December 31st, 2010 4:31 PM by Lehel S.
Get information on education programs that could help you increase your earning power.
The Minnesota couple refinanced in 2006 to start a business. It failed. Debts mounted. The Geweckes went bankrupt and failed to win a loan modification. But they bought time.
In 2009, the Geweckes filed a lawsuit to block their foreclosure. At the heart of their case is this question: Who owns their mortgage?
They allege the investor trust that claims to doesn't because there's no proper record of the mortgage's transfer to the trust. Their complaint also alleges that the mortgage didn't get to the trust until 18 months after the trust closed to new loans. If US Bank, the trustee, can't prove ownership, it can't foreclose, the Geweckes say.
Their argument is one that more borrowers are making as they fight foreclosures in courts nationwide. Their attorneys allege that companies used shoddy practices at the height of the subprime lending boom when reselling mortgage loans in rapid-fire fashion, leaving questions now about mortgage ownership as foreclosures mount.
While homeowners are unlikely to keep homes if they haven't paid their debts, their challenges are delaying foreclosures and giving them more leverage to win loan modifications, legal experts say. Their arguments are also getting more attention after revelations this fall that companies produced thousands of potentially fraudulent foreclosure documents. The Department of Justice and others are investigating.
"There has been a sea change," says Katherine Porter, a bankruptcy expert at the University of Iowa. "Judges are more willing to listen to homeowners ... to establish if the bank has done something wrong. In the past, it was always, 'The bank is right.' "
New York State Supreme Court Justice F. Dana Winslow testified at a congressional hearing this month that he's seen so many problems with foreclosure cases that he no longer assumes the company attempting to foreclose is the right one. Instead, he calls them the "presumptive mortgagee in foreclosure."
Winslow said he's often seen cases in which lawyers pushing for foreclosure failed to produce the mortgage note — which proves ownership of the debt — or produced the wrong note. Companies failed to establish the legal chain of title proving their right to foreclose and submitted "questionable" affidavits attesting to ownership of notes and mortgages, the lien on the property, he said.
Homeowners' attorneys also allege that companies created documents if they didn't have the ones they needed, including lost-note affidavits signed by low-level employees who never read the affidavits yet attested to their accuracy. It was "cheaper to make the documents up than ... to dig them up," says Linda Tirelli, New York consumer bankruptcy attorney.
Florida attorney James Kowalski, in recent written testimony to congressional lawmakers, cited a case in which two companies are trying to foreclose on the same house. Both claim to own the note.
Financial firms have said that any mistakes were minimal and can be remedied. In October, several firms, including Bank of America and GMAC Mortgage, temporarily halted some foreclosure sales to check procedures.
The industry also has defended the practice of bundling mortgages into securities for sale to investors. "There will be instances where mistakes were made ... but the broad process is sound," says Tom Deutsch, executive director of the industry's American Securitization Forum.
If companies can produce documents to prove standing to foreclose, some foreclosures may simply be delayed, legal experts say. But it's not clear that the issues are minor, said the Congressional Oversight Panel in a report last month. In a worst-case scenario, the report said that banks "may be unable to prove that they own" mortgages, clouding property titles for millions of homes and causing substantial financial harm to banks.
The issues are technical but "pose a potential systemic risk to the U.S. economy," Georgetown University law professor Adam Levitin said at a recent congressional hearing. If mortgages were not properly transferred, "Then mortgage-backed securities would in fact not be backed by any mortgages whatsoever," Levitin said.
A tangled paperwork trail
In the past, lenders rarely struggled to prove they had standing to foreclose. Local banks made mortgage loans, kept the documents and took payments.
But in the past decade, trillions of dollars of mortgage loans were packaged and sold to investors. Starting a day or two after homeowners signed closing papers, loans were sold and re-sold en route to investor trusts. To speed and reduce the cost of the process, lenders created Mortgage Electronic Registration Systems, or MERS, to track mortgage ownership and sometimes serve as mortgagee of record for the actual note owner. Some homeowners have challenged MERS' authority to foreclose on the note owner's behalf.
At issue now is whether mortgage loans were properly transferred and whether those transfers were properly documented.
Homeowner attorneys, such as the non-profit law firm representing the Geweckes, say that didn't always occur. Financial firms say it did. The trustee in the Gewecke case, US Bank, argues that Minnesota law does not require an assignment — a public record showing a transfer — of the mortgage at every step of its path into a trust. It also says that the note was put into the trust on time and so the mortgage was too. US Bank says it can prove that it owns the Geweckes' mortgage because it has the original note, the trust mentions the Gewecke loan and US Bank has an assignment that shows the mortgage was transferred from the Geweckes' original lender to US Bank. A hearing in Minnesota U.S. District Court is set for Jan. 10.
