Some Banks Can’t Foreclose, Unable to Find Loan Documents

Readers may have heard of cases, starting in Ohio, where judges have dismissed foreclosures because the bank (usually the mortgage servicer on behalf of a securitized entity) was unable to provide the right paperwork showing that it in fact owned the mortgage. That often results from mortgages passing though several hands before being securitized and the documentation required to execute the transfer not being performed properly at all steps along the chain.

Although the article doesn’t say so clearly, one point of failure is that quite a few mortgage companies are out of business. If one of them failed to sign the documentation over correctly to a purchaser, it’s impossible to go back and have them make corrections. But it also suggests that the lack of meticulousness has been around for some time, but means than foreclosing banks used to attempt to prove ownership before are now being rejected by the courts.

These cases have been dismissed without prejudice, meaning the bank can come back and foreclose again once it finds the right paperwork or goes back to the previous holders and gets the needed approvals.

Some banks in the end are not able to locate the needed documents, giving the defaulting borrower a free house.

Tanta has often gone on at considerable length about how the push for efficiency in mortgage processing has undermined good practice. This goes one step further: banks have gotten so keen to cut costs that they have simply gotten sloppy. Large transactions used to have procedures in place with a certain amount of double checking to make sure everything, including the forms, were in order. That appears to have gone by the wayside at some firms.

I have little sympathy with some of the sources quoted in the article, that the judges are wasting the time of the banks. I am bothered by the claims that the judges are favoring homeowners because they live in the same community as the borrower. Judges spend all day enforcing the code of law. They get offended when parties to a suit are cavalier about the law or rules of procedure. In the vast majority of cases, I have no doubt that the judges are angered by the conduct of the bank in trying to enforce an agreement without being able to prove that they have legitimate standing, rather than them having a bias in favor of the local guy.

From Bloomberg:

— Joe Lents hasn’t made a payment on his $1.5 million mortgage since 2002.

That’s when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton, Florida. The Seattle-based lender failed to prove that it owned Lents’s mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

“If you’re going to take my house away from me, you better own the note,” said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Judges in at least five states have stopped foreclosure proceedings because the banks that pool mortgages into securities and the companies that collect monthly payments haven’t been able to prove they own the mortgages. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

“I think it’s going to become pretty hairy,” said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. “Regulators appear to have ignored this, given the size and scope of the problem.”

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom, from 2003 to 2006, that assignment of ownership wasn’t always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Indiana.

“Loans were mass produced and short cuts were taken,” White said. “A lot of the paperwork is done in the name of the original lender and a lot of the original lenders aren’t around anymore.”

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.

The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime borrowers, who have bad or incomplete credit and whose mortgages typically are securitized by private banks rather than government-sponsored entities Fannie Mae and Freddie Mac, is at a four-year high, according to the mortgage bankers.

More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, California-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

“The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen,” said Chris Geidner, an attorney in Dann’s office. “These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people. They become foreclosure machines.”

When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what’s called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid in Florida.

Nobody knows how widespread the use of lost-note affidavits are, Charney said. She’s had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.

“They raise the issue of whether the trusts own the loans at all,” Charney said. “Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule.”

State laws generally make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.

“All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully,” Saft said. “The lenders can’t find the paper. We’re dealing with a lot of paper produced in a mortgage closing.”

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.

“It’s a gigantic waste of time,” Naimon said. “The mortgage may have transferred five, six, eight times. It’s possible that you don’t have all the pieces of paper, but it was enough to convince the next guy in the chain. There’s no true controversy over whether the owner owns the loan.”

Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit or a copy of the note, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, California.

“Things are heating up,” Doan said.

In Ohio, where RealtyTrac reported an 88 percent jump in foreclosures last year, Dann, the attorney general, is now arguing 40 foreclosure cases that challenge ownership of mortgage notes, according to his office.

U.S. District Judge David D. Dowd Jr. in Ohio’s northern district chastised Deutsche Bank National Trust Co. and Argent Mortgage Securities Inc. in October for what he called their “cavalier approach” and “take my word for it” attitude toward proving ownership of the mortgage note in a foreclosure case.

John Gallagher, a spokesman for Frankfurt-based Deutsche Bank AG, said the bank had no comment.

Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November due to the inability of the trustee and the servicer to prove ownership of the mortgages.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.

“Judges are human beings,” said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. “They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company.”

U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies.

“This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest,” the notice said.

Quick foreclosures benefit communities because properties in default lose value and homeowners in financial distress don’t maintain their houses or pay real estate taxes, said Saft of Dewey & Leboeuf.

“When banks originally made the loans they used people’s money from pension funds and savings accounts and they should be allowed to foreclose the loan as quickly as possible before the property depreciates in value any more,” Saft said. “The mortgage industry has been painted as the enemy when all they did was make loans to enable people to buy homes. Now there’s less money available for new borrowers to buy homes and that’s what’s causing the value of homes to go down.”

