A brief lesson in Karma and mortgages
By MITCHELL SOMMERS
On January 25, 2010, Rickie Walker filed a bankruptcy petition in the Eastern Distict of California Bankruptcy Court in Sacramento. Five days earlier, Marty and Tammy Box filed a bankruptcy petition in the Western District of Missouri Bankruptcy Court in Springfield.
Nothing special, really. Happens all the time, thousands of times a day across America. It may happen to you. It is probably happening to someone you know.
Depressing, but nothing special.
Except decisions in each of those cases may prove quite special for homeowners struggling to pay their mortgages.
To explain the importance of the mortgages of Rickie Walker and Marty and Tammy Box we have to go back, back in time to those happy, halcyon days when America’s lending institutions, backed by Fannie Mae and Freddie Mac, were writing loans for anyone with a pulse, and probably for a few people without pulses.
You probably know the outlines if you’ve been following the basics. In the previous decade, lenders wrote mortgage loan after mortgage loan, then bundled, sliced, diced, and filleted those loans into various securitized packages. In order to do all those things, which weren’t easy to do (it’s hard work to wreck the economy, and it takes really smart people to do it), they needed a company to register and record all those transactions so those loans could be sliced and diced.
Enter MERS. MERS—Mortgage Electronic Registration System, Inc. — was set up to record these mortgages. Which they did, millions and millions of times over and over again, all throughout the last decade.
Let me back up again. There are two parts to a real estate loan. The first is the mortgage. The second is the note. The mortgage, or deed of trust in some states, secures the house as collateral. But it’s the note that represents the actual promise on the part of the homeowner to pay. And if MERS does not have the note assigned to it, they only have one of the two critical documents.
And that brings us back to Rickie Walker and Marty and Tammy Box.
In both cases, their attorneys argued that when MERS took the assignment of the mortgage, they did not get the assignment of the note, that having been split off in the slicing and dicing phase. So when MERS, in turn, assigned their interest to another bank or mortgage servicer and they attempted to collect on the mortgage, the collector had a problem. They couldn’t collect what they didn’t own.
First, to quote Judge Ronald Sargis, Bankruptcy Judge in the Walker case (May of 2010):
“Since no evidence has been offered that the promissory note has been transferred, MERS could only transfer whatever interest it had in the Deed of Trust. However the promissory note and the Deed of Trust are inseparable.”
Now to quote Judge Arthur Federman in the Box case (a month later): “[Bank of America] has not produced the original Note, nor has it even produced a witness stating that BAC is in possession of the original Note.”
In both cases, the courts both said that, although the property owners owed somebody something, the servicer hadn’t proved that they were the somebody in question, because MERS never got the whole transaction in the first place.
If you think about it, this makes sense. I don’t have the right to collect someone else’s debt unless you’ve given me the right to do it. And if I’m going to court to prove you owe me the money, I better be able to prove I have the right to collect it, or I’m just wasting everyone’s time, and, in extreme cases, possibly committing fraud.
These are, of course, only two courts that have ruled this way. But those courts have built on the decisions of other courts in the past few years, including other bankruptcy courts in California, a Federal District Court in Ohio, and the Kansas Supreme Court. In other words, this is spreading. And what could be bad news for Bank of America, Wells Fargo and the rest could be very good news for struggling homeowners. And the karma-friendly twist is those banks brought it on themselves.