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Mortgage Note Issues Help Debtors Avoid Foreclosure

By BOB IVRY, Bloomberg News

Published: February 23, 2008

Updated: 02/22/2008 08:33 pm

Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton. The Seattle-based lender failed to prove that it owned Lents' mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

"If you're going to take my house away from me, you better own the note," said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

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. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

"I think it's going to become pretty hairy," said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. "Regulators appear to have ignored this, given the size and scope of the problem."

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Md.-based industry newsletter. Those loans may be sold several times before they land in a security.

Shortcuts Taken With Paperwork

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Ind.

"Loans were mass produced and short cuts were taken," White said. "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."

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.

The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime is at a four-year high, according to the mortgage bankers.

More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, Calif.-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

"The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen," said Chris Geidner, a lawyer in Dann's office. "These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people."

When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what's called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid.

She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.

"They raise the issue of whether the trusts own the loans at all," Charney said. "Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule."

State laws make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.

"All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully," Saft said. "The lenders can't find the paper."

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.

"It's a gigantic waste of time," Naimon said. "The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan."

Judges Helping 'The Little Guy'

Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, Calif.

Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November because of the inability of the trustee and the servicer to prove ownership of the mortgages.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.

"Judges are human beings," said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. "They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company."

Lents is former CEO of Investco Inc., a Boca Raton-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen.

"If the homeowner doesn't object to the lost-note affidavit, the judge rubber-stamps it," Lents said. "Is it oversight, or are they trying to get around the law?"

Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.

"I can't believe the handling of notes is worse than it was five years ago," said Guy Cecala, publisher of Inside Mortgage Finance. "What we didn't have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before."

American Home Mortgage Investment Corp., the Melville, N.Y.-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork.

The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It's run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Va.-based MERSCORP Inc., which is owned by mortgage companies.

MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company.

For about half of U.S. mortgages, there is no tracking mechanism.

MERS rules don't allow members to submit lost-note affidavits in place of mortgage notes, said R.K. Arnold, the company's CEO.

"A lot of companies say the note is lost when it's highly unlikely the note is lost," Arnold said. "Saying a note is lost when it's not really lost is wrong."

Lents' attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents' mortgage note.

"Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes," Raskin said. "As an officer of the court, I find it troubling that they've been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system."
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post #2 of 8 (permalink) Old 03-11-2008, 03:18 PM
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Originally Posted by lovemyc280 View Post
By BOB IVRY, Bloomberg News

Published: February 23, 2008

Updated: 02/22/2008 08:33 pm

Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.

That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton. The Seattle-based lender failed to prove that it owned Lents' mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.

"If you're going to take my house away from me, you better own the note," said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

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. The confusion is another headache for U.S. Treasury Secretary Henry Paulson as he revises rules for packaging mortgages into securities.

"I think it's going to become pretty hairy," said Josh Rosner, managing director at the New York-based investment research firm Graham Fisher & Co. "Regulators appear to have ignored this, given the size and scope of the problem."

More than $2.1 trillion, or 19 percent, of outstanding mortgages have been bundled into securities by private banks, according to Inside Mortgage Finance, a Bethesda, Md.-based industry newsletter. Those loans may be sold several times before they land in a security.

Shortcuts Taken With Paperwork

Each time the mortgages change hands, the sellers are required to sign over the mortgage notes to the buyers. In the rush to originate more loans during the U.S. mortgage boom from 2003 to 2006, that assignment of ownership wasn't always properly completed, said Alan White, assistant professor at Valparaiso University School of Law in Valparaiso, Ind.

"Loans were mass produced and short cuts were taken," White said. "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."

More than 100 mortgage companies stopped making loans, closed or were sold last year, according to Bloomberg data.

The foreclosure rate, at 1.69 percent of all U.S. homeowners, is the highest since the Mortgage Bankers Association began tracking it in 1993. The foreclosure rate for subprime is at a four-year high, according to the mortgage bankers.

More than 1.5 million homeowners will enter the foreclosure process this year, said Rick Sharga, executive vice president for marketing at RealtyTrac Inc., the Irvine, Calif.-based seller of foreclosure information. About half of them, 750,000, will have their homes repossessed, Sharga said.

Borrower advocates, including Ohio Attorney General Marc Dann, have seized upon the issue of missing mortgage notes as a way to stem foreclosures.

"The best thing to do is to keep people in their homes and for everybody to take steps necessary to make that happen," said Chris Geidner, a lawyer in Dann's office. "These trusts are purchasing these notes, and before they even get the paperwork, they foreclose on people."

When the mortgage servicers and securitizing banks that act as trustees of the securities fail to present proof that they own a mortgage, they sometimes file what's called a lost-note affidavit, said April Charney, a lawyer at Jacksonville Area Legal Aid.

She's had foreclosure proceedings for 300 clients dismissed or postponed in the past year, with about 80 percent of them involving lost-note affidavits, she said.

"They raise the issue of whether the trusts own the loans at all," Charney said. "Lost-note affidavits are pattern and practice in the industry. They are not exceptions. They are the rule."

State laws make it difficult to foreclose because they favor the homeowner, said Stuart Saft, a real estate lawyer and partner at the New York firm Dewey & LeBoeuf LLP.

"All these loan documents are being sent to the inside of a mountain in the middle of America and not being checked very carefully," Saft said. "The lenders can't find the paper."

Requiring banks to produce the paperwork at a foreclosure hearing is a nuisance, said Jeffrey Naimon, a partner in the Washington office of Buckley Kolar LLP.