Lents is former CEO of Investco Inc., a Boca Raton, Florida-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen. That’s the reason he couldn’t pay his mortgage, he said.

“If the homeowner doesn’t object to the lost-note affidavit, the judge rubber-stamps it,” Lents said. “Is it oversight, or are they trying to get around the law?”

Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.

“I can’t believe the handling of notes is worse than it was five years ago,” said Guy Cecala, publisher of Inside Mortgage Finance. “What we didn’t have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before.”

American Home Mortgage Investment Corp., the Melville, New York-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork and petitioned U.S. Bankruptcy Judge Christopher Sontchi in Wilmington, Delaware, for the right to toss it all. Sontchi ruled last week that American Home Mortgage could charge banks from $3 to $13 a file to retrieve documents.

The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It’s run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Virginia-based MERSCORP Inc., which is owned by mortgage companies.

MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company, including loans purchased by government-sponsored entities Fannie Mae, Freddie Mac and Ginnie Mae, said R.K. Arnold, the company’s CEO.

For about half of U.S. mortgages, there is no tracking mechanism.

MERS rules don’t allow members to submit lost-note affidavits in place of mortgage notes, Arnold said.

“A lot of companies say the note is lost when it’s highly unlikely the note is lost,” Arnold said. “Saying a note is lost when it’s not really lost is wrong.”

Lents’s attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents’s mortgage note.

“Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes,” Raskin said. “As an officer of the court, I find it troubling that they’ve been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system.”

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  1. Anonymous

    As an example of a loan conduit:

    Most students only enroll in the online course for $179.00 and select the optional DVD.  This is sufficient for most people to learn the process very quickly. Some people learn better in a classroom setting so that is why we offer the seminars. Others, would like to be taken to the deed record room and actually shown how to do a title search with hands on training which is offered in the Elite Training Package. If you select the online course only and would like to attend a seminar or Elite training package then you will receive credit for what you paid towards the additional training. 

    >> Meanwhile, back on earth you have computer models, loan officers, and an army of people willing and fully able to misplace your paperwork or take coffee breaks inbetween data entry errors. You can bet your home that this system, as part of The Ownership Society will be able to allow you an opportunity to share in The American Dream.

    God Bless & Thanks for voting

  2. Max

    Wait a minute – not only lenders gave away free options in form of no-money-down liar loans, but they essentially can’t even claim the collaterals?!

    HAHAHAHAHAHA!!! Talk about an “Oops..” moment.

  3. Anonymous

    More and more, it’s sounding like a scene from a Monty Python movie. When does the penguin explode?

  4. jojo


    The judges are following the law. In the US, a lender bears the burden of proof in establishing its right to foreclose. Otherwise, they are stuck on equal footing with all unsecured lenders to the debtor. This is nothing new.

  5. Yves Smith


    Agreed, that’s why I said in my intro to the article that I had no sympathy with the people quoted who were accusing judges of favoritism towards the locals or saying their demands that the plaintiffs prove they had standing (the right to pursue the claim) was “a waste of time.” Guess banks believe in the rule of law only when it works in their favor.

  6. Anonymous

    Hmmm… Along the lines of the tree falling in the empty forest, if there is no holder of record of the mortgage, is there a mortgage? Whatever the answer, there is still the mortgage on the real estate record – how do you get it released (if, say, you want to sell) if there is no mortgagee? A mortgagee is required by law to record a release of the mortgage when the debt is repaid (although here in California homeowners have had to resort to litigation to force lenders to comply with this law). In this case, being able to live in the house “for free” is nice, but selling it may be a headache.

  7. P. Jackson

    Yves –

    This is a non-issue beyond the press orgy on it.

    I’m getting pretty tired of reporters interviewing defendant’s counsel and then writing a story on it as if it were the gospel. See this post for a recent ruling in Ohio that might have surprised AG Marc Dann and some reporters, but isn’t a surprise to anyone who actually knows this stuff.

    From the magistrate’s ruling:

    [Those saying the original note is needed] conflate the need for real property transactions to be in writing with Ohio’s recording statutes….under the Uniform Commercial Code as codified in Ohio, parties to a Note, subsequent holders of the Note, nonholders in possession of the Note who have the rights of holders, and persons not in possession of the Note who are entitled to enforce the Note pursuant to other statutory requirements, may enforce the terms of the note as to each other. Parties falling within these legal categories may enforce the terms of the Note even if the Note is lost, stolen, or destroyed.

    California is pretty much the same way. Judges often decide to rule in ways that meet the whims of the public they serve, but it doesn’t mean they’re following the law or that borrowers get to keep their home.

    There is only one way to keep a home, and that’s by paying a mortgage. We can bicker all we want about who is to blame for putting borrowers into mortgages they can’t afford, we can brainstorm plans to keep them there — we can even discuss who subsidizes such a move — but to suggest that homes are “free” because of a lack of recording is just plain inane.

