Trillions in Loans in Doubt Due to Paperwork Snafus
Who’s got your loan papers? Bet even the bank you send your check to isn’t so sure.
Many bankers have lost the notes on the subprime loans they made during the earlier go-go years of this decade. The estimated total of these "orphaned” loans is now an astounding $2.1 trillion.
Now the work of re-establishing the chain of ownership could slow the housing correction dramatically. Some borrowers have simply stopped paying on these loans, in hopes they can game the system.
Banking experts tell MoneyNews that lenders have gotten wise to this tactic and are now litigating against the deadbeat debtors and asking judges to enforce the original home loan agreements — even paying for photos of homes to establish what property is where.
How did this happen? The paperwork for the original loans got lost when bankers packaged the loans and traded them as derivatives on the secondary market.
The debt moved forward, but the evidence stayed behind in filing cabinets, in computer files or just collecting dust on a desk.
"The prevalence of this problem is because due diligence by investment bankers in the trading of debt in the secondary market was non-existent,” Michael Sichenzia, COO of debt collection firm, Dynamic Consulting Enterprises in Deerfield Beach, Fla.
"There was a rush to get these deals done, book a fee, and move on. Everyone in the process took their eyes of the ball. They sold and traded file numbers without documentation of who owns what,” he says.
According to Sichenzia, in his experience, nearly all home foreclosure actions have an allegation in the complaint that asks the court to re-establish the lost note and mortgage, precisely because there is no proper assignment of the record.
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"The mortgage administration process is inherently flawed,” says Sichenzia. "When loans are sold, the actual paper never follows. Banks have been so eager to sell loans that they play fast and loose.
"No one picks up that there’s a problem until ownership goes through four or five investors downstream, and they are left with the burden of tracing it back," he says.
It's happening across the country, in California, Massachusetts, Kansas and New York. In Ohio, a federal judge dismissed 14 foreclosures cases in November for lack of proper ownership papers.
Deutsche Bank was left holding the bag.
In one notorious case, Boca Raton, Fla. man Joe Lents simply stopped making payments on his $1.5 million mortgage in 2002.
Washington Mutual tried to foreclose. The bank couldn't prove it owned Lents's mortgage note and gave up. Now the foreclosure is stalled, reports Bloomberg.
"If you're going to take my house away from me, you better own the note," said Lents, 63.
In Florida, bankers have lobbied the legislature, asking for new laws to help re-establish the lost loans.
Caught unawares, some bankers are turning to digital photography. After they have purchased homes, they snap pictures to prove that the home does exist.
A real estate technology firm called Zaio has gone about taking photos of homes in 30 states during the last year and is working closely with licensed real estate appraisers.
"Mortgage fraud is one of the fastest-growing crimes in the U.S.,” notes Rodric Bradford, a spokesman for Zaio. These photographic services, he says, "are beneficial for stopping mortgage fraud individually and nationally.”
This may help. But there’s nothing like original documents to make a judge in housing court take notice.
"Moving forward, banks must do their due diligence,” says Sichenzia. "They must have hard data, no scans of paperwork. And they must make sure the chain of assignment is correct.”
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