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I recently read an article which I found very interesting with regard to defaults and the mess created by lenders flipping, slicing and dicing loans. A home owner in Jacksonville FL closed on an adjustable mortgage with a teaser rate. When her rate adjusted to 10%, nearly double her initial rate she soon defaulted due to lack of resources to make the payment. The lender filed suit to foreclose. Then a stroke of luck, her legal aid attorney got the foreclosure withdrawn after discovering that the company that filed to foreclose didn’t own the loan! The owner was actually a securitized pool of loans overseen by Deutsche Bank. The attorney was able to obtain documents showing the pool bought the loan after the default—an illegal purchase for most pools, including this one. That means a court might refuse to recognize it owns the loan. These days just about every mortgage is flipped by a lender to another one or sliced up into pools of securitized packages that are sold on Wall Street. The financial engineering helped oil the housing boom by making credit more available. But stalled housing prices and rising defaults have revealed a mess. In the rush to flip paper, lots of the new lenders or pools don’t have the proper paperwork to show they even hold the mortgages. For the lenders, a possibly bigger threat on the horizon is that homeowner’s lawyers will bust up the “holder in due course” doctrine that makes it easier for subsequent owners of an IOU to collect. This doctrine says that certain defenses the evictee can use against the original lender (such as predatory lending) cannot be used against an innocent purchaser of the mortgage. The rule is enshrined in many federal and state statutes, but a judge could nonetheless find a way to side with the homeowner, particularly if a loan is purchased after it goes into default. Ohio’s Attorney General recently announced he will amend his suit against defunct lender New Century to possibly list as defendant the banks overseeing pools that bought its loans. “These pools are more than innocent holders.”
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