  8. Anonymous


    An attorney general sticking his nose in private suits is one matter, that clearly is pretty questionable. But the judges have been dismissing the cases without prejudice, Yves said that.

    If the banks can’t satisfy the documentary requirements on a second or third go, that’s their problem. It says they’ve done a pretty crappy job of record-keeping. Any party to a private contract has to prove the validity of their standing, whether it’s a bank or just two individuals dealing with each other. I don’t see the point in getting exercised about this.

  9. mmm

    P. Jackson is missing the forest for the trees. Yes, these few cases are getting a lot of play. Why? I doubt that a lot of borrowers expect that they will get a “get out of jail free” card by having their bank unable to prove that they have the right to foreclose.

    No, people are angry about banks and financial institutions. You have gotcha credit card offers, unjustifiably high fees for minor screw-ups (they weren’t regarded as a profit center 25 years ago), and examples of people regularly reported in the press of misrepresentation by mortgage brokers of the terms of the mortgage (along with plenty of reporting of borrowers being greedy, dumb, or unlucky).

    In days of yore, if a borrower got into trouble, everyone knew the best solution in the vast majority of cases was a renegotiation of the terms. Now as has been widely discussed, banks have cut way back on their workout staffs and don’t seem to think it’s worth the bother and expense to try to see if it makes economic sense not to foreclose (admittedly, their hands may be tied by the servicing agreement).

    So the public likes these stories because its shadenfreude. If a consumer didn’t understand the terms of his mortgage or credit card agreement, tough, he has to live with them. And if the banks didn’t bother keeping good enough files to satisfy a judge that they really do have the right to foreclose, too bad for them. That’s what’s at work here.

  10. Anonymous

    Ohio has some of the most bogus real estate situations in the nation! The state is filled with fraud and they push amazing loans with state backing!

    Re: While the overall rate of foreclosures in the Eugene-Springfield area doesn’t come close to those in some of the nation’s hot spots — Nevada, California, Florida, Michigan and Ohio top the list — the dramatic local increase in 2007 has drawn the attention of observers.

    from 2005:
    A bipartisan legislative proposal establishing a pilot program for Federal Housing Administration (FHA) insurance of zero downpayment mortgages would significantly increase homeownership opportunities for the nation’s working families, NAHB told Congress on June 30.

    Appearing before the House Subcommittee on Housing and Community Opportunity, NAHB President David Wilson testified in support of H.R. 3043, the “Zero Downpayment Pilot Program Act of 2005,” which was introduced by Reps. Patrick Tiberi (R-Ohio) and David Scott (D-Ga.).

    “This legislation continues a long tradition of innovation at the FHA by addressing a primary obstacle preventing many minority and low- and moderate-income families from becoming home owners — the lack of funds necessary for a downpayment,” said Wilson.

    Designed to be financially self-supporting while building a record of success, the pilot program established by the bill would enable the FHA to insure up to 50,000 zero downpayment mortgages for first-time home buyers.

    Home buyers would be required to pay a 2.25% mortgage insurance premium (MIP) for the loan upfront, compared to the 1.5% that is required for an FHA single-family loan with a 3% downpayment, and an annual MIP of 75 instead of 50 basis points for the first five years of the loan.


  11. Anonymous

    One possible additional dimension in this in light of the number of parties in the chain of ownership regarding these notes: Without the notes themselves, how does a court know that the party foreclosing has the legal standing and right to take action? The party says it does; it may even submit an affidavit. But how does the court know? And, if the court moves forward in the absence of the paper itself, the court is at risk of awarding relief to the wrong party.

  12. Anonymous

    What I can’t believe is why people just don’t Stop Foreclosure before it starts. What amazes me is so many people just give up on their home when they could save it. The problem is people dont know about places like Loan Resuce Programs and just figure they are in a hole. I know until I ran into them I didnt have a clue services like this existed either.

  13. Anonymous

    I can help solve it.. It is a conspricy with all these companies. I own the note and I’am being forclosed upon. I have never been late or missed a payment. The oridginal lender was paid. They bundled my loan up with others in series 2003-2 certificates and either sold are transfered a paid in full loan.I have been fighting for my home for 8 years.I’m still making payments to these sorry people. There was never an assignment of record at the deeds office. The now third new lender went to the deeds office 17 days after the foreclosure papers was served to record a fraudulant assignment of mortgage and to top it all off hired or paid someone to act as a vp of mers who by the way deactivated the min number in 2002 to sign acting as a nominee for the originial lender who has been disolved and the company that bought them is in bankruptcy.they are a network of brokers mortgagers attorneys and mers to hide and move securities against the public for the sole purpose of fraud. they no that no one person would ever have the money to keep fighting this through all the courts. I’m hoping to make national news with all my documents and prove that their needs to be a crimnimal and federal investigation into the mortgage industries and it’s serving agentsand any other entitys. Conspiritcy

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