“Total war over missing paperwork”

by Walter Olson on October 14, 2010

In general, if a mortgage servicer engages in improper corner-cutting in assembling the documents for foreclosure, it doesn’t lose the right to recover the property from the delinquent borrower: it just has to go back and do the steps properly (assuming the borrower insists on that in a timely way). Even negligent loss of key documents is not enough to alter the underlying property rights, for reasons well expressed by the late “Tanta” at Calculated Risk two years ago (via John Carney and Business Insider):

A financial institution in the business of making mortgage loans has no business routinely losing or damaging original promissory notes, and any institution that does so should be shut down by the federal regulators and I mean that.

But if consumer attorneys want to create a situation in which the simple fact of loss of or irreparable damage to an original note vacates the debt, I can promise you you will not like the consequences of that. If it turns into Total War here, don’t ever lose an original cancelled check. You should know that there is actually one fairly respectable reason for doing [foreclosure] filings with note copies, besides servicer laziness or loan sale screw-ups: taking your original note out of the custodian’s vault to send to some local attorney to attach to a court filing creates several more opportunities for it to get lost. If it becomes a requirement that [foreclosure] can proceed only with the original note in the courtroom, and the presence of an LNA [lost note affidavit] always means dismissal, then the things are going to have to be handled and shipped and received with the same level of security as a million-dollar bearer bond. Like, a Brink’s truck and a bonded courier carrying a briefcase handcuffed to his wrist. You want to pay the cost of that? No. You don’t. But you will.

More: Ted at PoL, quoting Arnold Kling and more John Carney.

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1 VMS 10.14.10 at 6:58 am

Normally only the mortgage and not the note is filed in the County Clerk’s office. The banks will just start filing the note too, and the courts will always accept a certified copy. The only time an original should be required is if there is a claim of a fraudulent copy of a document that is presented.

No one could seriously challenge that they did not get the mortgage loan in the amount and upon the terms stated. Also, the bank’s stated payment history coupled with any proof that the borrower may have that (s)he paid disputed deficiencies should be all that is necessary to give the bank the judgment it deserves.

Every so often you see a case where a bank engages in funny business where their officers or their friends or their law firm acquire title to the property at a bargain basement price at the expense of the mortgagor, but these are few and far between.

2 Dennis 10.14.10 at 8:18 am

I agree with VMS. If the bank has a valid property interest, and can prove it using normal legal means, they should be able to enforce that right. If they got the paperwork wrong, then get it right. This is not a game of Gotcha, it’s the orderly conduct of a loan business. Or it should be.

3 wfjag 10.14.10 at 8:46 am

In my experience, if the lender’s paperwork is not in order, it loses the right to use executory process to foreclose and evict the home buyer. Instead, it has to proceed by ordinary process. Also, the lender usually loses any right to claim that the debt was accelerated, plus attorney’s fees and other costs/fees, and then have an action for the deliquency amount against the home buyer. So, instead of getting title to the property and an eviction order at in ex parte proceeding (and so being able to start trying to re-sell it) in 15 days or so, the matter proceeds as ordinary civil litigation (meaning that if the buyer has even a marginally competent attorney, it will take 18 months to get to trial), and the lender may not have the possibility of a pursuing a deficiency judgment against the buyer. This means that the buyer can usually negotiate a favorable settlement with the lender, so that the lender gets clear title and possession sooner (and may agree to be responsible for any liens, property taxes, repair costs, etc.).

4 JW 10.14.10 at 8:55 am

Isn’t the main concern about whether the institution filing the foreclosure is truly the current mortgage holder? These notes have been sold on so many times that isn’t sometimes unclear who actually does own the debt?

My reading of your post is more about the original lender still owning the mortgage.

5 rxc 10.14.10 at 9:41 am

Original cancelled checks don’t even exist any more – they are scanned for transmission to the clearing house, and the originals are destroyed. I know at least one major insurance company that does not keep ANY original paperwork – it is ALL digitized.

The people who are trying to move us into an electronic society should be in an uproar over this. But seeing as the foreclosure uproar itself is more heat than light, the more important thing is to make sure that our great COngress does not get a chance to step in an make things worse before (or immediately after) the upcoming election.

6 jt 10.14.10 at 12:32 pm

Even if it is not clear which bank or financial institution owns the mortgage note, there is no fraud on the borrower. The one thing that is clear is that the borrower defaulted and has no claim on the home. If the wrong bank forecloses on a home, then that bank can be pursued in court by the bank that rightfully owns the note, or more likely they will reach a settlement between themselves.

I don’t see any way that this hurts the consumer in the way that many state AGs seem to be implying.

7 VMS 10.14.10 at 3:27 pm

JW@4 No matter how many times the Note is sold, the County Clerk will record each assignmemnt. If the court (or the borrower) is worried that the assignment is fraudulent, then they can require notice to the previous assignors of record.

8 David Schwartz 10.18.10 at 2:24 am

jt: On the more indirect side, the reduction in government revenue from recording fees means higher taxes and/or reductions in other services. On the more direct side, the lack of a clear record of who holds the mortgage and who has what rights make it virtually impossible for the consumer to know who he can renegotiate with.

The other way it hurts the consumer is when he goes to sell his house. How can he prove he made payments to the correct entity? How can he prove he has clear title to his land if nobody can establish who holds the note and thus who can release it?

Make no mistake about it, if the bank’s position is accepted, the homeowners have been screwed over. We all have been. If nothing else, we’ve been cheated out of billions of dollars in recording fees and the right to a clean public record documenting the title of land.

9 Bill Alexander 10.18.10 at 9:17 am

“If nothing else, we’ve been cheated out of billions of dollars in recording fees . . .”
You mean we have been cheated out of the opportunity to give billions of our dollars to the government?

10 David Schwartz 10.18.10 at 9:54 am

Those fees buy us a clean public record of the ownership of land. They allow the homeowners to know who holds their note, who they can negotiate with, and so on. $35 to record the transfer of an ownership of real property is a reasonable fee, and would have protected the banks from this disaster of their own making.

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