Escape Your Mortgage Due to a Bank Failure?
Tip It!As a followup to my previous article about what happens to your mortgage when you bank fails. I recently ran across an interesting article from last winter that talks about banks losing track of mortgage paperwork and being unable to foreclose on deadbeat homeowners.
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… More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks… Those loans may be sold several times before they land in a security.
Whenever loans are sold, the sellers are required to sign over the mortgage note to the buyers, but in the recent mortgage boom, that step wasn’t always properly completed.
According to Alan White of the Valparaiso University School of Law:
“Loans were mass produced and short cuts were taken. 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.”
In fact, more than 100 mortgage companies closed their doors during 2007, and I would imagine that the number has just kept climbing since then. Thus, in addition to all of the mortgages being sold through the normal course of business, the recent uptick in bank failures has created an even bigger mess. While mortgage banks can file a lost note affidavit fully document ownership of a particular loan, an increasing number of people are apparently challenging the ownership of their mortgage note.
Maybe it’s just me, but I’m surprised that people can get away with this. While the details vary from place to place, mortgages typically result in a lien on the property, and are filed with the county courthouse. This should establish that there is (or at least was) a mortgage on the property in question. If you combine that with evidence that the homeowner had been willingly paying the mortgage before going into default, the obvious conclusion should be that the mortgage is legit, resulting in what should be an open-and-shut case.
Of course, common sense and legalities don’t always intersect…
Source: Bloomberg.com
Published on October 1st, 2008 - 10 Comments
Filed under: Debt Reduction, Mortgages
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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October 1st, 2008 at 10:55 am
On the flipside, I wonder how many files they lost of people who are paying on their mortgage. I wonder if it could ever create a really annoying paperwork nightmare when they want to sell their house.
Of course it would get worked out, but would probably take a bunch of phone calls to get straightened out.
October 1st, 2008 at 10:52 pm
This is going to sound crazy given the current economic environment, but my mortgage started with Regions Bank and has stayed with them for 4 years. Since I banks there as well, I’m hoping it never gets sold!
October 2nd, 2008 at 2:00 am
I was writing to tell you of my experience and how my readers didn’t like it when I implemented a Captcha system.
However, this system ate my first comment and then wouldn’t let me repost my comment on the other post. Take that for what it is worth.
October 2nd, 2008 at 8:56 am
The legal issue isn’t whether or not the defendant owes the money, it’s whether or not the plaintiff is the entity legally entitled to file suit & thus receive the foreclosure.
For example, if my friend loaned you money, I can’t sue you to get it back.
The plaintiff has to prove that they are the legal owner of the mortgage.
It’s vexing to be sure! Especially because if the defendant were actually paying, the funds would probably go in an escrow until the ownership could be figured out, but the dispute is over non-payment, so there is not much else to be done.
October 2nd, 2008 at 9:15 am
LadyBug: Yes, but what if your friend told me that he had sold the debt to you, and I shifted to paying you for awhile before I ran into financial trouble? In that case, it would seem pretty clear that I recognized you as the rightful owner of the debt, even if you can no longer find the paperwork. But, as I said at the end, common sense doesn’t always intersect with legalities.
October 2nd, 2008 at 11:04 am
My fear would be that I’m paying my mortgage to a particular entity and later find out that someone else (due to sloppiness, hyper-complexity-caused confusion, etc.) later claims that my payments should have gone to him. Wall Street’s slicing and dicing, fomenting super-fragmented ownership, may just yield such results. Who shall sort that out? State law ought to clarify that the burden falls on the lender — via local property record lien filing and clear written notice requirements — to ensure proper and accurate payment paths. And where state law falls short, federal law should act by default. That way, the debtor may rely on the public lien filing for direction on payment, and be forever protected from contrary claims downwind.
October 2nd, 2008 at 11:53 am
The debtor does not magically get out of owing the mortgage just because a judge stops the foreclosure proceeding. The issue is not whether the homeowner owes the mortgage or not, the issue is that the courts must be satisfied that the entity wanting to foreclose has a legal right to the property. Imagine if courts did not require this proof– scammers would start foreclosing on homes to which they did not hold the mortgage, defrauding the actual mortgage holders. Although the short-term effect delays the foreclosure and benefits the debtor, this is a protection for the lender.
October 7th, 2008 at 10:50 pm
This doesn’t surprise me at all. It really became a juggling act over time. Lenders would take on a loan and then sell it shortly after. Especially if you had bad credit. I once new an individual who got a loan and had it sold to a new lender every month 7 months in a row.
Keep track of that paper mess.
The lenders were just playing a game of hot potato until someone got fried.
May 18th, 2010 at 9:12 pm
In my situation an unfortunate accident at work(which they deny) required 2 back surgeries a double fusion and perminent nerve damage. With my wife being a real estate agent and I suddenly disabled things went down hill quickly. We are currently losing our home and everything we have worked 20+ years to build. Our home loan started with Country Wide Home Loans, now Bank of America(or should I say Bank of Everything). We have tried the Making Homes Affordable Joke, which ended in we did not qualify. The government has given billions of dollars to help people like me and of those billions a very small fraction of that money has been spent to actually help people, but yet the banks can pay out bonuses that could buy my little house for me thousands of times over. As far as ETHICS goes 1 year ago there would be NO question I would have helped the bank find the paperwork, TODAY not a chance, I will fight to the last bitter moment for my home, so they better have the paperwork straight.
December 18th, 2011 at 4:34 pm
alot of people blame people who bought houses and after their non fixed payments increased dramaticly could not afford the payments,well take a hard look at the blundering idiots at the banks that made massive mistakes and huge profits and still stood there with their hands out wanting bailed out,the little guy wanting the american dream gets the blame,and it was the corrupt banking system that caused the nightmare,