February 26, 2008

Judge Boyko's Snowball Starts Rolling Downhill

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A bright note in the gathering foreclosure crisis.
U.S. Bankruptcy Judge Samuel L. Bufford in Los Angeles issued a notice last month warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies:

"This requirement will apply because developments in the secondary market for mortgages and other security interests cause the court to lack confidence that presenting a copy of a promissory note is sufficient to show that movant has a right to enforce the note or that it qualifies as a real party in interest."

In November, Federal District Judge Christopher Boyko walked into his Cleveland courtroom and into the news. He made the mainstream media in a small way and the blogosphere in a big one (and Fire on the Mountain was on the case). You may remember Boyko—he knocked the attorneys for the US unit of global giant Deutsche Bank for a loop. Their lawyers were in court as the subprime mortgage mess unfolded, trying to evict 14 families and seize their homes for non-payment.

Boyko asked to see the mortgages.

"Umm, the mortgages," mumbled the lawyers, pretending to pat their suit pockets. "The mortgages...Gee, nobody ever asked us to actually see them before, the mortgages per se, that is. But trust us, Deutsche Bank really does hold them."

Boyko was unimpressed and told the lawyers that until the paper was forthcoming, forget about foreclosure and repossession.

The physical mortgage notes had, no doubt, been tucked someplace while the mortgages were sold and sold again and bundled in tranches of mortgages of varying types and shuffled into mortgage-backed securities which were traded far and wide, until the bottom fell out last fall.

Now, asserts an article by Bob Ivry for Bloomberg News,

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.

Read Ivry’s nifty piece to get a sense of the worry this development is causing in the world of high finance, and why. About one mortgage in five, $2.1 trillion worth, is currently packaged in these securities. Maybe half of them are registered and transactions involving them recorded, at least in theory, by a tracking company set up by mortgage companies (and that information doesn’t necessarily say where the physical mortgage is). The other half? Don’t ask.

By law, in every transfer of a mortgage, the seller must sign over the notes to the buyer. How much of that do you think actually happened in lending, buying, selling, bundling, repackaging frenzy of the last six years? A lot of these mortgages look to be still technically held by one of the 100+ mortgage companies that stopped making loans, closed or were sold last year.

One of these, amusingly enough, is a NY state firm called American Home Mortgage Investment Corp. which filed for bankruptcy last August. They complain that warehousing their loan paperwork is costing them $45,000 a month that they don’t have and they've petitioned the Bankruptcy Judge to let them dump the lot!

There’s more good stuff to be found in Ivry’s article and by googling some of the instances he cites, but this post is plenty long enough already.

But, and this is a big, big but, before I sign off, there is one thing I want to make sure everyone who has read this far knows and understands and spreads the word on. Most foreclosures are still going smooth as silk, even with no paperwork in sight. In many cases banks are submitting "lost-note affidavits" as a matter of course. If you or anyone you know winds up facing foreclosure, your lawyer has to challenge the bank and the bank’s attorneys and not just pray that you have a Judge Boyko or a Judge Bufford on the bench.


3 comments:

Anonymous said...

Not all Bankruptcy Judges see it that way.

New Judge Taylor in San Diego says she will not require the production of notes to get relief from the automatic stay.

She comes from a creditor background so it is not surprising.

The Union Girl said...

American Home was a pretty good lender. When I reviewed loans, I liked getting their loans because they were always well documented and for the most part, sound. It's a shame so many lenders went the route of the subprime loans and the liar loans (no doc loans). These weren't good products and everyone knew it, but it was hard to say no to them when the money was so freaking good.

Having worked for government monitoring the lending industry for a decade, all of this just makes me sick. I've watched good lenders go bankrupt and small mom and pop lenders get gobbled up by lenders I would never close a loan with in my lifetime. All of this, it's just disgusting and I hold Congress to blame (not current). They had a chance to allow Fannie and Freddie to secure the subprimes but because of industry pressure from Countrywide and Wells Fargo, they did nothing (about 8 years ago). This is what doing nothing gets you. Fannie and Freddie should have regulated this market. It SHOULD be within their scope.

Carlo said...

Good Job!: )