For the Servicers: Is It Better to Rob Peter or Paul? – The U.S. mortgage servicing industry is in deep doo-doo. To foreclose on a mortgage, you must own the note and the mortgage. That’s a lot of paperwork to keep track of, especially when you’re trying to package as many mortgage loans into as many securitizations as you can before the market dries up. If we have learned nothing else in the past four years, it is a lot to ask Wall Street to make sure they get things right when there is money to be made. Because of lost, sloppy, and perhaps nonexistent paperwork, banks who purport to have the right to foreclose often cannot prove they own the note and mortgage.
Things are starting to hit the fan — we can’t say exactly what is hitting the fan because this is a family blog (except for here, here, and especially here). In defending itself, the mortgage industry is taking yet another reflexive, knee-jerk position that seems to me to be against their long-term interest.
A typical fact pattern might play out like this. Bank forecloses on Peter. At the foreclosure sale, Paul buys the property. Bank cannot prove it owned the mortgage and note at the time of the foreclosure sale, meaning it had as much right to foreclose as any other stranger to the property. That is to say, it had no right to foreclose.
At this point, Bank either owes Peter or Paul. It owes Peter for fraudulently obtaining a judgment of foreclosure against him and dispossessing him of his home. Or, if we overturn the foreclosure sale, it owes Paul for conveying an invalid title (more accurately, it would owe the sheriff who should have to return Paul’s money). If I had to choose between owing a homeowner for dispossessing the person of her home or owing a disappointed investor for conveying an invalid title at a foreclosure sale, I would rather owe the disappointed investor. It is going to be cheaper.