Prior to 1980, home mortgages were easy to understand. Banks made mortgage loans on local property to people they knew and held them until they were repaid. Bank deposits provided the money. This resulted in a local mortgage market funded by local deposits. The bank issuing the mortgage was the holder of the mortgage. If the homeowner didn’t pay, the bank foreclosed, end of story. However, with financial decontrol in 1980, housing finance shifted into the capital markets. These markets now provide the majority of funding for home financing.
Banking institutions and Government Sponsored Enterprises such as Fannie Mae and Freddie Mac decided to create a secondary mortgage market by securitizing pools of mortgages. Underwriting rules, which verified the values, allowed Fannie Mae and Freddie Mac to bundle together mortgages and sell them as mortgage backed securities (MBS). An SPV, or Special Purpose Vehicle, was created and the mortgages were pledged to that entity. Fannie and Freddie effectively cosigned these loans and in return they were paid an ongoing fee of 0.25 on all those payments, which resulted in huge revenues with no associated costs The attendant bonus payments to executives are legendary. At the other end of the stream there developed mortgage originators. They provided the mortgages to feed the growing beast . As a result less than perfect mortgages were created.
These mortgages needed to be dressed up. This was done by mixing them into the pools and dividing the pools into separate slices, the best slices represented the lowest risk and paid the lowest rate. They were called senior securities and rated AAA by the rating services. Whatever was left after these were paid went to the rest of the pool. These lower slices or tranches rated A or less, took all the risk of default and got the highest rate of return. In this way the true owners of the mortgages were the investors who bought the mortgage backed sedcurities. At law however the “holders in due course” were the originating banks whose name appeared on the loans. When the people who did not get paid filed suit, chaos ensued as no one could claim to be a holder of the original note, without an assignment.
Onto the scene rode one Christopher A. Boyko, a Federal judge in Ohio presiding over a series of foreclosure actions brought by one of the aforementioned SPVs. He ordered the lawyers to file a copy of the executed Mortgage Assignment demonstrating that the their client was the owner of the Note and Mortgage. This they could not do. So the Judge dismissed the case ruling that the SPV had no standing because they were not the owners of the mortgage. Lawyers for the banks presented a “Judge, you just don’t understand how things work,” argument .
According to the ruling “Typically, the homeowner who finds himself/herself in financial straits, fails to make the required mortgage payments and faces a foreclosure suit, is not interested in testing state or federal jurisdictional requirements, either pro se or through counsel. In the meantime, the financial institutions or successors/ assignees rush to foreclose, obtain a default judgment and then sit on the deed, avoiding responsibility for maintaining the property while reaping the financial benefits of interest running on a judgment. There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit —to the contrary , they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about profits. So if you find yourself facing foreclosure don’t course forget to ask: Are you a holder in due course or “Show me the note.”