"It's a gigantic waste of time," Naimon said. "The mortgage may have transferred five, six, eight times. It's possible that you don't have all the pieces of paper, but it was enough to convince the next guy in the chain. There's no true controversy over whether the owner owns the loan."

Judges Helping 'The Little Guy'

Judges are becoming increasingly impatient with plaintiffs who produce no more proof of ownership than a lost-note affidavit, said Michael Doan, an attorney at Doan Law Firm LLP in Carlsbad, Calif.

Federal District Judge Christopher Boyko dismissed 14 foreclosure cases in Cleveland in November because of the inability of the trustee and the servicer to prove ownership of the mortgages.

Similar cases were dismissed during the past year by judges in California, Massachusetts, Kansas and New York.

"Judges are human beings," said Kenneth M. Lapine, a partner at the Cleveland law firm Roetzel & Andress LPA. "They no doubt feel the little guy needs all the help he can get against the impersonal, out of town, mega-investment banking company."

Lents is former CEO of Investco Inc., a Boca Raton-based developer of voice recognition software. In 2002, the U.S. Securities and Exchange Commission sanctioned Lents and others for stock manipulation, according to the SEC Web site. He lost his job, was fined and his assets were frozen.

"If the homeowner doesn't object to the lost-note affidavit, the judge rubber-stamps it," Lents said. "Is it oversight, or are they trying to get around the law?"

Washington Mutual spokeswoman Geri Ann Baptista said the bank had no comment.

"I can't believe the handling of notes is worse than it was five years ago," said Guy Cecala, publisher of Inside Mortgage Finance. "What we didn't have back then were armies of attorneys out there looking for loopholes. People are challenging foreclosures and courts are paying a lot more attention to foreclosures than they ever did before."

American Home Mortgage Investment Corp., the Melville, N.Y.-based lender that filed for bankruptcy last August, said it was paying $45,000 a month to store loan paperwork.

The home-loan industry has had a central electronic database since 1997 to track mortgages as they are bought and sold. It's run by Mortgage Electronic Registration System, or MERS, a subsidiary of Vienna, Va.-based MERSCORP Inc., which is owned by mortgage companies.

MERS has 3,246 member companies and about half of outstanding mortgages are registered with the company.

For about half of U.S. mortgages, there is no tracking mechanism.

MERS rules don't allow members to submit lost-note affidavits in place of mortgage notes, said R.K. Arnold, the company's CEO.

"A lot of companies say the note is lost when it's highly unlikely the note is lost," Arnold said. "Saying a note is lost when it's not really lost is wrong."

Lents' attorney, Jane Raskin of Raskin & Raskin in Miami, said she has no idea who owns Lents' mortgage note.

"Something is wrong if you start from what I think is the reasonable assumption that these banks are not losing all of these notes," Raskin said. "As an officer of the court, I find it troubling that they've been going in and saying we lost the note, and because nobody is challenging it, the foreclosures are pushed through the system."
The dog ate my homework. One would think that excuse would not get past elementary school.

Federal regulations REQUIRE the banks to keep up with their shit. It's kind of "the law". They should lose EVERY one of these cases until they can follow at LEAST these simple rules that the government requires:

(b) Requirements of lending policies.
(1) Real estate lending policies adopted pursuant to this section shall be:
(i) Consistent with safe and sound banking practices;
(ii) Appropriate to the size of the institution and the nature and scope of its operations; and
(iii) Reviewed and approved by the bank’s board of directors at least annually.
(2) The lending policies shall establish:
(i) Loan portfolio diversification standards;
(ii) Prudent underwriting standards, including loan-to-value limits, that are clear and measurable;
(iii) Loan administration procedures for the bank’s real estate portfolio; and
(iv) Documentation, approval, and reporting requirements to monitor compliance with the bank’s real estate lending policies.


By the way, there is a much bigger requirement, but the little bold red one pretty much covers it.

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Do you have the link for this article. I need to send it to someone. Thanks

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post #6 of 8 (permalink) Old 03-11-2008, 04:08 PM
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Ah, back to the issues. Paperwork and record keeping are fundamental
processes in banking institutions. Imagine your savings account
losing a bunch of zeros and the bank says sorry we don't have the
paperwork. That situation is not tenable in the modern world. What's next,
storing gold bars in the basement of a new ranch ?


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Originally Posted by mcbear View Post
The dog ate my homework. One would think that excuse would not get past elementary school.

Federal regulations REQUIRE the banks to keep up with their shit. It's kind of "the law". They should lose EVERY one of these cases until they can follow at LEAST these simple rules that the government requires:

(b) Requirements of lending policies.
(1) Real estate lending policies adopted pursuant to this section shall be:
(i) Consistent with safe and sound banking practices;
(ii) Appropriate to the size of the institution and the nature and scope of its operations; and
(iii) Reviewed and approved by the bank’s board of directors at least annually.
(2) The lending policies shall establish:
(i) Loan portfolio diversification standards;
(ii) Prudent underwriting standards, including loan-to-value limits, that are clear and measurable;
(iii) Loan administration procedures for the bank’s real estate portfolio; and
(iv) Documentation, approval, and reporting requirements to monitor compliance with the bank’s real estate lending policies.


By the way, there is a much bigger requirement, but the little bold red one pretty much covers it.

Last edited by mlfun; 03-11-2008 at 06:31 PM.
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post #8 of 8 (permalink) Old 03-11-2008, 06:22 PM
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That situation is not tenable in the modern world. What's next,
storing gold bars in the basement of a new ranch ?
My good sir, you have struck upon the one way to preserve your capital in Bush's America, circa 2008.
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