Who owns your home? Lost paper trail allows borrower to keep her house

Those complex financial instruments known as mortgage-backed securities, which famously caused so much damage in the banking sector and the nation's economy when the housing bubble burst, are causing another problem for some mortgage lenders: the inability to prove that they have a legitimate claim to homes entering foreclosure.

This little problem led to a curious scene in White Plains, N.Y., federal court earlier this month when Judge Robert D. Drain eliminated more than $460,000 in mortgage debt on a delinquent borrower's property after PHH Mortgage failed to prove its claim to the property, as reported by The New York Times. In essence, the judge's ruling made the mortgage disappear.
So how was it that the mortgage company was unable to prove its claim? It goes back to those pesky mortgage-backed securities. Their structures are so complex that it's unclear what's in them. During the mortgage boom, untold numbers of them were bundled and sold to scads of investors, but, according to the Times, notes that left a trail, proving who owned what, weren't maintained.

Citing court records, the Times reports the case involved an unnamed homeowner living with her daughter and son-in-law. The borrower purchased the home in 2001 with a mortgage from Wells Fargo (WFC), and then refinanced the loan four-and-a-half years later with Mortgage World Bankers Inc.

But she fell behind in her payments and in February filed for Chapter 13 bankruptcy with the help of an attorney, to prevent the loss of her home.

In March, PHH Mortgage filed a proof of claim to the debt noting that it was owed $461,263, which included more than $30,000 in past-due payments. The homeowner's lawyer sought to have the loan modified, but after the bank dragged its feet, as the lawyer described PHH's actions to the Times, the lawyer asked PHH to prove its claim.

Unable to do so to his satisfaction, Judge Drain ordered the debt expunged, concluding that PHH had failed to show it had been assigned the mortgage.

The case is being appealed by PHH, but even if the homeowner remains victorious, there remains a problem for her: Without a clear title, the homeowner will likely have difficulty selling her home if she chooses to do so. That would require an amended plan or a lawsuit to secure clear title. Whatever the outcome, it's clear all parties will be spending months tangled in legal maneuvers.

What's further unknown is whether the White Plains case is an anomaly or an example of a situation that may soon become commonplace in the nation's court system. It serves as a warning that the tough-armed tactics used previously by mortgage lenders to prove right to ownership may no longer secure their claims in court, without adequate records.

To paraphrase famed defense attorney Johnnie Cochran, "If it isn't in print, you can't evict."
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