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.

Filed under: mortgages