The housing bubble and the ensuing mortgage crisis have touched us individually in many ways. Now there is a story out of White Plains, NY that offers some bittersweet business lessons that can all benefit from.
It begins in 2001 when a borrower bought a house with a mortgage from Wells Fargo. Four and a half years later they refinanced with Mortgage World Bankers Inc. Like too many home owners in the current economy this one fell behind in her payments. In an effort to save her home she filed for bankruptcy protection.
Mortgage servicer PHH filed a proof of claim saying the full amount owed on the property was $461,263. The homeowner initially wanted to renegotiate the terms of the loan, but PHH turned a deaf ear. That was PHH’s second mistake.
To get PHH’s attention the homeowner’s bankruptcy lawyer requested PHH provide proof of standing in the case. “Standing” refers to the principal of law that requires a plaintiff in a case to demonstrate that they have a legal right at stake, or at issue, in the case. In the
PHH responded with a letter identifying itself as the servicer of the loan, but U.S. Bank, a trustee of a securitization pool, as the actual holder of the underlying note. Since a letter isn’t much in the way of evidence, the bankruptcy lawyer next asked for proof from U.S. Bank.
U.S. Bank offered something more formal than a letter. They sent an affidavit but it was signed by the same PHH vice president who sent the letter and said pretty much what the original PHH letter had said. In support of the affidavit they attached a copy of the mortgage assignment signed by the same PHH vice president, but this time identifying her as an assistant vice president of the Mortgage Electronic Registration System, a bank owned registry that bypasses the need to make changes to local land records.
Hmmmm, okay, let’s say this vice president is multi-tasking . . . but how do you explain the date of the mortgage assignment. It says the assignment was made after the bankruptcy filing.
When appearing before the bankruptcy judge PHH’s attorney tried to explain how in the secondary mortgage markets assignments don’t always happen as they should and that such delays were standard operating procedure. The judge wasn’t born yesterday and didn’t buy the “this is the way everybody’s been doing it for years” argument. He said the documentation raised a question about who owned the mortgage and that such uncertainty meant the homeowner could be paying the wrong person. Due to the sloppy documentation the judge expunged the mortgage debt. He wiped the slate clean.
That brings me to mistake number one on the lender’s side: the failure to properly document. It worked out well for the home owner; but, somewhere there is a business that is out a bunch of money.
What happens next? Well, PHH is in the awkward position of trying to get title to a house that has a mortgage, but no debt, and they can also try to appeal the judge’s ruling. To be successful on the appeal they’ll have to show why they couldn’t produce the proper documentation in the first place and under the current discovery rules that is not a friendly discussion with any judge. Let’s just say I wouldn’t want to be in their shoes.
When you stand back and look at this comedy of errors you see that it all started with the failure to document properly and in a timely manner. If the paperwork were in order they would have been able to produce it when asked.
Even when you have documents, being able to find them is critical. That’s why document retention practices are important.
I understand that documentation and document retention aren’t very sexy; but, they’re an important and necessary part of business. Get sloppy and it can trip you up and cost you a lot of money.
Even if the ruling gets overturned, think about the legal fees and the overall aggravation.
Finally, if a new deal had been negotiated, all of this ugliness could have been avoided. Assuming you know what cards you hold without actually looking at them can therefore lead to unexpected results and more cost and expense than you bargained for.
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