November 15, 2007 - Judge Christopher Boyko, a Federal District Judge in Ohio, has ruled against Deutsch Bank in a case involving foreclosure on 14 homes. He had ordered the bank to provide proof that it actually owned the mortgages of homes that they were foreclosing on. When the bank failed to produce the documentation, he dismissed the case. The case is an indication of troubles that banks face as a result of recent problems with mortgages nationwide and the judge's ruling may provide some relief for tens of thousands of homeowners who are facing foreclosures of their own.

Typically, foreclosures are the end result when a consumer fails to make his or her mortgage payments. When you take out a mortgage from a bank, the bank owns the right to foreclose on your property if you don't make your payments through a "note" or "deed of trust". But many lenders sell their notes on a secondary market. And this is what tripped up Deutsch Bank.

Through a complex trading system, Deutsch Bank and other essentially dice up their mortgages and convert them into securities for which are backed by mortgages. These securities (which are similar to shares of stock) can then be purchased by anyone.

Unfortunately for Deutsch Bank, no system was ever put in place to show which individual mortgages were backing specific securities. In essence, this means that it is difficult or impossible for the owners of these securities to prove that they have a right to foreclose on any individual property.

Until now, the ability of banks to show that they have a right to foreclose on a property has not really been an issue. This is because most foreclosures are never challenged in court. But Judge Boyko's decision could change this, and there are indications that lenders could be facing some real problems if homeowners decide to take them to court more often.

A study conducted by the University of Iowa School of Law found that in 1,733 foreclosure cases that they looked at, the banks involved didn't provide proof that the owned the mortgages 40% of the time. It is quite likely that attorneys around the country will refer to Judge Boyko's decision in their court filings. It is also likely that judges around the country will agree with his findings.

In his ruling, Judge Boyko wrote, "The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate." He went on to say that the argument from Deutsch Bank's attorneys that ‘Judge, you just don't understand how things work reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process."

While it is unlikely that anyone facing foreclosure will be able to use the ruling to permanently remain in their home without paying their mortgage, the decision is likely to give homeowners more time to work out payment agreements with their lender. It is also very likely that lenders will be more willing to work with homeowners to avoid foreclosure if they have any doubt about being able to show the court that they actually own the mortgages that they are foreclosing on.

by Jim Malmberg

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