One of the claims we’ve heard throughout the mortgage crisis is that all the systems and records are fine, that the banks have just made a few “mistakes” and when they find out about them, they correct them promptly and cheerfully.
If you believe that, I have a bridge I’d like to sell you. Not only is evidence of widespread, and very likely systematic abuses piling up in courtrooms all over the US, but even at this late date, new types of misconduct are coming to light.
Lisa Epstein and April Charney pointed out the latest version, that of “zombie notes”. It’s another version of the “who has the note” (the borrower IOU) problem. In this case, thousands of borrowers in Florida (and potentially other states) who were being foreclosed upon were contacted by Fannie Mae and offered the opportunity to have the debt cancelled if they gave a deed in lieu of foreclosure. That’s a fancy way of saying if they gave up their rights to the house and vacated, Fannie would drop the foreclosure action. The advantage to the borrower is that he puts the matter behind him (if the house is sold for less than the mortgage balance, for instance, he can’t be sued for a deficiency judgment) and suffers less damage to his credit record.
But it appears Fannie did not live up to its side of the bargain, and even a representative of the American Bankers Association distanced itself from the agency’s action, saying it is “not a practice we’ve ever heard of.”
From the Fort Myers News-Press:
Here’s what happened, according to Lee County court documents:
1. Marshall Watson, the attorney for Fannie Mae and for Bank of America, sends a document called a deed in lieu of foreclosure to Cruz in late 2009. The document, when signed by [David] Cruz, transfers ownership of the house in Tice from him to Fannie Mae.
In exchange, Fannie Mae agrees “that it is releasing the promissory note” and it won’t sue Cruz for money owed under either the note or the mortgage. Cruz signs the deed and returns it to Watson.
2. On Feb. 15, 2010, Bank of America – which was handling Cruz’s loan for Fannie – simultaneously records the deed in lieu of foreclosure and assigns its ownership of the mortgage and note back to Fannie Mae.
The bank handling a loan typically is assigned ownership temporarily so it can deal with the case. Bottom line: Fannie Mae now has ownership of the house in Tice.
3. On April 23, 2010, Fannie Mae records a satisfaction of mortgage, which discharges Cruz’s $123,750 mortgage.
The document does not, however, mention the note despite the language of the deed in lieu of foreclosure.
The holder of the note, whoever that may be, has the legal right to recover the mortgage money from Cruz….
Xiomara Cruz, David Cruz’s attorney and ex-wife, said she’s looked at court records from around the state and likely thousands of people were treated in the same way….
“Under the commercial code, it’s still alive,” she said. “The deal he made was to cancel the note. If they can’t perform, it’s a fraud.”
Xiomara Cruz said she hasn’t been able to find out who owns the note.
The article points out the risk to the borrower is not theoretical:
Even if Fannie has the note, Cruz should take little comfort from the fact he’s dealing with a federally backed entity, said Jack Williams, resident scholar at the American Bankruptcy Institute and a bankruptcy professor at Georgia State University.
“That note is a legal obligation,” he said, and even if Fannie Mae doesn’t sue, it could sell the debt to someone who would….
“Let me tell you, people made millions of dollars suing homeowners back in the day [in the wake of the savings and loan crisis],” Williams said.
Some of the debt was in the form of deficiency notes: court judgments saying a certain amount was owed even after the property was sold at public auction.
But in other cases, Williams said, it was the note, straight up.
Have readers seen this happen in other states, particularly with Fannie or Freddie?