Non-Recourse Lending

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The Washington Times

“Fannie Mae and Freddie Mac, the two mortgage finance giants whose financial woes required massive taxpayer bailouts in recent years, could be missing out on as much as $4.6 billion in payments from foreclosed mortgages in their portfolios . . . .

“Freddie Mac alone has not dealt with about 58,000 foreclosures on single-family homes, letting the borrowers go into default instead of paying back the loans . . . .  many of those in default are not disenfranchised families down on their luck. Instead, they have the financial capability to pay back their loans.

 “Freddie Mac eliminated any possibility of recovery when it did not refer foreclosed mortgages for evaluation of collectibility,”. . . .  Disorganization cost the mortgage company 6,000 potential foreclosures because the statute of limitations expired.

“The numbers are even worse for Fannie Mae, which . . . did not pursue 44,600 cases because the statute of limitations expired.

“Inaction by Fannie Mae, Freddie Mac and other companies causes a high level of ‘non-recourse lending.’ This type of lending carries few consequences because businesses legally can’t or won’t pursue people who default on their mortgages . . . .”

OK—according to this article, Fannie Mae and Freddie Mac failed to collect almost $5 billion in mortgage payments due to: 1) “Disorganization”; and 2) “Inaction”. Result?  The statute of limitations ran out and collection procedures had to terminate.

That explanation seems reasonable since just about everyone believes that government is so screwed up that “disorganization” and “inaction” could easily explain and excuse the loss of a “mere” $5 billion.

The article explains that the result of this “disorganization” and “inaction” was “non-recourse lending” wherein the lender had no legal capacity to sue or foreclose if the borrower defaulted on his mortgage.

I don’t doubt that the result was “non-recourse lending” where the banks have no recourse (can’t collect or foreclose) against borrowers who don’t repay their mortgages.  But I doubt that the cause for “non-recourse lending” was government “disorganization” or “inaction”.

Instead, I suspect that those home loans were truly “non-recourse lending” because the lender sold the Notes and Mortgages and therefore had no legal right to foreclose.

I’m not a licensed attorney.  Take my suspicions with a grain of salt.

Nevertheless, my understanding of the mortgage and foreclosure law leads me to suspect that the reason the government couldn’t foreclose on over 100,000 mortgage defaults is that Freddie Mac and Fannie May didn’t have and could not acquire the orginal Notes and the actual Mortgages (or Deeds of Trust) actually signed by the borrowers.

Mere copies, even verified copies will not legally suffice.  In order to assert ownership to land, the plaintiff has to produce the one, actual, original title with the original signatures on it.  Similarly, without ownership and possession of the original Notes and Mortgages, the purported “lenders” and their agents had no more legal right to foreclose on those 100,000 homes than I do.

Q:  Why can’t Fannie Mae and Freddie Mac find the original Notes and Mortgages?

A:  Because they were “sliced and diced,” incorporated into “mortgage-backed securities,” sold to third parties and spread around the world.

The original Notes and Mortgages probably couldn’t be found under any circumstances.  But even if they could somehow be found, they probably couldn’t be used in court because they no longer exist in a coherent form.

Is the problem of missing Notes and Mortgages true for only the 100,000 mortgages that Fannie and Freddie neglected to enforce?

Probably not.  The problem of “missing” Notes and Mortgage could apply to millions of homes that were purchased between A.D. 1990 and A.D. 2010.

But the vast majority of those millions of mortgagors don’t understand the law.  Those millions of Americans don’t understand that if the bank sold their Note and Mortgage to some 3^rd party, the bank—and Freddie Mac and Fannie May—may have no legal right to foreclose.  Only the 3^rd party who owns both the Note and the Mortgage has the legal capacity to foreclose.

But if the 3^rd party subsequently sold, lost or destroyed those Notes and Mortgages, then no one has the right to collect mortgage payments on that property and no one has the right to foreclose if the purchaser fails to make payments on his loan.  Although the extent of this mortgage fraud isn’t clearly known, it’s possible that millions of Americans have been hustled and deceived by their lenders and the banking system into making mortgage payments to alleged “creditors” and “lenders” who have no right to collect those payments.  Millions may have been foreclosed on and forced to abandon their homes by “lenders” who didn’t have the actual Note and Mortgage and therefore had no right to foreclose.

Those millions of American borrowers understood and agreed that they were legally bound to make payments on their mortgage debt.  What they did not understand is that they’re only bound to pay whoever owns and produces their original Note and the original Mortgage.

They don’t have to pay me because I don’t own their original Note and Mortgage.  Any fool can see that.

But most people have a hard time imagining that they also don’t have to repay their home loans to the bank that made the loan–even if that bank no longer holds the original Note or Mortgage.  Americans recognize the importance of paying their debts.  They do not recognize the critical importance of the original paperwork (not copies) associated with that debt.

