As we all know, the mortgage funding world changed dramatically in the past few decades. Back in the ‘day’, the bank which provided the mortgage used its own funds to finance the mortgage, collected on it directly, and held the note as its own mortgage. Over time, mortgages were sold off after the bank originally issued them, so that banks, which paid depositors volatile short-term interest rates, were not stuck receiving fixed long-term interest on mortgages. Groups of mortgages were bundled together and sold as a package. More recently, these packages of mortgages were “securitized”: sliced up and the right to receive the income from the slices in order of priority was sold to investors world wide.
With the housing bubble collapse of the past few years, foreclosures zoomed, although not in western New York, where housing prices were stable. A legal issue in foreclosures is ownership of the mortgage. We see a similar issue in bankruptcy cases, where the purported mortgage owner files a claim for its mortgage. In Chapter 13 cases, if a debtor falls behind on post-petition mortgage payments, the mortgage owner will make a “lift stay” motion in bankruptcy court asking permission to start or resume a foreclosure.
In all three of these legal situations – foreclosures, bankruptcy claims, and lift stay motions, the mortgage holder must prove it actually owns the mortgage. Foreclosure and bankruptcy law has not been updated in relation to the securitization of mortgages, and property owners have sometimes challenged ownership issues in bankruptcy and foreclosure courts. Recent newspaper articles have highlighted the paper-trail issues now facing foreclosure attorneys.
I would like to highlight three blogs from “Credit Slips”, a thoughtful blog on “credit, finance, and bankruptcy.” These three blogs were written over a year ago (August 2009) by O. Max Gardner III, but there are a very thoughtful analysis of the evidentiary complications mortgage securitization presents to mortgage holders:
The Alphabet Problem and the Pooling and Servicing Agreements (August 14, 2009)
Show Me the Original Note and I Will Show You the Money (August 17, 2010)
The Lack of Evidentiary Foundations Fosters Fraud (August 18, 2009)