniform Commercial Code” is a set of laws governing commercial transactions that many states, such as Florida, have adopted. It contains a specific provision on this subject (Section 3-309) which states that a person can enforce a promissory note without having the original, BUT only under certain limited circumstances. All of the following must be proven:

1. The person has to claim that it no longer has the original note;
2. The person has to prove that it was properly in possession of the note and entitled to enforce it WHEN it lost possession of the note;
3. The person has to prove it didn’t “lose” possession simply because it transferred the note to someone else (i.e., it’s not really lost); and
4. The person has to prove that it cannot produce the original note, because the instrument was destroyed, or its whereabouts cannot be determined, or it was stolen by someone who had no right to it.

All of these matters have to be proven by the person trying to foreclose on the property. It is not the obligation of the borrower to prove or disprove any of this.

It is up to the Court to determine whether the lender has satisfactorily explained why it no longer can produce the original note. The Court also has to be satisfied that when the original note was lost, the person trying to foreclose on the property had possession of the note at the time it was lost. Until the Court has been satisfied of all of this, the foreclosure cannot proceed; if it does, the borrower is still at risk.

Why? Because incredibly, even if a Court has found that the original note is lost and the foreclosure sale is finalized, if someone later turns up with the original note and proves that it is the proper holder of the note, and not the person who foreclosed on the property, the original borrower is STILL LIABLE.

And one more . . .

WHO OWNS THE NOTE? Your goal is to make certain the institution suing you is, in fact, the owner of the note (see steps to follow below). There is only one original note for your mortgage that has your signature on it. This is the document that proves you owe the debt.

During the lending boom, most mortgages were flipped and sold to another lender or servicer or sliced up and sold to investors as securitized packages on Wall Street. In the rush to turn these over as fast as possible to make the most money, many of the new lenders did not get the proper paperwork to show they own the note and mortgage. This is the key to the produce the note strategy. Now, many lenders are moving to foreclose on homeowners, resulting in part from problems they created, and don’t have the proper paperwork to prove they have a right to foreclose.

THE HARM: If you don’t challenge your lender, the court will simply allow the foreclosure to proceed. It’s important to hold lenders accountable for their carelessness. This is the biggest asset in your life. It’s just a piece of paper to them, and one they likely either lost or destroyed.

When you get a copy of the foreclosure suit, many lenders now automatically include a count to re-establish the note. It often reads something like: “ . . . the Mortgage note has either been lost or destroyed and the Plaintiff is unable to state the manner in which this occurred.” In other words, they are admitting they don’t have the note that proves they have a right to foreclose.

If the lender is allowed to proceed without that proof, there is a possibility another institution, which may have bought your note along the way, will also try to collect the same debt from you again.

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For those of you who “still” don’t get what is going on in America, and have turned your backs on your neighbors in need, and who have decided that all 8-10 million people who have lost their homes “made mistakes and brought this on themselves,” think again.

I worry about such people as they clearly are NOT facing reality. Just how many steps away from losing everything are you? A job? Both jobs? Health? A car accident? Your stocks take a nose dive?

Do you know for sure who owns your home?

I thought mine was owned by the bank that gave me the loan. My checks go to them, all correspondence. Everything. I just learned that they sold the loan right after I purchased my home and it has been sold at least twice since then. By law, I gather, the homeowner is supposed to be notified. Not only was I not notified, the bank doesn’t even know who has the note at this point, but they are still collecting money from me.

Protect yourself: At least find out who owns your home, who holds the note. I’m quite sure this will be an eye-opener for you. This is NO time to be naive.

THIS COULD BE YOU: A gentlemen of my acquaintance was Knighted some years ago, living in a 3500+ square foot house, travelling, had his retirement all in place. Basically his family was on top of the world. The children seemed to be “Trust Fund Babies,” who would never really have to think about working every day of their lives.” Nope. The senior member of the family lived to an extremely ripe old age, ate up much of the investment money, the investment market tanked (twice, actually). The family now rents an apartment. Point is, even with careful planning, middle-income working people are facing serious financial hardships.

PLEASE keep in mind: “There But For God Go I” and “You.” This IS an unprecedented time in our country; if we don’t stand by each other, if we do not work to halt illegal activities, what is the point of this country?

From The New York Times, May 26 2009

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis. Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

From The New York Times, July 29, 2009

But industry insiders and legal experts say the limited capacity of mortgage companies is not the primary factor impeding the government’s $75 billion program to prevent foreclosures. Instead, it is that many mortgage companies are reluctant to give strapped homeowners a break because the companies collect lucrative fees on delinquent loans.

Even when borrowers stop paying, mortgage companies that service the loans collect fees out of the proceeds when homes are ultimately sold in foreclosure. So the longer borrowers remain delinquent, the greater the opportunities for these mortgage companies to extract revenue — fees for insurance, appraisals, title searches and legal services.

Under the Obama administration’s foreclosure program, a servicer that modifies a loan for a homeowner collects $1,000 from the government, followed by $1,000 a year for each of the next three years. A senior Treasury adviser, Seth Wheeler, said these payments amounted to “meaningful incentives to servicers to help overcome the challenges and competing demands they face in considering and completing loan modifications.” He added that mortgage companies “are contractually obligated to the terms of this program, which require them to offer modifications to qualified borrowers.”

But experts say the administration’s incentives are often outweighed by the benefits of collecting fees from delinquency, and then more fees through the sale of homes in foreclosure.

God Bless Us All!

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