If the bank or lender sold, lost or destroyed the original Note and Mortgage—too bad for them.  Without those original documents, they have no standing to foreclose or even collect the mortgage payments.

It’s like buying the winning lottery ticket and then accidentally setting that ticket on fire and causing it to disappear.  Go ahead; contact the lottery people and tell ‘em that you clearly remember buying a lottery ticket with the winning number but, unfortunately, you lost the ticket.  Odds are, the lottery people won’t allow you to collect your prize.  The prize is due to however holds the original paperwork (the lottery ticket).  No tickee, no checkee.

Same thing with Notes and Mortgages.  If the alleged creditor can’t produce the original Note and Mortgage, he has no right to foreclose.  He might be able to bluff an unsophisticated borrower into paying the debt, but without the original Note and Mortgage, the lender has no actual right to collect on the debt or foreclose.

The original mortgagor may be obligated to pay someone the substantial debt on his home loan.  However, the mortgagor is not obligated to pay just anyone.  He’s only obligated to pay the debt to whoever legally owns the original Note.  He has no obligation to pay the debt to anyone who can’t produce the original Note.  Likewise, he can’t be foreclosed on except by whoever holds both the original Note and the original Mortgage.

This is why, back when I was a kid, people who finally paid off their mortgages had a mortgage=-burning party.  When the mortgage was finally repaid, the bank returned the original Note and Mortgage to the borrower.  The borrower then celebrated (and insured himself against future mortgage payments) by burning and destroying the original paperwork.  Once the original paperwork no longer existed, no one had a right to collect mortgage payments on the house and no one had a right to foreclose.  Being freed from that threat, the borrower celebrated his good fortune.

Today, if you finish repaying your mortgage debt there’ll be no “mortgage burning party” because the original lender sold your paperwork and couldn’t find it if you put a gun to his head.

Nevertheless, in their pristine ignorance, millions of American mortgagors may have been subjected to foreclosure—even by people and institutions who don’t have the original Notes and Mortgages.  Such foreclosures would be fraudulent but still presumed legal because the borrowers didn’t have sense enough to challenge the standing of the plaintiffs to foreclose by demanding that the plaintiff produce the original Note and Mortgage.

And those who seek to foreclose must have both: 1) the original Note; and 2) the original Mortgage.  The Note establishes the debt.  The Mortgage causes the house to be deemed security for the Note.  If you have the original Note on the loan used to buy my home, I owe you (and only you) the amount specified on the Note.  But if you don’t also have the original Mortgage, you can’t foreclose on the house if I fail to make payments on the Note.  You can put a lien on the house and if I ever sell it, you can collect whatever is owed you out of the proceeds of the sale.  However, even if I haven’t paid you a dime in years, you won’t be able to legally foreclose on the house even if you have the original Note but don’t also hold the original mortgage.

I therefore suspect that the 100,000 delinquent mortgagors who weren’t foreclosed on by Fannie Mae and Freddie Mac may have been allowed to “escape” because they understood enough law to demand to see their original Note and Mortgage as proof of Fanny’s and Freddy’s right to foreclose.  Once that issue was raised, Fannie and Freddie would have to produce the original Note and Mortgage or openly admit that they had made a “non-recourse loan”.  If they admitted that they’d sold, lost or destroyed the original Note and Mortgage, they would’ve lost their legal remedy to enforce payment of the loan and be left with no “recourse” in court.

If Fannie and Freddie admitted on the public record that they didn’t have the original Note and Mortgage and therefore couldn’t foreclose, they’d inspire millions of other borrowers to begin to ask about who holds their Notes and Mortgages.  Once those millions learned that their Notes and Mortgage were also “missing,” they’d also default on their mortgages and collapse the mortgage “bubble”/Ponzi scheme.  Therefore, I suspect that in order to prevent a widespread collapse of the mortgage Ponzi scheme, Fannie and Freddie simply ceased collection efforts against anyone who was smart enough to demand to see the original Note and Mortgage.

Fannie and Freddie claimed the $5 billion in lost foreclosures was due to “disorganization” and “inaction”.  Maybe so.  But I’d bet that Fannie and Freddie declined to foreclose on those who demanded to see the original Note & Mortgage rather than risk being charged with fraud.

Result?

The fraudsters lost $5 billion to those Americans smart enough to know the law.

If you knew the relevant law, and if you understood the significance of original documents,  and knew how to gather and introduce evidence into a court record, you might not be subject to foreclosure.  You might not even be subject to making mortgage payments. If you were really knowledgeable, you might even be able to sue your purported mortgage creditor and collect some or all of the fraudulent mortgage payments you’ve already made.