US judge temporarily delays loan document shredding

Mon Jan 24, 2011 1:57pm EST

* Two defunct lenders seeking to destroy boxes of records

* One judge temporarily blocks document destruction

* In separate hearing, destruction partially allowed

* Rulings come amid wide concerns of missing loan docs

By Scot J. Paltrow

WILMINGTON, Del., Jan 24 (Reuters) - A U.S. bankruptcy judge temporarily blocked bankrupt subprime lender Mortgage Lenders Network USA from destroying 18,000 boxes of original loan files after federal prosecutors said documents in them may be needed as evidence in more than 50 criminal investigations.

In a hearing Monday before U.S. Bankruptcy Judge Peter J. Walsh, a representative from the Delaware U.S. Attorneys' Office said she did not know details of any of the investigations.

But she said prosecutors and FBI offices around the country had requested time to access to the boxes and assess whether the contents contain needed evidence before the judge permits any destruction.

Walsh granted a 30-day delay, and said he would hold another hearing on Mortgage Lenders' request.

A series of recent court rulings have increased the importance of original loan documents, holding that they are essential for investors to prove ownership of mortgages and to have the right to foreclose.

Connecticut-based Mortgage Lenders Network closed down and filed for bankruptcy protection in February 2007, and now is being liquidated.

Dozens of subprime lenders went out of business in 2007 with the collapse of the housing market. There is increasing tension as trustees for several of these defunct lenders seek to destroy documents to save storage costs, while law enforcement officials and advocates for homeowners and investors in mortgage-backed securities argue that the documents should be preserved.

Concern about missing mortgage documents emerged beginning in October 2010, with disclosures that large numbers of original loan documents were missing and that falsified ones were being submitted in foreclosure cases.

In a separate hearing Monday in the same court, U.S. Bankruptcy Judge Christopher Sontchi allowed defunct American Home Mortgage, once one of the largest subprime lenders, to destroy most of the 4,100 boxes of original loan files it still has.

But the judge granted a request by Margaret Becker, a lawyer in Staten Island for the Legal Aid Society, to require the American Home trustee to set aside and cull through a few hundred of the boxes which may contain records still relevant to possible foreclosures.

Becker said many low income homeowners were victims of deception about how much their loans actually would cost, and records from the boxes could help prove that they had been defrauded.

"These documents are critical for borrowers to demonstrate to foreclosing courts the deception and fraud that was a routine part of this mortgage industry," Becker said.

Sean Beach, a lawyer for American Home's liquidation trustee, said the company under an earlier court order already had destroyed or returned to loan servicers 50,000 boxes of "hard copy loan files." (Reporting by Scot J. Paltrow; Editing by Tim Dobbyn)

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