Monday, October 26, 2009

The Debtors' Revolt?

On Naked Capitalism over the weekend, Edward Harrison, who keeps a well-read blog titled "Credit Write-downs," takes 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."
To wit: Across the country, judges have more and more been taking the parts of home-owners whose mortgage holders are unable to produce the actual, signed, documents of the mortgage's origination, etc. Sheriffs in regions particularly hard-hit by the multiple whammies of the current economic and political collapse are refusing to evict delinquent residents. Harrison repeats a piece in the NYT on Saturday by economics correspondent Gretchen Mortenson, "describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage," under the fanciful hed:
If Lenders Say ‘The Dog Ate Your Mortgage’

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.
(Emphases supplied--W)
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 agents of the mortgagees. 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.

Oh, and in an unrelated case, but also involving bank customers successfuly contesting big finance, Citibank Belgium is being held liable by state prosecutors for duping its savers into taking safe money out of their savings account and investing it in Lehman Brothers. When Lehman went bust, 128 million euros of their savings money went poof. See my story here. Agence France Press has covered it, but don’t expect it to get huge coverage in the U.S. Mish thinks Citigroup is in “serious trouble” globally. So do I.

Let the backlash against reckless finance begin.
Who's got the pitch-forks and the bubbling tar?

Seriously, unless they can produce the mortgage documents with your signature affixed, you have the right to sit tight. And Sheriffs in jurisdictions from California and Nevada to Illinois and Michigan are sympathetic to the plight of the 'dispossessed.'


Cecelia said...

'Why mortgages aren't modified .......' is the best explanation I have read on this. There is no question as to the unscrupulousness with the lenders, and their taking advantage of unknowing consumers. This whole thing does need to crumble apart from the inside out which this ruling could precedent.

Thanks for your posts. Reading your blog as I have been since discovering it is keeping me better informed.
Cecelia Dalzin

Woody (Tokin Librul/Rogue Scholar/ Helluvafella!) said...

THank you, Madam. You stimulate me to post that entire entry.

Check out the rest of Woody's Bloggy Blogginess...