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Newsflash: The Law Matters!

posted by Elizabeth Warren

In its role as a big-time mortgage servicer, Deutsche Bank has carefully instructed the courts that the rules requiring the foreclosing party to demonstrating standing (e.g., the movant holds the mortgage and the note) were just too old fashioned to survive in the hip world of SIVs.  Unfortunately for DB, the federal judge in the case just wasn't hip enough.  The rule, said the court, is the rule.  If you try to foreclose, come up with the documentation that shows you are legally entitled to do so.  The court then dismissed 14 foreclosure motions. 

Gasp!  The law matters.

The piece on the front page of today's NYT is important for at least three reasons:

First, Katie Porter's work has made it to the front page of the NYT twice in two weeks. Her study on mortgage documentation in bankruptcy showed that 40% of the claims were not accompanied by proof of a mortgage--as clearly required by law.  Some of this may be sloppiness in filing the paperwork, but if half of it reflects the servicers inability to find the correct documentation, then there will be a LOT of disappointed mortgage lenders.  The subprime market will start melting faster than a popsicle in El Paso in August.   

Second, the NYT piece quotes a person in the industry as explaining that the problem of showing whether the servicer (and the relevant pool) is entitled to collect is more than just a technical nicety.  In fact, he says, sometimes the same mortgage is in two or three different pools simultaneously.  Wow.  This problem is located somewhere on a continuum between lousy bookkeeping and fraud.  If double or triple counting has occurred in even 10 percent of all cases, the downgrading of mortgage portfolio valuations needs to move even faster.  The popsicle is now been placed in a bonfire. 

Third, what has gone wrong in the American courts that makes "follow the rules" such a news flash?  The mortgage SIV market is measured in trillions ($14 trillion, according to the NYT).  doing the paperwork to make sure these mortgages comply with the law and tracking those mortgages into various pools should have been the basic business obligation of the people putting together these deals and taking on the responsibility for managing them.  Banks have to keep track of your money, and mutual funds need to know which stocks are in the pool and which aren't.  Did SIVs think they would be exempt?  I smell lawsuits coming, only this time the targets won't be families trying to hang on to a three-bed-two-bath fixer upper. 


Please don't depend on the NY Times for useful mortgage information. While this "development" has potential to expose a really ugly problem in the market, the conclusions drawn by the Times and the original blog poster (Iamfacingforeclosure) aren't them. Tanta over at Calculated Risk put this issue in the right frame before the Times even thought about it. (http://calculatedrisk.blogspot.com/2007/11/gm-watch-flap-continues.html)

Ultimate issues? The banks have apparently been deficit in ensuring the proper assignments were made when the notes were sold. In the past this was kind of ignored in proceedings but not in this case. So now to foreclose, they'll have to go back and clean up their legal ownership trail. Big threat, some of those who'll need to sign the assignments have gone bankrupt and are no longer around. Meaning some lawyers will get fat fees for having a court sort it out. And the foreclosure is held up until standing is clear.

Unlikely that the loans were sold multiple times as investors would be complaining about not getting payments by now, i.e., you pay your house payment to a servicer, who in turn pays the note holder. The servicer doesn't pay out the payment multiple times without someone noticing. Are their borrowers who can show timely payments but are foreclosed on anyway because investor number 2 didn't get his payments because they went to investor 1?

You should read footnote 3 of the order which Tanta posts here: http://calculatedrisk.blogspot.com/2007/11/in-re-foreclosure-cases.html It is good stuff along the lines of this blog.

To me it appears the judge isn't at all happy with the lender's rush to get a judgement of default then sitting on the foreclosure while they sort out their sloppy paperwork.

And while I'm not a lawyer, I think saying the following to a Federal Judge would be bad:

Plaintiff’s, “Judge, you just don’t understand how things work,”...

It certainly appears to have put the judge in a less than amiable mood toward the lender.

I'm perplexed why DB brought the foreclosure action in federal court. Is there something unusual about Ohio state courts that would lead a lender to prefer a federal venue?

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