“Produce the Note” problems trip up more lenders

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The New York Times covered the phenomenon of the missing mortgage note and its impact on the foreclosure process. Namely, lenders unable to produce the original note signed by the borrower are unable to foreclose on the property. We covered “produce the note” earlier in the week, and apparently, more and more foreclosures are falling apart as lenders scramble to find the document that secures the property as collateral for the mortgage.

The New York Times spins it as part of the largess of the boom; banks in too big of a hurry to make money that they failed to properly complete assignments and track the critical document as mortgages were pooled and sold. In fact, while it may be part of it, the natural complexity of the secondary mortgage market make tracking down documents difficult in its own right.

Consider my former mortgage bank and how a note changes hands frequently. We have a borrower sign a note, then send the note to our warehouse bank as collateral for funding the loan. The purchasing bank then purchases the loan from us and the warehouse bank ships the note to the purchasing bank. That bank will then pool their mortgages and resell them.

In addition to the above paper shuffle there are what are called trailing documents. Documents that aren’t due at the close of the purchase of the loan, but are delivered within 60-120 days after the closing. These often include the transfer and assignment of the note to the purchasing lender. There is a transfer and assignment after that to the buyer of the pooled loans, and further down the line. That’s a lot of documentation that trails the origination of the mortgage and makes for a messy paper trail to determine the ultimate ownership (in addition to finding the note itself).

No doubt, with the tilting legal landscape of the foreclosure process, it may behoove homeowners to check with a consumer-protection lawyer when served foreclosure paperwork to determine if the foreclosing party does, in fact, have the legal right to do so.

While this may spell some short-term relief for the impacted homeowners, ultimately it is going to increase costs on the mortgage industry which will always be passed on to new borrowers. Lenders need to document the ownership of the note clearly and homeowners have a right to ensure that their rights as a homeowner are not infringed by lenders who are no longer party to the ownership of the home; but this will cause headaches on both sides moving forward as banks try to foreclose and homeowners try to modify mortgages with questionable ownership.

From the New York Times:

No one knows how many loans went into securitization trusts with defective documentation. But as messes go, this one has, ahem, potential. According to Inside Mortgage Finance, some eight million nonprime mortgages were put into securities pools in 2005 and 2006 and sold to investors. The value of these loans was $797 billion in 2005 and $815 billion in 2006.

If notes underlying even some of these mortgages were improperly assigned or lost, that will surely complicate pending legislation intended to allow bankruptcy judges to modify mortgage terms for troubled borrowers. A so-called cram-down provision in the law would let judges reduce the size of a loan, forcing whoever holds the security interest in it to take a loss.