Another worry for big banks: They might have trouble even proving they own your home.
The massive repackaging of loans into collateralized debt obligations (CDOs) — $6.5 trillion in outstanding securitized mortgage debt, by one estimate — is making it hard enough to price investment risk.
But a recent court ruling could make it hard for banks to foreclose at all, adding to the potential losses as each case ends up in court instead, adding interminable legal time to the process.
Ohio Federal Court Judge Christopher A. Boyko dismissed 14 foreclosures actions brought on behalf of mortgage investors. He ruled that they failed to prove their ownership of the properties on which they wanted to foreclose.
In a nutshell, here’s the problem: Mortgage notes put in securitization pools typically appear as data transfers rather than actual legal transfers, a move intended to speed the process.
However, if the mortgage note in question has not been legally transferred and assigned to the securitization trust, the trust has no legal standing to foreclose.
“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate,” Boyko wrote in his ruling.
Editor’s Note: The Mother of All Financial Disasters. Protect Yourself Now.
Industry observers and consumer advocates note that mortgage securities make fixing troubled loans difficult because their complex structure and disparate ownership make identifying just who hold their mortgage notes difficult if not impossible.
"This court ruling in Ohio means that the securitized trusts own nothing," according to Bob Chapman of the International Forecaster. "The investors in these securities might have assumed — wrongly, it turns out — that they actually owned some real estate in these deals. The problem is, they own nothing."
The ruling involves foreclosure actions brought by Deutsche Bank National Trust Company, which acts as trustee for the mortgage securitization pools that claimed to hold the underlying mortgages DBNTC wanted to reclaim.
Deutsche Bank attorneys provided documents that showed intent to convey mortgage rights rather than actual proof of mortgage ownership on the date the foreclosure actions were filed.
The Ohio court’s action is expected to bolster the position of attorneys representing distressed borrowers and may encourage other judges to demand more compelling evidence of ownership from lenders bringing foreclosure actions.
Once the lender with which the borrower initially deals with grants the loan, it typically becomes part of a pool that contains thousands of other mortgage loans. Once such a pool is created, it’s offered to investors.
A trustee bank oversees the pool’s operations to make sure that investors receive the payments borrowers make. However, there is no central repository for securitized mortgages, which can show up in more than one pool.
Attorneys arguing for borrowers assert that trustees acting for investors frequently do not produce proof of mortgage ownership.
Their assertions are supported by a recent study of 1,733 foreclosures conducted by University of Iowa associate professor of law Katherine M. Porter, which reported that 40 percent of the foreclosing creditors studied did not show proof of ownership.