Derivatives shell-game leaves mortgages "orphaned" -- stop paying your mortgage, keep your house

Worried about your mortgage? How about just not paying it? Some banks were so enthusiastic in playing subprime derivatives shell-games that they've literally lost the notes on the mortgages they "own," and can't prove that deadbeat homeowners owe them any money. An estimated $2.1 trillion worth of these mortgages are "orphaned" with no apparent owner.

Joe Lents hasn't made a payment on his $1.5 million mortgage since 2002.
That's when Washington Mutual Inc. first tried to foreclose on his home in Boca Raton. The Seattle-based lender failed to prove that it owned Lents' mortgage note and dropped attempts to take his house. Subsequent efforts to foreclose have stalled because no one has produced the paperwork.
"If you're going to take my house away from me, you better own the note," said Lents, 63, the former chief executive officer of a now-defunct voice recognition software company.

Link (via Karmabanque)

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ekppp

Wow, you guys are good. I signed up for an account to point out Tanta’s post at Calculated Risk, only to find that it is noted already.

The pertinent quote from that post, I think:

“But if consumer attorneys want to create a situation in which the simple fact of loss of or irreparable damage to an original note vacates the debt, I can promise you you will not like the consequences of that. If it turns into Total War here, don’t ever lose an original cancelled check.”
jfranchino

Thanks for pointing out this interesting story.

However, there is not, as you say, “$2.1 trillion worth of these ‘orphaned’ mortgages.” The $2.1 trillion figure in the article refers to the amount of repackaged mortgages. It’s clear that even in this case, the mortgage is not orphaned.

WaMu is trying to service the mortgage, despite their errors. The home “owner” is simply exploiting a technical issue to delay the proceedings. In all fairness, it should be no great burden for WaMu to produce the note. But even if they can’t, the case will drag on and eventually Lents will have to pay up or get out.

With his stalling tactics, he’s shelling out about $2000 per month in legal fees. That’s cheaper than his mortgage is, but there’s no indication he’ll get to “keep his house”.
Anonymous

STEPHENB has it right, the mortgage holder sold the note, they got their money, now they do a pass through, ie. service the mortgage for a fee and pass the remaining interest and principal to the next holder of the note, who may or may not still hold it. The point is the note is the makers property, if the maker demands the note back at a forclosure hearing and the party forclosing cannot produce it, no forclosure. The alternative is, the party forclosing can find the note and buy it back at what ever price the holder wants. The reason a bank would buy notes is “they place the note in their asset account as a reserve, they can create nine times the face value of the note in new money to loan at interest. The note is the money held in the asset account, also called required reserves. How many of you ever got your note back when you paid off the mortgage? Probably, very few, these paid off notes are also out there on someones balence sheet serving as assets, to create more money to loan, at interest.
Registrado

O Hai! Yur bank haz sold me yur morgage, but I losts the paperwerk. Plz send moniez. Kthxbye.
Jeff

Rich said, “… but it is vital that we kill the myth that contracts impose upon an individual a moral duty.”

You mean like a marriage contract? Or something more mondune, like a contract to pay someone what you owe them? You don’t think there is a moral issue here?
stephenb

Mr. Lents may not be a perfect American when it comes down to business practices but it has nothing to do with the Law. The fact that he has not paid in 6 years brings another issue into play, the (SOL) Statue of Limitations in Florida for promissory or written notes is 5 years.
The plaintiff is now what is referred to as â€œtime barredâ€ so any further action by a Court action can be thrown out, dismissed if the defendant pursues on that defense.
But prior to the SOL he has every right to make the Plaintiff compel to the request for the â€œoriginal noteâ€!
You need to review the Florida Rules of Evidence to see that in civil issues the original wet copy is the only evidence that can be admitted into the court record as proof of debt. Itâ€™s quite clear!
Copies of a note or a loss note affidavit are not considered evidence and can be thrown out if the defendant objects as what Mr. Lents has done. So if the plaintiff doesnâ€™t have the original note in their possession they are going to have to come up with a competent fact witness who has personal firsthand knowledge of the account. Not just that the account exists with that company but personal knowledge of transactions.
This will be impossible to do, most credit card companies try to this smoke and mirror trick all the time in court. That is someone who testifies through a written affidavit that they have personal firsthand knowledge the account exists and even shows statements.
But when it comes down to it that person must be present in court so the defendant can cross exam, if not statements and all affidavits can and will be thrown out if the defendant objects properly and timely.
Mr. Lents has a strong case by all the legal measure and I am following this very closely because this can be very damaging to all those greedy lenders who were caught playing the game. Foreign investors were hungry for mortgage backed securities back around 2004 but when they became scarce Banks started looking the other way when accepting applications, thus causing our mortgage meltdown today!
For those of you that want to argue the â€œmoral issueâ€ save that for the coffee house or bar. This is purely a legal issue and the Banks know it too! Just spend a few hours in a civil court session and watch the BS the lawyers pull with lying and cheating the system to win for the collectors/creditors. Itâ€™s unfortunate what they get away with, this is where the real crime is taking place!
mujadaddy

#10 Jeff: You just can’t stop paying your bills because you think someone out there doesn’t know where you paperwork is.

