So why have foreclosures stalled? The answer is that the process of recording mortgage notes is so screwed up that it’s stopped foreclosure activity worth hundreds of billions of dollars.

This issue has been known for years, since at least the 2007 Boyko decision when a federal judge in Ohio refused to foreclose 14 homeowners. The problem: The loan notes, the paperwork needed by a lender to show standing in a foreclosure case, could not be produced in court. No note, no ability to foreclose.

One problem is that loans around the country have been originated locally and then sold into MERS — the Mortgage Electronic Registration Systems. The idea was that once ownership of a note had been sold to MERS, then MERS members could electronically trade ownership of the note back and forth without physically registering each sale and purchase with local government recordation offices — or paying the recordation fees.

However, it turns out that the electronic system is hardly foolproof and we have also discovered that many foreclosure claims were made on the basis of robo-signing — a process where a clerk signs hundreds if not thousands of foreclosure affidavits per day. The problem, of course, is that if hundreds or thousands of sworn statements are made per day then some of them could be wrong — meaning that someone might lose a home unfairly and unjustly.

As a result of the MERS system and the separate robo-signing scandal courts in many states now demand better paperwork before a home can be foreclosed. There’s a stalemate — lenders can’t foreclose in many instances, borrowers will not pay and the bottom line is an historic set of payment delays.

RealtyTrac reported for the first half of 2011 that the foreclosure process an average took 318 days from the initial foreclosure notice to the completed foreclosure, up from a revised 298 days in the first quarter and up from 277 days in the second quarter of 2010.

“The foreclosure process took the longest in New York,” said the company, “at 966 days on average for properties foreclosed in the second quarter, followed by New Jersey at 944 days and Florida at 676 days. Texas posted the shortest foreclosure timeline, at 92 days for properties foreclosed in the second quarter, followed by Virginia at 106 days.

Also, said RealtyTrac, “U.S. REO properties that sold in the second quarter took an average of 178 days to sell from the time they were foreclosed, up slightly from 176 days in the first quarter and up from 164 days in the second quarter of 2010. REO properties took the longest to sell in New York, at 309 days, followed by New Jersey at 285 days and Minnesota at 268 days.

“U.S. properties in the foreclosure process that sold in second quarter (typically short sales) took an average of 213 days to sell from the time they entered the foreclosure process, down from 228 days in the first quarter but up from 195 days in the second quarter of 2010.”

Foreclosures: No Mortgage Payments For Years is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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For several years foreclosure defense attorneys have been telling anyone who would listen that the entire foreclosure process is flawed because you have to own a mortgage note before there can be a foreclose — and several courts have found that the affidavits used in foreclosures do not prove ownership.

Go back to 2007. Federal judge Christopher Boyko of the U.S. District Court in Ohio — a 2005 appointee of George W. Bush — was asked to foreclose on 14 homeowners.

In a lot of courts the borrowers and their families would instantly be on the street but Judge Boyko said before there could be a foreclosure the lenders would first have to show that they owned the delinquent loans and therefore had the right to appear in court.

The problem was that public records showed the loans were owned by the local banks that originated the mortgages, not the big banks before the court. So, to foreclose, the big banks would first have to show ownership of the notes. How? By providing evidence of ownership such as a sworn affidavit.

Judge Boyko looked at the affidavits and made this ruling:

“The Court’s Amended General Order No. 2006-16 requires Plaintiff to submit an affidavit along with the Complaint, which identifies Plaintiff either as the original mortgage holder, or as an assignee, trustee or successor-in-interest. Once again, the affidavits submitted in all these cases recite the averment that Plaintiff is the owner of the Note and Mortgage, without any mention of an assignment or trust or successor interest. Consequently, the very filings and submissions of the Plaintiff create a conflict. In every instance, then, Plaintiff has not satisfied its burden of demonstrating standing at the time of the filing of the Complaint.”

Boyko 2007 Foreclosure Decision — Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227

Why The Ownership Mess Matters

The Boyko decision arose because lenders wanted to have a way to quickly transfer loan ownership. This is necessary if you’re going to electronically buy and sell mortgage-backed securities, essentially bonds secured with thousands of mortgages.

Before the computer era lenders would have to go down to the courthouse each time a mortgage was sold. The sale would be recorded in the public records and a new owner would be named. If the borrower defaulted the owner of the loan — the party who had the right to go to court and foreclose — was clear.

However, with the creation of mortgage-backed securities Wall Street needed a way to avoid the pesky and costly recordation system so it came up with MERS — the Mortgage Electronic Registration System.

In general the MERS concept works like this: When a loan is originated and sold on Wall Street MERS would become the nominal owner. Loan ownership can then be transferred within MERS and without having to change the public record with every loan sale.

Not only was the MERS system a big time saver, it also saved lenders a bunch of money:

“Lenders save at least $25 for every new loan they register on the MERS System ,” said Carson Mullen, Executive Vice President of the MERS Customer Division. “Since the beginning, MERS has saved the mortgage industry over $1 billion in unnecessary costs.”

