Banks Lose in Court to Deadbeat Homeowners as Loans Sold in Bonds Vanish
February 26th, 2008Please make sure you get some of this fine calliope music playing before you read on.
Down payment: $0
Liar loan origination fees: $5000
Preventing a bank from foreclosing on you because they can’t prove they own the note: Priceless.
Via: Bloomberg:
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, Florida. The Seattle-based lender failed to prove that it owned Lents’s 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, Maryland-based industry newsletter. Those loans may be sold several times before they land in a security. Mortgage servicers, who collect monthly payments and distribute them to securities investors, can buy and sell the home loans many times.
Housing Boom
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, Indiana.
“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 borrowers, who have bad or incomplete credit and whose mortgages typically are securitized by private banks rather than government-sponsored entities Fannie Mae and Freddie Mac, is at a four-year high, according to the mortgage bankers.
It really boggles the mind how short-sighted and stupid people can be, especially when greed is involved. If mortgages are going to be bundled together and sold as securities (the wisdom of packaging or buying dodgy debt as an “asset” is something I won’t go into here), doesn’t it make sense to keep track of whose mortgage is in which bundle, and to whom each bundle is being sold, and to keep a record of who currently owns the bundle at the institution at which the bundle (or should I say “bungle”?) originated?