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Mortgage Paperwork Often Hard To Find

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Mortgage Paperwork Often Hard To Find


Mortgage Paperwork Often Hard To Find

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  • <iframe src="" width="100%" height="290" frameborder="0" scrolling="no" title="NPR embedded audio player">
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From NPR News, this is ALL THINGS CONSIDERED. I'm Mary Louise Kelly.


And I'm Melissa Block.

We've been reporting all week about banks paperwork problems. The country's foreclosure system is quickly grinding to a halt.

As NPR's Yuki Noguchi reports, the latest news is that banks, or their mortgage servicers, sometimes can't even prove who owns the title to a property in foreclosure.

YUKI NOGUCHI: To understand this latest issue, picture yourself facing foreclosure. You're running out of time and options. Finally, you say to your bank, show me the note. A seemingly simple request that's tying banks in knots. Gary Klein is a lawyer representing people fighting foreclosure. He says in many cases, banks cannot, in fact, show them the note. And that, he says, is a big problem.

GARY KLEIN: The fundamental issue is that no one really knows who owns hundreds of thousands of mortgages that have been made in the last decade, and really no one really knows who has the right to foreclose.

NOGUCHI: Sometimes banks have no record of the original loan. Or there are faulty records of which investor owns the loan. And that's not all.

KLEIN: The issue, as these cases start to shake out, is not always whether the paper is public, the issue is whether the paperwork exists at all.

NOGUCHI: How could this be? The answer is a problem of both complexity and volume. Many of the mortgages generated in the last decade were bundled, then sold in the form of securities. As many as half of mortgages were bought and sold at least four times before reaching their final investors. The chain of ownership became hard to follow.

Every time that ownership changed, there should have been a record of that transfer. Not just digital forms, but actual 20th-century style paper that physically traveled to each investor. But in the rush to process millions of new mortgages, the papers often didn't make it.

Alan White is a professor at Valparaiso School of Law. He says the industry began cutting corners.

ALAN WHITE: They devised various shortcuts with the assurance of some high-powered lawyers that these shortcuts were fully, legally equivalent to doing it the old-fashioned way. But nobody really knew for sure whether they were the full legal equivalent or not. And now we're going to find out.

NOGUCHI: White says to, quote, "show you the note," banks or their loan servicing operations might have to do some forensic digging. Some of that paper might exist in a warehouse somewhere, some might exist in the MERS, the industry's Mortgage Electronic Registration System. But some might not exist at all.

WHITE: And I've heard that at certain points they found it too costly to even store all the notes, and a lot of them just got shredded.

NOGUCHI: The lack of a note may mean some owners can avoid foreclosure - although that's not exactly clear. The real new issue here is what this might mean for the banking industry. Investors in mortgage securities, which in many cases have lost all or most of their value, might turn to banks to cover their losses.

Chris Katopis is the executive director of the Association of Mortgage Investors. Katopis says investors are protected by agreements that say if there's any defect with the contract, that the banks will buy back those securities.

CHRIS KATOPIS: What we're hoping for is banks to step up and do what they're legally accountable to do under these agreements, and be responsible.

PAUL MILLER: Banks will probably be held most responsible if there is a problem.

NOGUCHI: If, emphasizes Paul Miller. He is managing director at investment firm FBR Capital Markets. He believes the evidence so far does not indicate that the problem will hold up most foreclosures. But no one yet knows for sure.

MILLER: My concern is, is maybe this is the tip of the iceberg and there was other shortcuts taken that we don't completely understand.

NOGUCHI: And if that's the case, Miller says, these paperwork issues could amount to a huge economic problem.

Yuki Noguchi, NPR News.

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