Even before Deutsche Bank started trying to foreclose on Hosea and Bernice Anderson's Columbia house, they wondered: Exactly who owned their mortgage?
They had borrowed $277,250 from Wilmington Finance in 2006 and later fell behind on the payments. In 2008, Deutsche Bank initiated foreclosure, saying it was the mortgage's new owner. Prove it, the Andersons said.
That turned out to be very difficult.
Like many bankers a few years ago, the financiers dealing with the Andersons' mortgage seemed to have been more interested in packaging and flipping the note and collecting the accompanying fees than in maintaining proper ownership records.
Now it's a headache. Without paperwork showing unambiguous title, banks that acquired mortgages third- and fourth-hand are having trouble seizing houses when the notes go into default.
This month, the highest state court in Massachusetts reversed foreclosures by Wells Fargo and U.S. Bancorp, ruling that the banks hadn't proved they owned the mortgages when they initiated the seizures.
The Andersons' case is different in important respects, and on Dec. 22 Maryland's Court of Special Appeals ruled that Deutsche Bank could move forward on seizing their house. However, it might not be over. The Andersons' case also involved large gaps in the paper trail, and the couple's lawyer, Randall L. Hagen, says they may seek to have the matter heard in the Court of Appeals, Maryland's highest court.
The Andersons' experience shows how nutty things got during the mortgage bubble and why efforts to work out the knots of defaults, repos and resales are so agonizingly slow.
Hosea Anderson is an artist whose business was hurt by the recession, Hagen said. (Anderson didn't respond to a request for an interview. Hagen said he advised him not to comment because the case is still pending.) In October 2006 the Andersons refinanced their mortgage with an adjustable 30-year note from Wilmington Finance with an initial monthly payment of $1,542, according to court documents.
Few banking companies wanted to hold on to mortgage paper and collect interest in those days. The game was about realizing the (supposed) net present value of an obligation right away and letting somebody else worry about whether the money would get paid back.
Wilmington sold its ownership rights under the note to Morgan Stanley Capital Holdings and the servicing rights to Saxon Mortgage Services. Morgan Stanley packaged the Andersons' mortgage into a subprime "asset-backed security," the kind of "toxic asset" that burned so many investors. Eventually the rights landed with Deutsche Bank Trust Co. Americas, as trustee for Morgan Stanley Home Equity Loan Trust.
Problem: When it came time for Deutsche to foreclose, there was no record that the note had ever been properly assigned, or "indorsed," to the new owners.
Think of it as a birthday check from your grandmother. The check is made out to you, but you assign it to a friend to whom you owe money. "Pay to the order of Joe Doakes," says your indorsement and signature on the back of the check.
Without the indorsement, Joe can't legally cash the check. While nobody doubted that Deutsche Bank had acquired the rights to their mortgage, the Andersons argued that without the proper "chain of title" paperwork, Deutsche had no right to seize their house.
The scanty documentation should have been a warning to the people buying mortgages around 2006 and 2007. If Wall Street was blowing off the most basic legal document in capitalism — a certificate of ownership — what other corners was it cutting in issuing all these mortgages?
A legal brief from the real estate industry in the Massachusetts case stated that there were "thousands" of foreclosure cases in that state similar to the ones reversed by the high court, according to The New York Times.
And missing ownership papers have hardly been the only examples of inadequate paperwork during the mortgage bubble and its denouement. Some Maryland attorneys have submitted foreclosure affidavits signed in their names by others, The Baltimore Sun has reported. Across the country, mortgage officials have been reported to have engaged in "robo-signing" — processing foreclosure documents in bulk without verifying the details.
It all amounts to a troubling, insouciant neglect of details when it came to settling and then undoing the biggest financial transaction many Americans will ever engage in.
The bad news for defaulted homeowners is that a lack of proof of ownership is not likely to keep mortgage companies from ultimately foreclosing.
"No documents? No problem!" is basically what the Maryland Court of Special Appeals ruled in the Andersons' case. Deutsche Bank has the right to foreclose because it is "in possession" of the Andersons' note, even though it's not technically a "holder" of the note, the court ruled.
"It is troubling, and we are seriously considering asking the Court of Appeals to look at the decision," Hagen said.
Even in Massachusetts, U.S. Bancorp and Wells Fargo might be able to seize the disputed houses by restarting the foreclosure process.
The good news for defaulted homeowners is that the Maryland decision is not likely to give a green light to speedier foreclosures here. Starting in July, Marylanders facing foreclosure have been able to request mandatory mediation, which often brings lenders to the table for a possible compromise, says Shikha Parikh, a lawyer with Compliance Counsel, a Virginia firm that defends against foreclosures.
The Maryland decision "limits our ability to challenge some of the cases" on the basis of missing paperwork, Parikh said. "But I don't think it's going to expedite anything."
In resolving the worst financial crisis in 80 years, involving millions of houses, trillions of dollars and uncounted missing, crucial documents, nothing is going to be expedited.