Yeah, you can.
Hans

It seems like, from the linked article, the 2.1 trillion refers not to the value of orphaned loans, but to the value of bundled loans (some of which may be well tracked). Regardless, this is a huge amount (on the order of 15% of the US GDP, in round terms).

The relative responsibility of Mr. Lents, to my mind, pales in comparison to the responsibility of managing such a sum of money. Mismanagement on the order of trillions of dollars could cause widespread effects, so to do so on the basis of personal gain is reprehensible.
Rich Gibson

@Jeff – No, I absolutely do not think there is a moral issue in a legal contract between an individual and a corporation.

It is very important that we stop believing that individuals have moral duties to corporations.

The idea that you have moral obligations to an entity that is incapable of having moral obligations back towards you is incredibly destructive. It is like bringing a knife to a gun fight and saying ‘hey, that is no fair, the corporation brought a gun.’
Anonymous

All:

Is it illegal for a bank to sell a note to another bank without getting the mortgage holder’s signature in person? We recently asked our bank to produce our original note and they produced a note we signed in 2005 when we refinanced with another institutaion. They since bought the paper from that institution. Are they bound by law to get our signature or are we bound to them because they have our original note from that other institution in 2005. A friend of ours is telling us that we can legally ask for a renegotiation of our loan and have the upper hand here. We are NOT in foreclosure yet and are trying to avoid it no matter what, so if there’s any law that protects us because the banks didn’t bother getting our original signature, can someone please let me know. Please don’t bother making any “moral” comments because I am soooo not interested in morality right now…just interested in renegotiating a mortgage (not refusing to pay at all, which I believe I can also do). Thanks!
dculberson

Jeff, I’m not taking sides here, but a marriage contract is not between an individual and a corporation. Unless you’ve got some mighty odd fetish.

Lents’s mortgage was sold, so who does he pay? How can he know who the correct party is to pay without the original document? Sure this particular guy is almost certainly trying to game the system, but I can believe that a similar situation could arise that results in the wrong party being paid for a mortgage. (Or the wrong party being held responsible for repayment, which happened to my company. $1mm in legal fees later and we were clear. Ugh.)
Antinous

Lents’s mortgage was sold, so who does he pay?

When I did a re-fi c. 2003, my trust deed was sold three times in less than a year. Until Countrywide picked it up, none of them had the paperwork in order. I went several months without making payments because the old company had sold the loan and the new one hadn’t gotten around to billing me. It’s not my problem if they’re too greed-addled to keep accounts in order.
bcsizemo

Well something tells me if enough time passes, and or decides to do something with the property, the state would get involved. After some period if no one could produce the paper work it would probably be sold at auction by the state. More or less if no one has the actual deed to the house then I would assume by state law no one actually owns it.

It’d also be nice if the state charged him with squatting….. of course then he may get first right to purchase if it did go to auction….how ironic.
SteveKiwi

Today I’m pleased to see this, because today I experienced the bad side of mortgage companies too.

Yesterday I received a letter from my insurance company (letter dated Feb 18, so of the 14 days notice 9 were spent in the mail), saying they were cancelling my homeowners insurance as of next Monday, because I didn’t pay the bill. I called them and said my mortgage company pays this bill, from escrow.

They said well, we sent you a bill two months ago. I said no you didn’t, I never got one. After some research they admitted that when transferring me from one agent to another last year, they had somehow messed up the mortgage details and didn’t send me the copy of the bill they were supposed to send.

Then, they called the mortgage company (at least they took care of that part) and called me back and told me what they said. The mortgage company guy said “oh, I guess we mislaid that one, yeah, that happens all the time”. They said they would mail a check today (this was about 4pm local time, so did they really?).

I told the insurance agent that the cancellation notice says it will cancel at 12.01am on March 3 – next Monday. What happens if there is some kind of delay in the mail? She said oh, don’t worry, your insurance will be cancelled but we’ll reinstate and backdate when we get the check.

So, what happens to my credit if my insurance gets cancelled, even for one day? Let alone what might already have happened since they had to send this cancellation notice? And what say they don’t get the check until Tuesday, and my house burns down on Monday? Okay, odds are low, but still, I know for damn sure they wouldn’t pay a penny.

So, like I said at the start, today is a good day to see this post. And #22, I agree with you 100%.
Argonautica

Don’t feel too bad for Washington Mutual. Last time they screwed up, a homeowner lost his house to foreclosure even though he had made all his payments.

He refinanced his home, but Washington Mutual never recorded it as being paid off, so they later foreclosed. Because he couldn’t show it had been paid (Washington Mutual had lost those documents), WM foreclosed and he lost in court on a procedural timing issue.

http://saveinvestretire.com/34/
jdharper

Joe Lents is a thief and a liar. He promised to pay a loan, and now he’s refusing to honor his commitment. Despicable.

The bank is guilty of mismanagement and negligence on a massive scale. Joe Lents is an outright criminal, even if the bank can’t prove his crimes.

