10/26/2009 By: Darrell Delamaide
A federal bankruptcy judge in New York created new uncertainties for mortgage servicers when he expunged a mortgage debt after the servicer could not provide sufficient documentation that it had a claim on the home.
The ruling came earlier this month in bankruptcy court in the Southern District of New York in a case involving Mount Laurel, New Jersey-based PHH Mortgage and a property in White Plains, the New York Times reported.
Judge Robert Drain wiped out a $461,263 mortgage debt on the property, in another case of how things can go wrong when documentation does not keep up with transfers of mortgages in a world of securitized loans.
A recent ruling by the Kansas Supreme Court similarly denied the Mortgage Electronic Registration Service (MERS) rights to recovery in a foreclosure case, even though MERS often stands in for banks that actually hold the mortgage. As a consequence, the bank holding the mortgage lost out in the foreclosure.
In the PHH case, the homeowner, who was not identified, filed for bankruptcy and PHH claimed its mortgage debt.
When attempts by the homeowner’s lawyer to get PHH to modify the debt met with no success, he asked for proof of PHH’s standing and received a letter stating that PHH was the servicer of the loan but that the holder of the note was U.S. Bank, as trustee of a securitization pool.
When he then asked for proof that U.S. Bank was indeed the holder of the note, he received only an affidavit from an executive at PHH Mortgage, the Times reported.
Among the documents supplied to the court to support PHH’s assertion was a copy of the assignment of the mortgage, but this was signed by the same PHH executive identified this time as an official of MERS, and was dated March 26 of this year, well after the bankruptcy had been filed.
In the hearing, the PHH lawyer argued that in the secondary market, there are many cases where assignment of mortgages or assignment of notes don’t happen at the time they should – that this was standard operating procedure for many years.
Judge Drain rejected that argument, the Times reported. “I think that I have a more than 50 percent doubt that if the debtor paid this claim, it would be paying the wrong person,” the newspaper quoted him as saying. “That’s the problem. And that’s because the claimant has not shown an assignment of a mortgage.”
PHH is appealing Judge Drain’s decision.
The ruling also puts the homeowner in uncharted territory. “Right now I am in bankruptcy court with a house that has no discernible debt on it,” her lawyer told the Times, “yet I have a client with a signed mortgage. We cannot in theory just go out and sell this house because the title company won’t give a clear title on it.”
The lawyer’s options are to file an amended plan or sue to try to get clear title to the property.