Wow, judges now nixing lenders’ foreclosure claims entirely in court
This is probably my fourth post on the tangled web woven by securitization, which puts a considerable distance between home owners and mortgagees which own a mortgage. The issue is causing huge problems in bankruptcy and foreclosure in courts around the U.S.
This morning, Gretchen Morgenson has another good piece out describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage.
The debtors’ revolt is on.
For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.
On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.
In other words, with lenders in the driver’s seat, borrowers were run over, more often than not…
But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.
One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.
I see this as a watershed case in jurisprudence surrounding mortgage-related bankruptcies and foreclosures. The reason this is huge is that it echoes the case in Kansas I have written about in two previous posts:
- “Why mortgages aren’t modified and what a ruling stopping foreclosures means”
- “What are the legal rights of lenders and homeowners in foreclosure?”)
At issue is the question of what legal rights do lenders or their agents have in foreclosure in the new byzantine world of securitized mortgages. In the New York case the judge nixed the entire claim as the mortgagee could not prove it had legal claim to the mortgage note. With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free, Morgenson attests. That’s huge – and we should definitely expect an appeal.
In the Kansas case, MERS, a mortgage registrar, and a second-mortgage mortgagee were not informed of the homeowners bankruptcy and disposition of assets and claims before judgment was made. Nevertheless, the district court, the appeals court AND the Kansas supreme court all upheld the original summary judgment arguing that MERS was not contingently necessary. While I would expect this case to be appealed because of the precedent it could set, I don’t see how it can be overturned after affirmation in every court – that is except through a politicization of the verdict.
Notice how PHH and MERS, the two lender agents in each cases, are not the actual owners of the mortgages. They are the servicers of the mortgages. This is why these cases have a lot to do with securitization
See also: How much money is Wells Fargo really making? for how some of this affects earnings at money center banks.
Morgenson had another article of merit on this topic last week. See her piece The Mortgage Machine Backfires. This could get interesting.
It’s different in England. I had a guest post by Carmen Butler who attempted the same thing in England and the case appears to have been dismissed, in English land law, the courts always prefer the big guy to the little guy.
But if this catches on, then does it not cause moral hazard? Sure the banks and people who buy securitised mortgages will be more careful in future, but it seems a tad generous to just retrospectively waive massive debts like this, notwithstanding the borrowers did not understand what they were getting into.
And it seems a tad unfair that Neighbour A who has a mortgage of $100,000 and never misses an instalment has to keep paying but Neighbour B who owes $400,000 gets off scot free.
It has nothing to do with neighbour B. Is neighbour B’s house in forclousure? If Neighbour B is having the same problems then he should seek to have his problems resolved by the courts too who should then render the same verdict as it did for neighbour A. Now, if neighbour B is happy paying his mortgage and not having any problems at all why should Neighbour A getting his mortgage dismissed unfair to Neighbour B?
I wouldn’t get too excited, Ed. While the legal precedents set here are truly the first positive development coming out of this whole affair, the judges involved must have forgotten that they live in a dictatorship. By the time that the legal system has gotten through with these rulings we’ll have statutes nullifying their effect. The Congress hasn’t exactly proven itself unresponsive to the interests of lenders, now, has it? It may take a few weeks but someone will be introducing new legislation that will “fix” the whole issue of nominees, agents and the like so that the status quo of plaintiffs simply making an assertion about documentation will be tantamount to there being an affirmative finding. Don’t think, so? I see.
Mark and Lavrenti, while I applaud the opportunity for a leveling of the playing field for the David v. Goliath battle that foreclosure generally is, I have to question whether a whole cloth abrogation of a claim to a mortgage is the right legal decision. I have yet to get a look at the fine details or see the actual opinion. But, from what I know, the NY judgment seems dubious to me.
The Kansas judgment looks more interesting and likely to get a hearing more quickly since it has moved through the state courts already.
And the point Mark makes about how to apply the NY case to neighbour A and b in a fair unbiased way is a good one. This is a huge can of worms that will get a legislative “fix” as you suggest, Lavrenti.
Personally, I imagine the Supreme Court could overturn Kansas on appeal and that all hell would break loose when people see this as a politicized judgment. This is what I am waiting to see.
I will look to post something on the debtor revolts in Iowa and elsewhere that took place in the Great Depression because the comparison could be revealing.
Anything like that in Britain, Mark?
What happens if that mortgage has been synthesised into multiple MBS’s?
This is the question no one has an answer to. We are hitting new legal ground here.