A pox on all their houses.
Mr. Gunn

Yeah, there’s blame enough to go around, but you gotta admit it’s funny to see shit roll uphill for once.
Rich Gibson

@MOMUS_98 I’m not arguing we ‘stick it to the man’ (that is another topic :-) Simply that we can’t use our tools of ‘morality’ when dealing with an entity that has no mechanism capable of making moral choices.
haileris

The leading blog on the subprime crisis, Calculated Risk has an article explaining this case.
TheFool

Yeah, I hope he has $1.5mil plus interest saved in his piggy bank, someday someone’s going to come asking for it.
chowda

The mortgage company has the responsibility of maintaining the contract… if they don’t it… there’s no contract by definition… right?

I wonder what happens with the title in a case like that… can he sell the house? can he pass it on in his will?
knodi

Same thing as those people who habitually contest traffic tickets, because the odds are quite good that either the “witness” (cop) won’t show, or won’t have the paperwork filled out right, or won’t have sufficient proof…

Their bureaucracy looks mighty from the outside, but it doesn’t have the muscle to back up its claims.

I still think the people who contest traffic tickets would be more morally superior if they focused on changing laws instead of dodging ones they disapprove of, but that rationale doesn’t even apply here. Yeah, Joe Lents is a thief, and he’s robbing a faceless corporation who will have a hard time finding sympathy.
ill lich

So, if they never manage to find the note in question, he could just keep the house? If I were him I’d start paying those mortgage payments into a special pseudo-escrow account; not to give to the bank but to help him find a new place if they ever DO produce the note and evict him.
Downpressor

Bad summary headline, no donut.
foobar

What would happen if he *did* pay off this mortgage, and some other bank later produced the paperwork? Do you really think they’d just go away because he’d payed someone else?

He hasn’t done anything wrong. He has every right to insist the bank have its papers in order. They certainly wouldn’t let him get away with anything less.
BadKittyM

That is an interesting question. If ownership of a house cannot be verified, does it automatically…what? Revert to previous ownership? Wouldn’t that be amusing, if so. I would laugh myself sick if the former owner who sold to Lents came back and had him thrown out.

Of course, I’m pretty sure that could not happen. Be that as it may, since he doesn’t own the house either and can’t produce title, shouldn’t the city then claim it? It’s not vacant, but if the person residing there is in effect a squatter…hilarity could ensue.
Jeff

The law states that as long as –YOU– know what you owe–and there will be a piece of paper with your name on it, in your files–that you are responsible for paying that note. You just can’t stop paying your bills because you think someone out there doesn’t know where you paperwork is. And regardless of how bad a job the banks have done, it’s still the borrower’s responsibilty to know what they are getting into. Just like when you walk into a cassino and start burning your money at the black jack table. Or buy stocks on marigin. (Ha ha ha…buy stocks on margin! SUCKER.)
Rich Gibson

@JDHARPER How is Joe Lents a thief or a liar? And why are you so emotionally worked up about the case?

As near as I can tell, from reading this article (http://calculatedrisk.blogspot.com/2008/02/lost-note-affidavits-skeletons-in.html), Lents attempted to work out his case, but Washington Mutual ignored him.

There is little doubt that he agreed to pay his loan, but there is also reasonable doubt as to who actually holds his loan.

And in our system it is not a crime to not pay a loan. You are not a ‘thief and a liar’ because you use the legal system in your defense.

It is amusing that Washington Mutual committed perjury when they filed a Lost Note Affidavit, but for good or bad that appears to be a somewhat standard practice. (read that whole calculated risk article – it provides a lot of interesting perspectives).

I strongly object to people, like you, attempting to impose a moral duty for individuals in their relationship with corporations.

Lents may, or may not, have a legal duty to Washington Mutual, but he has no moral duty to that entity.

Corporations are not moral actors. That is the fundamental genius, and evil, of their existence. They do what they do out of a ‘pre-conventional’ morality. They work to avoid punishment and seek their own self interest.

A contract with a corporation is a legal agreement, not a moral agreement. That contract comes with its own rewards and punishments, but it is vital that we kill the myth that contracts impose upon an individual a moral duty.
Anonymous

This is an attempt to respond to #29 anonymous.

Whether or not it is illegal for a bank to sell a note wihout first getting the note makers signature is somthing I don’t know, but also probably irrevelent.

You said when you asked for your original note, the bank produced a note from a refinance done in 2005. My question is, where is the original note underlying the original mortgage? I think that would be the line of approach to this thing. Who has that original note?
momus_98

All this talk about “moral obligations” to some debt owed to a faceless corporation:

You think any of us wouldn’t be pleased as hell to finally have The System work in our favor for a change? An extra fiver from the teller as she’s counting out your withdrawal? The barista at Starbucks undercharging you?

Granted a mortgage is vastly different than a $4 cuppa Joe, but the way I see it is this: If *you* screw up, forget to pay, whatever, you can bet the corporation in question will eat you alive. Overdraft fees, excess fee fees, processing fees, etc.

However, *their* screwup is not my problem. I cheer whenever CEOs finally get their just desserts. I’d love to see corporations such as Bank of America collapse under the weight of their own blatant greed. Corporations and the government have us all by the balls & there isn’t shit we can do about it. We have no recourse.

So I say stick it to The Man whenever we can. Screw em.