CLEVELAND: A mortgage lender cannot proceed with plans to foreclose on 14 homes because it does not have proof that it owns the properties, a federal judge said in a ruling that could pose a new complication for the nation's troubled mortgage industry.
The Oct. 31 ruling from U.S. District Court Judge Christopher A. Boyko in Cleveland could jeopardize efforts by lenders to foreclose. It also could mean that homeowners might get more time to resolve their debts while lenders handle the intricacies of getting custody of documents for mortgages that are rolled into securities and sold to investors.
Boyko warned Deutsche Bank National Trust Co. on Oct. 10 that he would dismiss the cases if the mortgage documents weren't produced. The documents filed with the judge by the bank only indicated plans to convey to the bank the rights to home titles, the judge said.
The foreclosure actions were dismissed without prejudice, meaning they may be refiled.
The pooling of home loans into securities has been a long-standing practice. At the end of 2006, $6.5 trillion of securitized mortgage debt was outstanding.
When a loan goes into a securitization, the note is not sent to the trust; instead, it shows up as a data transfer. The actual
note typically is kept at a separate document repository company.
Deutsche Bank spokesman John Gallagher didn't comment on the ruling, but in an e-mail he said the bank isn't responsible for foreclosures and doesn't sell foreclosed property.
The bank's attorney, Benjamin Hoen in Cleveland, didn't return a message seeking comment.
Moody's Economy.com projects that more than 2 million mortgages worth about $450 billion will default. Even after homes are sold at foreclosure auctions, investors in those mortgages still are likely to be hit with nearly $150 billion in losses, according to the forecast.
Ohio is among the states hardest hit by the nationwide spike in foreclosures, and Cuyahoga County is the state's foreclosure leader.
Ohio's 3.5 percent foreclosure rate in the first quarter of 2007 was almost triple the national figure, according to the Mortgage Bankers Association.
Laura McNally, a Case Western Reserve University professor who has studied predatory-lending practices, said attorneys representing borrowers around the country are excited by the ruling.
The case was decided before the defendants hired attorneys, and there already has been talk by some to get involved and help the borrowers, she said.
A law school colleague on the Case Western campus in Cleveland, Jonathan Entin, said the ruling reflects the increasingly complex and globalized nature of the mortgage business.
Entin said the case sends the message that lenders must be better prepared when they go to court to show they have an interest in a property on which they want to foreclose. ''It does not mean borrowers are necessarily going to have an out, and I don't think Judge Boyko wrote his order in a way that can fairly be read that way,'' he said.
Larry Platt, who specializes in mortgage lending issues at the K&L Gates law firm in New York, downplayed the importance of the ruling. ''I think it's scaring more lenders than it needs to. It is focused on a narrow procedural issue,'' Platt said.
''The case seems to suggest there's only one way to prove it (holding a mortgage), and, I think, historically there's been alternative ways.''
The case moved in court quickly. It was filed Aug. 21, and one day later the judge notified the bank that it hadn't complied with the requirement to show it held the mortgages in question. The bank issued summonses to defendants on Oct. 29 requiring them to respond to the action, and the judge dismissed the case two days later.
The first-named defendants in the case, Donna and Sean Jenkins, took out an $87,300, 30-year mortgage for a house in Cleveland's inner-city Glenville neighborhood on Nov. 21, 2005, at a fixed rate of 9.05 percent.
The lender was Argent Mortgage Co., which placed the mortgage in a securities pool on Feb. 1, 2006.
The couple could not be reached for comment. They have an unlisted phone at the suburban South Euclid address listed on the summons issued to them.