Can Banks Foreclose on Mortgages They Do Not Own?

01-06-2011 • Ritholtz.com

There are several issues in the case: The technical one is whether a mortgage can be transferred without naming the recipient, as is commonly done in securitizations. But the more important issue applies to mortgage rights — do they “detach” from the promissory note when that note is sold? Asked more plainly, must someone asserting the right to foreclose actually own that Note? This is more than a technical issue; at risk is whether we, as a nation, are going to allow corporate entities to violate existing law, or even worse, attempt to create their own, extra-legal, non democratic policies. In the current case, a mortgage that was sold and resold ultimately was purchased at auction. (Complicating the case was the paucity of bidders for the mortgage — the buyers were the only bidders, and they “substantial discount” paid for the notes). The key legal issue is whether the banks had the right to foreclose without the mortgage notes — a violation of State law. In March 2009, a lower court ruled they didn’t. The court cited “Published notices listing U.S. Bank and Wells Fargo as the foreclosing parties when they weren’t the actual mortgage holders at the time of the 2007 foreclosure auction. Massachusetts state law requires foreclosing parties to actually be the mortgage holder. According to the evidence at trial, the Ibanez mortgage was transferred to U.S. Bank 14 months after the foreclosure auction, and the LaRace mortgage was transferred to Wells Fargo 10 months after. If upheld, an undetermined number of homeowners may be able to “invalidate some foreclosures and force loan originators to buy back mortgages wrongly transferred into loan pools.” Bloomberg quoted law professor Kurt Eggert of the Chapman University School of Law in Orange, California. He noted “It ties into a theme nationally. The broader theme is the argument that efficiency of transfer is more important than real-property law.” Way back when I was a law student, it always stuck me as odd that efficiency arguments could somehow trump legislation passed by elected state legislators. Somehow, an efficiency was insinuated into legal cases. Not efficiency of Judicial resources mind you, but economic efficiency. Blame Gary Becker and the Chicago school of economics for wedging this extra-constitutional economics arguments into jurisprudence via a back door. It always sounded not only false to me, but a treasonous violation of the US Constitution that Judges are sworn to uphold. An economic theory, not part of the constitution, and not passed by any elected body, somehow was superior to democratically passed laws.