Lenders Clamping Foreclosures Face Legal Hurdle

Posted in Foreclosures, November 19th, 2007 |

In Ohio a court ruling went against a foreclosure practice that so far had made it easy for lenders to reclaim properties. The question was raised about the legal position of investors engaged in mortgage securities. Judge Boyko of Federal District Court of Cleveland took this point to dismiss 14 foreclosure cases saying that the investors had been unable to prove that they owned the properties involved.

For decades this practice has been in operation of using house loans as securities that had resulted in ballooning of real estate prices. Investors saw in mortgage trusts a way to easy high profits. By the end of 2006 $6.5 trillion of securitized mortgage debts became outstanding.

When people failed to meet mortgage commitments it became difficult to locate the holder of the mortgage notes to talk about negotiation. The Ohio ruling has complicated matters for the lenders also. Basically the court wants clear identification of the owners before allowing the property to change hands. This loophole might force lenders to sit down to amicable talks with the borrowers. Also judges in other courts are likely to follow the example set in Cleveland court.

The ruling on 31st October was against Deutsche Bank National Trust Company. The bank is the trustee for these securitization pools. When asked to show documents to prove ownership of the properties in question, the bank could only show an intent to convey the rights rather than unambiguous ownership proof. The documents fell far short of what was required of them. In a scathing statement the judge wrote that just because so far the lenders have been getting away with this unchallenged it does not mean that this legal compliance will continue. The fourteen cases of foreclosure were brought to a halt.

Deutsche Bank remained non-committal. The same loan might be in two or three pools. The story starts with the sanctioning of a home loan by a lender. It is then sold to a firm in Wall Street that brackets it with thousands of others rolling in. Then it is made into a packet and sold in slices to different investors. A trustee bank oversees the pool operations so that the payments remitted by the borrowers go into the pockets of the respective investor. The primary question in any court of law is – who owns the mortgage note? The lenders fail to answer.