Other States

Challenges to the nominee system of ownership have now emerged in a number of states including Nevada, Missouri and Kansas.

According to the Kansas Supreme Court, “MERS did not demonstrate, in fact, did not attempt to demonstrate, that it possessed any tangible interest in the mortgage beyond a nominal designation as the mortgagor. It lent no money and received no payments from the borrower. It suffered no direct, ascertainable monetary loss as a consequence of the litigation. Having suffered no injury, it does not qualify for protection under the Due Process Clause of either the United States or the Kansas Constitutions.”

A federal bankruptcy judge in Nevada found that MERS could not foreclose. She wrote:

“If MERS is not the holder of the note, then to enforce it MERS must be a transferee in possession who is entitled to the rights of a holder or have authority under state law to act for the holder. Simply being a beneficiary or having an assignment of a deed of trust is not enough to be entitled to foreclose on a deed of trust. For there to be a valid assignment for purposes of foreclosure both the note and the deed of trust must be assigned. A mortgage loan consists of a promissory note and a security instrument, typically a mortgage or a deed of trust. When the note is split from the deed of trust, “the note becomes, as a practical matter, unsecured.”

“MERS,” said the Nevada decision, “may not enforce the notes as the alleged beneficiary. While MERS may have standing to prosecute the motion in the name of its Member as a nominee, there is no evidence that the named nominee is entitled to
enforce the note or that MERS is the agent of the note’s holder. Indeed, the evidence is to the contrary, the note has been sold, and the named nominee no longer has any interest in the note.”

“There is no evidence in the record or the pleadings,” said the Missouri Court of Appeals, “that MERS held the promissory note or that BNC (the lender) gave MERS the authority to transfer the promissory note. MERS could not transfer the promissory note; therefore the language in the assignment of the deed of trust purporting to transfer the promissory note is ineffective.” (Parenthesis mine)

What Next

If more courts agree that mortgage ownership cannot be proven then vast numbers of foreclosures can’t occur until the actual loan owners go to court. At the same time, if loan ownership is unclear then what’s the real market value of mortgages now on lender books or securities backed by bundles of mortgages? And what if a thorough audit shows mistakes such as the ownership of one mortgage by several lenders or mortgage-backed securities?

We may soon find ourselves in a financial environment where foreclosures are stalled, mortgage ownership is unclear, asset values are uncertain and the foreclosure problems of the past few years will be minor and minimal when compared with issues which lie ahead. In the meantime, massive new employment opportunities will open up in such fields as foreclosure defense law and mortgage ownership auditing.

The Real Foreclosure Crisis: Who Owns The Mortgages? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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Jacksonville attorney Chip Parker in the video below explains how the lack of a note can be used to prevent foreclosures in Florida and perhaps workout a loan modification. While his discussion applies to the rules in one state, the general concept may work in others. For specifics you’ll need to speak with a foreclosure defense attorney in your community — they may be interested in Parker’s comments and they may also want to see what we have regarding the famous Boyko missing note decision.

No Mortgage Note, No Foreclosure is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

Technorati Tags: attorney, Boyko, Chip Parker, copy substitute, foreclosure, loan, missing, modification, mortgage, note

At first this may seem unimportant. After all, when a home is financed doesn’t a lender own the loan? And if a borrower doesn’t pay shouldn’t the lender have a right to foreclose?

It turns out that the first question is not so simple. A large proportion of the institutions that we see as “lenders” don’t actually own the loans they make. Instead, they create loans and then sell them to issuers. The issuers package the loans to create mortgage-backed securities (MBS) and those securities are then sold to investors worldwide. The investors, in turn, are represented by a trustee.

That means, according to ruling by federal judge Christopher Boyko of the U.S. District Court in Ohio, that many foreclosures cannot proceed because the actual loan owners are not the lenders that originally issued the loans — even though the names of those original note holders continue to appear in official records.

Boyko 2007 Foreclosure Decision — Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227

Who Owns The Loan?

Before someone can lose their home in a foreclosure a plaintiff must prove that it’s actually the loan owner. In more than a dozen Ohio foreclosure cases Deutsche Bank said it owned various notes and mortgages. However, Boyko found in each case that the paperwork actually identified the original lenders as the loan owners and said nothing about Deutsche Bank.

The problem is that the original lenders who created the loans — the lenders listed as the loan owners in public records — were not seeking to foreclose. Instead, it was Deutsche Bank that was taking homeowners to court and Deutsche Bank, said Boyko, had no grounds to foreclose because it did not own the loans or have any authority to foreclose.

Given that borrowers make monthly payments and that the money ultimately goes to those who own the mortgages, the Boyko decision seems odd. Aren’t the loan owners the ones getting the monthly payments?

