Under the universal law of what you least expect, it appears that the rabid feeding frenzy of banks to initiate loads of subprime mortgages resulted in sloppy loans and sloppy documentation.
Bankruptcy judges, foreclosure courts and lawyers are now getting a bit wiser to the trailing mess created as banks sold and resold pools of securitized mortgages. It appears that in many cases the underlying notes that support the loans cannot be found.
On Feb. 11, a circuit court judge in Miami-Dade County in Florida set aside a judgment against Ana L. Fernandez, a borrower whose home had been foreclosed and repurchased on Jan. 21 by Chevy Chase Bank, the institution claiming to hold the note. But the bank had been unable to produce evidence that the original lender had assigned the note, which was in the amount of $225,000, to Chevy Chase.
With the sale set aside, Ms. Fernandez remains in the home. “We believe this loan was never assigned,” said Ray Garcia, the lawyer in Miami who represented the borrower. Now, he said, it is up to whoever can produce the underlying note to litigate the case. The statute of limitations on such a matter runs for five years, he said.
Now the inability for the note holder to produce the original note to prove they are the owner is a real problem. In the past I did have one client that asked her bank for proof of the original loan document and they never could find it and eventually forgave her debt.
In the past, issues like that were a fluke, but I think that the issue of tracking the note through the deal from one buyer to another to the entity that is holding it now, has got some real merit.
Some smart lawyers are going to make a lifetime of work from specializing in forcing banks to prove they are the actual note holder, and if the banks can’t, well then they can’t foreclose and after the statute of limitations runs out, the note will be uncollectible.
As a recent New York Times article said:
In a recent case, Judge Bufford said, he asked a lender to produce the original of the note and it turned out to be different from the copy that had been previously submitted to the court. The original had been assigned to a bank that had then transferred it to Freddie Mac, the judge explained. “They had no clue what happened after that,” he said. “Now somebody’s got to go find that note.”
“My guess is it’s because in the secondary mortgage market they have been sloppy,” Judge Bufford added. “The people who put the deals together get paid for the deals, but they don’t get paid for the paperwork.”