Basically, the borrower in this situation, bought the house in 2001 with Wells Fargo holding the mortgage. She later refinanced with Mortgage World Bankers.  When she fell into arrears a Chapter 13 bankruptcy was filed.  A claim to the debt was filed by PHH. PHH was asked to modify the loan but didn’t respond to the request which is when the homeowner’s lawyer asked for proof of PHH’s standing in the case.

PHH responded to the request for proof of standing saying that U.S. Bank held the loan but U.S. Bank was not a party to the action. PHH was unable to provide proof that U.S. Bank held the note, instead filing an affidavit from a vice president of PHH Mortgage which included a copy of the assignment of the mortgage.  The assignment of the mortgage showed that the note was assigned after the bankruptcy had been filed.

PHH admitted to levying an improper $450 foreclosure fee and overcharging interest.

It sounds like there were a number of irregularities involved in the whole situation and of course PHH is appealing the ruling.  There have been incidences of homeowners being foreclosed on asking for proof of the note from the foreclosing bank, thus stalling foreclosure.  This is the first I’ve read of a judge wiping out a mortgage in court.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

So the ruling may put a new dynamic in play in the foreclosure mess: If the lender can’t come forward with proof of ownership, and judges don’t look kindly on that, then borrowers may have a stronger hand to play in court and, apparently, may even be able to stay in their homes mortgage-free.

The reason that notes have gone missing is the huge mass of mortgage securitizations that occurred during the housing boom. Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what.

To be sure, many legal hurdles mean that the initial outcome of the White Plains case may not be repeated elsewhere. Nevertheless, the ruling — by a federal judge, no less — is bound to bring a smile to anyone who has been subjected to rough treatment by a lender. Methinks a few of those people still exist.

More important, the case is an alert to lenders that dubious proof-of-ownership tactics may no longer be accepted practice. They may even be viewed as a fraud on the court.

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