It used to be that if you wanted a mortgage you went to a local lender such as a savings & loan association or a commercial bank. The lender actually owned the loan.

The Secondary System

However, the system changed with the development of the “secondary” market. Now local lenders could sell their loans to investors around the country. Big institutions, such as Fannie Mae and Freddie Mac, would buy local loans, but only if those loans met certain standards. The loans that could readily be sold on the secondary market were called “conforming” mortgages because they conformed to the requirements established by Fannie Mae and Freddie Mac.

With the secondary system a local lender could make loans, sell those mortgages, replenish its capital with the money it got from selling, and then make more loans. More loans meant the lender could generate more fees and charges. More loans also meant more money was available for local loans, and that helped lubricate the local housing market.

Within the secondary market Fannie Mae, Freddie Mac and others would create securities backed by mortgages. Those securities would be sold to investors worldwide. The securities sold well because home mortgages were believed to represent little risk and because Fannie Mae and Freddie Mac made certain guarantees. Since Fannie Mae and Freddie Mac were “government-sponsored enterprises” that could borrow directly from the U.S. Treasury, many investors thought mortgage-backed securities were just about risk-free.

Fannie Mae and Freddie Mac are not the only ones packaging mortgages, however. Wall Street firms got into the act and began accepting loans that did not meet conforming loan standards — mortgages with little down, loans with “nontraditional” terms and supersized “jumbo” loans that neither Fannie Mae nor Freddie Mac would buy.

In the past few years it would not be uncommon for a lender to put up capital to fund a loan. The loan would be marketed to borrowers by a mortgage banker or a mortgage broker who, essentially, was a salesman for the lender. To borrowers, the mortgage broker or the mortgage banker was their “lender,” however that was not usually the case. Instead, the loan was typically sold by the original lender to an “issuer” and borrowers would make payments to a “servicer.”

The actual owner of the loan at this point was not the original lender, not the mortgage broker, not the mortgage banker nor the servicer or the issuer. Why? When the loan was sold to the issuer, the issuer took that one mortgage, packaged it with other loans, and created a private-label mortgage-backed security (MBS). In effect, the issuer sold the loan to the holders of the mortgage-backed security.

Equitable Interest

But those who invest in the MBS do not actually own the loan either. They have, perhaps, an “equitable interest” in the sense that they are entitled to interest from the mortgage payments and a return of their capital when the loan is sold, paid off or foreclosed.

However, it could be that a single loan might wind up in several loan pools, each with a different level of investor risk — more risk would hopefully produce a higher level of return. Or, it could be that a loan is in one pool today and another pool tomorrow.

In such circumstances, as lawyers might ask, who is the real party in interest, the party who actually owns the loan?

“This court acknowledges the right of banks, holding valid mortgages, to receive timely payments,” said Boyko. “And, if they do not receive timely payments, banks have the right to properly file actions on the defaulted notes — seeking foreclosure on the property securing the notes. Yet, this court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary mortgage market, nor monetary or economic considerations of the parties, nor the convenience of the litigants supersede those obligations.”

In other words, a borrower can only be foreclosed when the actual owner of the loan goes to court. In the cases seen by Boyko, the paperwork said the loan owners were various banks, not the trustee for the owners of a mortgage-backed security.

What does it all mean?

First, the Boyko decision could be stayed or over-turned by higher courts. It may have no standing in other districts. It could also be voided with new laws from Congress.

While no one can predict how courts may rule, help for lenders, trustees and MBS investors from Washington is unlikely. The politics of the time — with an estimated two million homeowners facing foreclosure this year — make assistance from Capitol Hill improbable, regardless of PAC contributions.

Second, Judge Boyko asked a simple question: If a borrower fails to pay their mortgage then who is hurt? It’s not the original lender because they sold the loan. It’s not servicers because they do not have title to the mortgage. It may not be an individual trustee if a single mortgage has been used to support several mortgage-backed securities. Lastly, since mortgage-backed securities can be sold with electronic speed, it may not be the investor who held a stake in one particular MBS 10 minutes ago.

If the Boyko decision spreads to other districts and courtrooms, then issuers will have to tie specific loans to particular mortgage-backed securities. In the same way that real estate titles are recorded in official records, a similar system will be needed for loan documents. Such a system will support investor claims when borrowers default, but at the same time such a system will also prevent unjustified foreclosures and forfeitures.

“Given the huge stakes in this matter, everyone benefits by knowing who actually owns individual loans,” says Jim Saccacio, Chairman and CEO at RealtyTrac.com, the leading online marketplace for foreclosure properties. “There’s no doubt that some foreclosures can be avoided if only borrowers and loan owners communicated at the earliest possible moment. For such a situation to arise the name of the loan owner has to be disclosed in a way that’s easily accessible to borrowers, disclosure which is not common today.”

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Published originally by RealtyTrac.com during November 2007 and posted with permission.

Judge To Lenders: Show Me The Note is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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