Whose Mortgage Is It Anyway?

When doing a short sale, one must be very careful that the entity you are negotiating with has the authority to approve a short sale and can properly provide a satisfaction of mortgage.  Here is a link to an article: http://www.nytimes.com/2009/10/25/business/economy/25gret.html?_r=1 where a federal judge in the Southern District of New York wiped out a $461,000 mortgage debt.  It completely disappeared.  The reason was that the apparent owner of the mortgage could not prove it.  To summarize the article, a borrower went into bankruptcy.  He filed a Chapter 13 in hopes of negotiating a new payment schedule.  Any time a bankruptcy petition is filed, anyone who claims they are owed money by the debtor must file what is called a proof of claim.  The entity that filed the proof of claim was asked to provide documentation that they owned the note.  When they could not provide it, the judge wiped out the mortgage. 

This is a situation that is occurring more and more often.  Mortgages have been bundled, securitized, sold and resold.  The note which is proof of the debt sometimes gets lost.  This becomes important when handling a short sale.  I was trying to obtain a mortgage for a borrower who wanted to purchase a short sale property.  I was provided a short sale approval from a servicer and sent it to the title company.  The title company asked the same question that was asked in Butch Cassidy and the Sundance Kid, “Who Are Those Guys.”  They were no where to be found on the recorded mortgage, there were no assignments on record.  The title company told me that unless proof could be provided that they owned the debt, they would not insure title.  The servicer could not provide anything and the sale died.   The reasoning behind this is that what if in the future someone comes with the note and now demands payment?  It is a mess.

The moral of the story is that when you are negotiating a short sale, you should demand proof the entity approving the short sale has the authority to do so.  If I where representing a buyer I would require this because I would not want to buy a house and then have some one claim in the future that they have a valid lien against the property.

If you read the article, you may have the reaction that a borrower who was actually lent over $400,000 has through a technicality been able to avoid payment and now can live in the house for free.  The borrower is not saying he does not owe the money, but that he is entitled to proof that the person claiming payment is legally entitled to receive it.  For example, suppose I borrow $1,000 from Joe and agree to pay him in a year.  A year later, Sam comes to me and demands the $1,000.  I would say “Who are you and why should I pay you?”  If Sam says that Joe authorized him to collect the debt, I would say, “Prove it.”  If Joe is no where to be found and Sam cannot provide any documentation, why should I pay Sam?  That is the situation that many borrowers now face.  It is important to make sure that the legal entitlement to collect a mortgage debt is verified.