Records for properties in foreclosure about to get more complicated

Delinquent homeowners have known for years that the can get a few months of free housing when going into foreclosure. With the volume of foreclosures being handled by lenders, it is usually 3 – 5 months from the time the borrower stops paying, until the foreclosure event takes place. Homeowners have taken advantage of this to save up some money to get re-established after they move out.

An Ohio Congresswoman, Marcy Kaptur, is advising property owners to take this a step further, and fight the foreclosure using a vulnerability in the way some mortgages are recorded. As we know, over the past 10 years, lenders have become much more likely to re-sell the mortgages to other banks, or investors. More importantly, the mortgage note wasn’t simply passed on to one other lender. Since 2004, it is very likely that each new mortgage was re-sold many times over, and often split into separate pieces, so that it is owned by multiple entities. The original recorded mortgage document often indicates a note owner who may be different from the lender foreclosing on the property.

Sometimes assignments are recorded, but lenders often keep track of ownership internally, especially when servicing rights and income tranches are sold separately. MERS and other nominee trustees were set up to make this process easier.

However, it can create complications when the homeowner demands that the lender prove clear ownership at a foreclosure proceeding. If the lender does not have a clear paper trail to show the judge, the foreclosure can be stayed. Turmoil in the banking and investment industries over the past 2 years make it more likely that there may be a break in the “chain” of documentation for mortgage ownership. When the “chain” of mortgage ownership is maintained within in the land records system, it can be easily traced back. When it is part of a securities trading system, there is a great chance for error. Investment banks who trade mortgages operate on a system where they can reconcile account numbers, and work out the details amongst themselves if there is any error. The owners of the mortgage notes probably never considered having to prove ownership outside of their own network, and that the land records system has weight within the court system.

MERS was aware of this possible issue back in 2005, and there have been examples of judges dismissing foreclosures when the lender could not produce satisfactory evidence of owning the note. A judge dismissed 14 foreclosures in Ohio late in 2007, for this reason.

It turns out that another undesirable side-effect of mortgage backed securities is that this structure clouds the clear ownership of the individual underlying mortgages. If a judge ever rules that mortgage note ownership can only be proven by valid recorded document, mortgagees will have to go back and re-create the mortgage assignment chain in the land records.