NEW YORK Why have sketchy mortgage procedures been so difficult to root out? Some lawyers blame misguided efforts to cut costs. Most foreclosures are uncontested, they note. And so servicers save money by avoiding costly searches for missing original documents or hiring additional staff to deal with the surge in foreclosures.
There are signs, however, that servicers resort to doubtful documents because they have no choice if they are determined to foreclose: To a great extent, originals simply don't exist.
It's one of the overlooked legacies of the housing boom.
In the rush to make new home loans and sell them off as fast as possible to investors on Wall Street, the original lenders --big banks as well as now defunct makers of subprime loans --destroyed original documents, or never turned them over as required to the ownership pools that scooped them up. From 2004 through the end of the housing boom in 2006, more than half of all new mortgages were securitized and sold to such pools, known as mortgage-securitization trusts, according to the Securities Industry and Financial Markets Association.
So, banks and intermediaries in many cases never turned over the two essential documents underpinning a home loan -- promissory notes and mortgages -- that would convey ownership to the investor trusts. That means many pension funds, insurance companies and hedge funds that invested in the trusts never got formal title to mortgages they had paid for.
Sheila Bair, who recently stepped down as Federal Deposit Insurance Corp. chairman, in Congressional testimony has called for a wide-ranging audit of the problem. But other regulators so far haven't backed the idea, possibly fearing that if the extent of the problem became known the housing market might worsen.
One example: Public records in foreclosure cases indicate that New Century Mortgage, the nation's second-largest subprime lender until it collapsed in 2007, almost never endorsed promissory notes or assigned mortgages to trusts that bought its mortgages.
A Reuters sampling of 50 foreclosure cases filed in Duval County, Florida, involving New Century mortgages found that none of the promissory notes filed in the cases had any endorsements at all on them. Records show that similar large-scale lapses occurred with other big lenders.
The result is that trusts may be out many billions of dollars, says Matthew Weidner, a lawyer who specializes in mortgage litigation. If proper procedures are followed now, foreclosures could slow to a trickle. And a cloud would hang over title to millions of homes, potentially further depressing the housing market.
Sheila Bair, who recently stepped down as Federal Deposit Insurance Corp. chairman, in Congressional testimony has called for a wide-ranging audit of the problem. But other regulators so far haven't backed the idea, possibly fearing the consequences if the extent of the problem became known.
(Editing by Michael Williams)