A Third of Mortgages Missing

By Kevin Chiu

Legal paperwork determines the ownership of real estate. If those documents are not passed along to a new owner of a mortgage, investors or banks holding a loan on the property have no legal right to it. Up to a third of all mortgage “notes” or $3.7-trillion in U.S. mortgages are likely to be missing or lost, according to the American Bankruptcy Institute.

The finding was determined earlier this year in a little publicized study conducted by the institute into the mortgage crisis.

Buying investments in something that actually doesn’t exist, takes place everyday in financial markets, especially in commodities, and often drives speculative manias. Take the run-up of oil prices a year ago last summer for example. The very same events happened in the mortgage market, where lenders re-sold mortgages to different investors time and time again.

Many homes with missing paperwork

However, in cases of Wall Street traders dealing in mortgage-backed securities, deals were concluded with “lost-note affidavits” for mortgage securities, according to traders who completed the sales. The affidavits were meant to be temporary fixes to transfer the securities, but were mostly never replaced by original “notes.” The “lost-note affidavits” essentially act as IOUs in place of a real mortgage.

Since these notes were never recovered, banks, mortgage companies and bank servicing companies that have foreclosed on homes lacking the legal proof of ownership may be held responsible for losses and held liable for damages in court. However, homeowners or mortgage holders usually receive a signed copy of their mortgage note following the transactions closing, which could be brought in as evidence into a court of law.

Since many mortgages are sold and re-sold after closings, however, the proof of ownership would be the responsibility of the plaintiff or suing party, which would be the lender in cases of foreclosure. Mortgage holders are contacting attorneys and a wave of lawsuits are being filed as a result. The upwelling of lawsuits is expected to be most severe in states where judicial foreclosures are required in 23 states. As the foreclosure crisis unravels, uncertainty rattles housing markets and makes some home buyers wait out market tensions.

“While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing,” said American Bankruptcy Institute executive director Samuel Gerdano. “We expect that there will be nearly 1.6 million new bankruptcy filings by year end.”

More than $535-billion in taxpayer money has been doled out to banks and other firms as part of the Troubled Asset Relief Program (TARP), including $148-billion of it bailout Fannie Mae and Freddie Mac, according to federal figures. Some $992-million has gone to help homeowners in distress. A congressional panel was told by a Treasury Department official last week that investigations and lawsuits “may exert downward pressure on overall housing prices both in the short and long run.”

More than three years after the foreclosure crisis started, Federal Reserve Chairman Ben Bernanke said that his agency is one of a handful of federal agencies finally investigating bank foreclosure practices.

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