At the height of the housing boom in 2004, homeownership reached a record high of 69.2%. Just eight years later, 8.1 million homes—or sixteen percent of all mortgages—are expected to be in foreclosure. The mortgage securitizations and assignments, which allowed Wall Street to push America’s housing market towards the peak reached in 2004, were often hastily completed and are now creating problems for the financial institutions attempting to bring those 8.1 million foreclosures. These foreclosure problems first appeared in the courts, but have since garnered national attention as a result of the widespread use of questionable evidence to establish the elements of a foreclosure.
In 2007, in the U.S. District Court for the Northern District of Ohio, Judge Boyko dismissed fourteen foreclosure cases because none of the plaintiffs presented the notes associated with the mortgages or established that they had standing to foreclose on those mortgages. Since then, numerous state and federal courts have dealt with the problems created by the improper, untimely, or non-existent assignments associated with securitized mortgages. The level of neglect for the assignment formalities falls on a spectrum. Untimely assignments and poorly documented assignments fall relatively low on the spectrum, and courts are split on the effect of these less severe forms of neglected formalities. However, as the financial institutions’ neglect for the traditional assignment formalities increases in severity, all courts should begin to recognize that foreclosures based on those severely neglected assignments must be prevented.
In deciding if and when problem mortgages can be foreclosed upon, courts have wrestled with several factors. In federal courts, the main question has been about the federal standing doctrine. In state courts, there have been similar standing analyses, but through the lens of state law. With the recent revelations regarding the use of improper evidence and “robo-signers” to prove the elements of a foreclosure, all courts should be increasingly concerned with the evidence used to establish a bank’s right to foreclose.
Several state and federal courts have expressly acknowledged two public policies at play when making their decisions. These two constant and countervailing policies are (1) the interest in protecting families and communities by not allowing financial institutions to foreclose on homes without the legal authority to do so, and (2) preventing further harm to an economy dependent on the mortgage industry’s ability to recoup debt. While several courts have expressly considered the two interests above, other courts have disregarded these policies either by allowing foreclosures to go through with inadequate documentation or by wiping clean the entire debt on a mortgage when no proof of assignment was presented at the initial filing.
This Comment argues that when disregard for the assignment process rises to the level of bringing a foreclosure without a legal assignment, on behalf of an undisclosed third party, or with inadequate evidence, standing should never be afforded to the foreclosing financial institution regardless of the court, governing state law, or countervailing public policies. To ensure that banks do not foreclose when they are unable to adequately prove their standing to do so, while at the same time preventing further damage to the global economy, this Comment concludes that all courts should consider the relevant public policies and that cases reaching the higher levels of neglect should always be dismissed without prejudice or, in bankruptcy, claims should always be given leave to amend.
To begin, Part II.A lays out some of the significant changes in the mortgage industry which contributed to the financial crisis. Parts II.B and II.C then discuss mortgage assignment requirements and departures from the assignment recording process. To lay a foundation for the judicial reaction to the foreclosure crisis, Parts II.C, II.D, and II.E detail the emergence of the foreclosure crisis, the different types of foreclosure, the role of bankruptcy in foreclosure, the emergence of bank reliance on questionable evidence, and the standing requirements. Part II.F then presents several ways courts have reacted to the foreclosure crisis and the neglected formalities in mortgage assignments.
Part III.A discusses how federal courts should apply the standing doctrine to mortgage assignments. Finally, Part III.B places recent cases in the context of the two opposing public policies: (1) protecting consumers from improper foreclosures based on neglected assignments and questionable evidence and (2) preventing further damage to the economy. Part III.B concludes that the individual consumer and the economy as a whole will best be protected if courts always consider these two policies and (1) strictly hold banks accountable to the standing requirements, while (2) giving banks an opportunity to correct mistakes in foreclosure filings through dismissals without prejudice or through opportunities to amend proofs of claim in bankruptcy. This proposal will ensure that banks adequately prove all elements of a foreclosure, but will give banks a second chance to prove those elements if a bank’s first filing was inadequate.