There is a little known secret that most banks are loathe to discuss – there are people that have been living in their homes for years without paying on their mortgage and there is nothing that anyone can do about it.
In the rush to make controversial mortgage backed securities, many banks failed to actually file the proper paperwork and/or retain the actual notes behind the original mortgage. The end result? Courts can not legally foreclose on the property and remove the homeowners from the house. Additionally, since the mortgage is lost, there is nothing forcing these homeowners from paying.
Joe Lentz was approved for a mortgage of $1.5 million on a home that he hasn’t made a payment on since 2002. That’s right – he’s been living in his $1.5 million dollar home for 8 years without making a single mortgage payment and there isn’t anything anyone can do about it. His mortgage was one of millions that had been bundled into a mortgage backed security and Washington Mutual was unable to produce the paperwork proving that they owned the note. They eventually gave up and Mr. Lentz is now mortgage-free.
This is not an isolated incident either. Just over $2.1 trillion worth of mortgages – roughly 1 out of 5 homes have been bundled into similar securities by private banks, according to Inside Mortgage Finance. Those mortgages can be sold several times before they end up in one of these mortgage-backed securities.
Each time the mortgage changes hands, the sellers are required to sign over the notes to the buyers, but often times in a rush to get the paperwork done this step was skipped. If the homeowner doesn’t ask for proof of ownership on the note to be provided during foreclosure hearings, many courts simple ignore the lack of signatures and approve the foreclosure. Mr. Lentz asked the court for proof that Washington Mutual owned the note, and that’s why the courts didn’t approve the foreclosure.
Complicating things further, hundreds of the original banks that originated the mortgages no longer exist, so they aren’t around to provide the original mortgage application paperwork. It’s estimated that roughly 1 million homes will be repossessed this year, but many of these homeowners could avoid that by simply asking for the paperwork that proves the bank owns the note. To try and avoid detection, many banks provide something called Lost-Note Affidavits, and as long as the homeowner doesn’t object, the judge will just rubber stamp it in favor of the bank.
[...] every financial expert will obviously recommend avoiding such a situation. Everybody wants to keep their house, and if you follow a few steps you should be able to do just [...]