Modern-day home mortgages have been so sliced and diced by rapacious financiers that some homeowners are successfully delaying -- or even blocking -- foreclosures through the simple tactic of demanding that banks produce the original mortgage note, which amazingly enough is often not so easy for them to do.
As the foreclosure rate continues to set new highs, a little-noticed legal provision that requires bankers, if challenged, to prove they hold the original mortgage documents before getting possession has spawned a minor homeowner rebellion, alternately called "produce the note" or "show me the note". For homeowners trying desperately to keep their homes, the tactic is one way to buy some time -- and maybe even get the upper hand on the lender.
"You wouldn't imagine that the lenders would be that slovenly that they would not be able to produce adequate documentation of the debt," said House Financial Services Committee member Rep. Brad Miller (D-N.C.). "But apparently a lot of times they really have been unable to."
Since North Carolina has begun to provide legal assistance to homeowners facing foreclosure, Miller said, roughly one of every three mortgages has been found to have some substantial legal discrepancy.
The fouled-up paperwork or other lack of legal compliance "has resulted in a much higher rate of negotiated [mortgage] modifications" in North Carolina, said Miller. "It gave the homeowner additional defenses and counterclaims that strengthened their hands substantially."
The chaos is a sign of how far the mortgage business has come since people commonly took out a mortgage from their neighborhood banker, who kept the relevant documents locked away until the house was sold or paid off. During the securitization boom, millions of mortgages were sold and packaged into bonds -- often many times over, metastasizing into esoteric financial instruments -- for sale to investors. Each time, the paperwork should have been changing hands and the homeowner should have been notified that someone new held the note. But just as deciphering the true holder of the mortgage has become more and more difficult for homeowners -- Is it the servicer? Investor? Trustee? Original lender? -- the paperwork has also become difficult to track.
In Florida, Jacksonville Area Legal Aid attorney April Charney has been using the missing-note argument since she first identified the lenders' weakness in 2004. She began arguing that those initiating foreclosure proceedings on behalf of securitized pools of mortgage loans had no right to do so, because they couldn't prove they actually owned the debt.
Five years later, some of those homeowners are still in their homes, she says. Because of the missing ownership documentation, Charney is now starting to file quiet title actions, hoping to get her homeowner clients full title to their homes (a quiet title action "quiets" all other claims).
Charney says she's helped thousands of homeowners delay or prevent foreclosure, and trained thousands of lawyers across the country on how to protect homeowners and battle in court.
When lenders wish to foreclose, the law typically requires them to produce original, signed documents including the mortgage and loan note. While the mortgage documentation is on file at the local courthouse, the note is often lost or misplaced, particularly if the mortgage has been sold and securitized.
In dismissing 14 foreclosure cases in 2007 based on a lack of proper documentation, a federal judge in Ohio admonished the lenders, stating their argument that "'Judge, you just don't understand how things work'...reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process."
A recent study of foreclosures in bankruptcy by Katherine M. Porter, a visiting professor at the U.C. Berkeley School of Law, found that in 40 percent of cases creditors foreclosing on borrowers did not show the note. It's what consumer rights advocates and strict judges are seizing on.
It's still an uphill battle for homeowners, however, Charney says. There are few states where foreclosure proceedings have to go through a judge, notably Florida and New York, which gives homeowners their best shot. In other states, homeowners have to go to court on their own in order to see a judge, running up expensive legal bills in hopes of stopping foreclosure.
Some in Congress are trying to make it easier for homeowners. Rep. Marcy Kaptur, an Ohio Democrat, introduced a bill in February with Rep. John Conyers (D-Mich.) that would actually prohibit foreclosures unless lenders produced necessary documentation in court, including the note and evidence that the homeowner was, in fact, notified each time the note was transferred.
"I am encouraging [homeowners] to stay in their homes [and] go through the court proceedings until the institution in question can produce [the] note, because chances are, they can't," Kaptur said in an interview Monday. "Somehow the playing field has to be leveled here, and [the bill] provides a very strong means of doing that."
The bill is languishing in the House Financial Services Committee, headed by Rep. Barney Frank (D-Mass.), she said.
"I think that they need to hasten their attention to matters like this, which actually give the American people some leverage with these really big institutions," she said. "I would hope that the Financial Services Committee would see this as part of their mission."
Kaptur said she's going to push to have her bill included as part of the impending financial regulatory overhaul