Foreclosure Foul-up: Tracking Down Those ‘Lost’ Mortgages

Nov 30, 2010

COMBO Title and Securitization Search, Report, Documents, Analysis & Commentary

“In hundreds of thousand of cases, the promissory note that proves a bank owns a borrower mortgage is now gone. Vanished. Some borrowers may walk away scot free. In other instances, banks may be forced to dramatically reduce what a borrower owes. Many foreclosures have already been halted by the courts or by the banks themselves. Still, bank officials say, even if they are missing the original promissory note, they have the paperwork to prove they own the mortgages.”

Editor’s Note: This is a good example that highlights the problem. The pretender lenders are by definition not the lenders but they wanted to be treated as lenders when it comes to foreclosing on property. If everything was on the up and up, there wouldn’t be any problem getting the chain of signatures required to do so, but they have some things to hide. The risk they face is that if they actually show the real documents, they might be sued for fraud, their bank charters might be revoked and the people involved might go to jail.

So they have created this convoluted system of “transfers” and “custodians” which combined with very official looking paperwork got several million foreclosures through the judicial system and through the non-judicial system like poop through a goose. Their problem is that SAYING doesn’t make it so and neither does wishing. They created some rabbit holes we went down looking for lost or destroyed documents when they were sitting in warehouses, but nobody wanted to admit that they existed, much less where they were.

The reason is that there were no actual transfers or deliveries of the loans and the loans themselves did not conform to the requirements of the securitization documents. But that is not the worst part. The worst is that the loans did not conform to the description that was used to “satisfy” the requirement that the pools be filled with real-life loans that were properly secured by real property whose value exceeded the value of the loan.

Thus we have “depositors” with whom nothing was legally deposited, “lenders” who loaned nothing, “bonds” that promised nothing, and “notes” that described an obligation that did not exist, all “secured” by an instrument referring to a transaction that never happened. In plain language, the transaction with the borrower was not the one described in the paperwork. THAT is a problem that cannot be corrected with a power of attorney, a limited signing officer, an endorsement in blank, or a trust that doesn’t exist.

By STEPHEN GANDEL Monday, Nov. 29, 2010

One of a million foreclosures this year.
Anthony Suau for TIME
PrintEmailReprintsFacebookTwitter

Trevor Douglas, 54, may soon lose his Orlando house. Sure, Douglas hasn’t paid his mortgage in more than two years, which is what a Bank of America spokesperson tells me “is important to remember.” It is. Still, if it happens, I will feel partially responsible. I helped push Douglas closer to eviction.

Like many other home loans, Douglas’ IOU was bought and sold numerous times and finally packed into a bond. So when his foreclosure notice finally arrived, the entity trying to kick him out was one he had never heard of, something called GSAMP 2005-HE3. Worse, GSAMP said it had lost the original document — called a promissory note — to prove they owned his loan. Douglas hired a lawyer, who got the foreclosure put on hold. And that’s when I showed up. Much of the ire focused on the banks recently has been on their use of robo-signers — low-wage workers hired by banks to witness and sign hundreds of thousands of foreclosure notices without verifying that the grounds for the evictions were valid. On Thursday, a Federal Reserve official told lawmakers on a House Financial Service subcommittee that U.S. bank regulators are conducting a review of the banks’ foreclosure practices. In hundreds of thousand of cases, the promissory note that proves a bank owns a borrower mortgage is now gone. Vanished. Some borrowers may walk away scot free. In other instances, banks may be forced to dramatically reduce what a borrower owes. Many foreclosures have already been halted by the courts or by the banks themselves. Still, bank officials say, even if they are missing the original promissory note, they have the paperwork to prove they own the mortgages.

(See pictures of Americans in their homes.)

Just how bad is the problem? TIME dug into the mortgage of one troubled borrower. What we found suggests that many promissory notes are not lost. In an effort to rush homeowners to foreclosure, and hide damaging information, bankers’ have needlessly created a huge legal mess that once again questions the financial industry’s credibility and ethics. “They [banks] don’t comply with the law when they’re taking people’s homes,” says Michael Olenick, who owns Legalprise, a legal research firm.
Douglas’ mortgage broker got him a loan from subprime lender Fremont General, which before it went bankrupt in 2008, was based in Brea, California. In mid-2005, Fremont sold the loan to New York-based Goldman Sachs, which packaged it up with other loans and sold it off to investors. In June, Iris Owens, an official in the servicing arm of Bank of Amerca, signed an affidavit attesting that after a “diligent search,” Douglas’ original note could not be recovered. But even without the bank’s internal record it took me about four hours to find Douglas’ loan.

(See pictures of TIME’s Wall Street covers.)

Where is it? About five miles east of downtown Minneapolis, in a warehouse owned by Wells Fargo.

A simple search of public documents on the Securities and Exchange Commissions website was able to produce the address and telephone number of the building it was in. Bank of America now concedes it made a mistake. Instead of calling Wells Fargo, an associate in Bank of America’s mortgage-servicing division requested Douglas’ note from Deutsche Bank, which runs the mortgage trust Douglas’ loan is in, but is not the document custodian. Wells, as the SEC documents say, has that job. What’s less clear is why Deutsche didn’t tell the associate to call Wells or why someone at Bank of America didn’t look up the same SEC filing I did. Instead, Owens, based on the information from her associate and doing no checking of her own, signed the lost-note affidavit. Douglas’ loan had officially disappeared.

(See 10 big recession surprises.)

In early November, based on my research, Bank of America retrieved Douglas’ original promissory note from Wells Fargo. The bank spokeswoman says it plans to soon file the note with the court. Bank of America says it is reviewing Douglas for a loan modification. But if he doesn’t qualify, now that Bank of America has the original note, Douglas is sure to lose his house. If Douglas’ mortgage is any indication of what’s out there, while embarrassing for the banks, it suggests the cleanup will be less costly than feared. Still, it’s not going to end soon. Multiply the four hours it took me to find Douglas’ loan by 400,000 — one professor’s estimate of the number of missing notes. Banks will be at this for a while.
This is an abridged version of an article that appears in the Nov. 29, 2010, print and iPad editions of TIME magazine.

See 25 people to blame for the financial crisis.

See the top 10 bankruptcies.

Posted in bubble, Corruption, Eviction, securities fraud |