Deutsch also says that the typical contract governing trusts doesn't require that all prior owners or holders of mortgage notes appear on documents to show chain of ownership as notes pass from lenders or others to trusts. Levitin says they typically do. The law on such matters is "uncertain," says Christopher Peterson, law professor at the University of Utah. He predicts years of litigation.
Judge rules against BofA
The homeowners' cause scored a win last month when U.S. Bankruptcy Judge Judith Wizmur dismissed Bank of America's claim to enforce a New Jersey mortgage originated by Countrywide Home Loans in 2006.
Wizmur said that Countrywide, which Bank of America bought in 2008, never properly endorsed and transferred the mortgage note to the Bank of New York, the trustee of an investor trust. As such, there was no evidence that Bank of New York owned the note, leaving it unenforceable. A Bank of America employee also testified that Countrywide routinely failed to transfer original notes.
In her order, Judge Wizmur noted a "bizarre twist" in which Countrywide said the note had been "misplaced, lost or destroyed" but then said it had been found. Attorneys couldn't "explain the inconsistencies," Wizmur wrote.
Bank of America counters that it was Countrywide's policy to deliver notes as trust rules require and that the employee who testified "was mistaken," says spokesman Jerry Dubrowski. Bank of America will not appeal because it doesn't think the ruling will have broad implications, he adds.
The homeowner's attorney, Bruce Levitt, says the ruling means that his client no longer owes the $211,000 that Bank of America said was owed.
Moody's Investors Service, in a Dec. 6 report, said Countrywide probably did deliver mortgage notes. But it also said that when companies failed to do that, they "may not be able to foreclose" and that, given the New Jersey case, Bank of America may face more such challenges.
Other judges have also required more proof of right to foreclose. This month, a Florida judge dismissed a foreclosure case and said it could be refiled but needed to lay out the chain of who owned and held the mortgage loan from the start. In Ohio, a judge this month also ruled in a homeowner's favor in a foreclosure when he said, among other things, that there was no evidence that an allonge — a paper signed by the mortgage note's previous owner transferring ownership — was affixed to the note as it should have been. That left the note's ownership unclear.
The United States Trustee Program, which guards against bankruptcy court fraud for the Department of Justice, has also launched an "enhanced review of documents" in cases where banks seek to foreclose or collect payments, says U.S. Trustee spokeswoman Jane Limprecht.
The impact is being felt. Last month, the Justice Department's trustee for bankruptcy cases in northern Georgia filed papers in at least two cases saying that banks hadn't proved that they could enforce notes or deeds for the debtors' homes. The increased oversight by the trustees is meaningful, says bankruptcy attorney Howard Rothbloom. "The federal government has come in and said that lenders have to have their paperwork in order," he says.
Few foreclosures challenged
More than 90% of homeowners don't fight their foreclosures, lawyers say. Even if they do, the vast majority are unlikely to keep homes, because they haven't paid their debts, attorneys say. "The only way to avoid foreclosure ... is to pay off the loan," says Shari Olefson, a real estate attorney who often represents banks. If needed, companies will find notes, re-do sloppy paperwork and prove standing, she says. Bank of America and Wells Fargo say they can retrieve notes, when needed, and have good processes.
While banks made mistakes, the "probability is high that we'll figure out who owns the mortgage," says Richard Bove, banking analyst for Rochdale Securities.
Still, attorneys say companies may be more apt to modify loans if foreclosure records aren't in tip-top shape. Modifications "become more available when there is greater risk to the lender," says Judge Winslow in an interview. Rarely, if ever, will homeowners walk away with free homes even if there are title issues that take time to resolve, Winslow adds. Homeowners "owe someone."
The Geweckes want a loan modification so they can stay in their home of 16 years. Their current loan has an adjustable 9.25% interest rate. They owe more on the house than it's worth.
They're not looking for a "free ride," says Steven, 40, who works in marketing. Neither do they want to pay off one firm and then face a future claim by another.
They also hope their case will send a message to mortgage companies that they must obey rules, too.
"I understand that if you don't make your payments, you'll lose your home," says Tamara Gewecke, 41. "But make sure you do it right. Make sure you've got your paperwork done."