This is what shredded mortgage files look like
Written by Craig D. Robins, Esq.
In the news this week was an interesting convergence between the need to investigate mortgage fraud and the desire to maximize the distribution to creditors of a defunct mortgagee.
I first wrote about American Home Loan Mortgage Company in 2007, which was based on Long Island. At the time they were one of the country’s largest mortgage lenders and they quickly and utterly collapsed as one of the earliest victims of the sub-prime mortgage meltdown. (see: The Sub-Prime Mortgage Meltdown
Now we have an issue of what will happen to the many thousands of sub-prime mortgage files sitting in a storage room of the now-abandoned company’s Melville, Long Island headquarters — a five-minute drive from my Woodbury office.
What Happens to Mortgage Files When a Mortgagee Goes Out of Business?
American Home Loan, which hasn’t operated since it collapsed in 2007, has been in a Chapter 7 bankruptcy liquidation proceeding for several years now. Earlier this week, the operating trustee asked the bankruptcy court for permission to destroy 4,100 boxes of loan documents.
The trustee is arguing that the local fire marshal wants the boxes of mortgage files removed as it is posing a fire hazard. The trustee is also complaining that it will cost too much to move them and that they should instead be destroyed.
Paying to remove the file boxes to a storage facility costs money — money that would have gone to the creditors of American Home Mortgage who filed claims in the bankruptcy proceeding. The cost of having maintained storage of the files was approximately $15,000 a month.
Two years ago, the trustee had made a similar request which was approved, and several thousand boxes were destroyed at that time after banks and other loan servicers had been given a chance to pick up the files but neglected to do so.
Now there are 4,100 boxes left. My guess is that each box contains 20 files, meaning that the boxes contain the records of nearly 80,000 sub-prime mortgages.
Is Evidence of Mortgage Fraud Being Destroyed by Destroying the Mortgage Files?
Since the earlier batch of files was destroyed, the subject of mortgage fraud has risen to become major headline news.
That led the attorneys general in all 50 states to immediately begin investigations into foreclosure procedures, improper mortgage assignments, and all sorts of other mortgage document deficiencies.
Also in the past few months, we have seen massive amounts of evidence turning up all around the country showing that original mortgage loan documents were never transferred as required when the mortgages were securitized and sold to investors.
Now, these ever-so important mortgage files are about to be destroyed. Yesterday the Delaware Bankruptcy Court approved the trustee’s document destruction request.
However, a Legal Aid Society attorney, who also appeared in the proceeding, was successful in requiring the trustee to set aside several hundred of the storage boxes which may contain records still relevant to some pending foreclosures.
She argued that many low income homeowners were victims of deception about how much their mortgage loans would cost, and that the original mortgage files could contain evidence that they had been defrauded. This is another concept I previously wrote about in The Sub-Prime Mortgage Meltdown
Who Benefits When Mortgage Files Are Destroyed?
As I mentioned, the creditors of the defunct mortgage company stand to receive a (very slightly) larger distribution.
But what about the hapless homeowners who are defending foreclosure proceedings? Perhaps this could be good news for them. Judges are becoming more and more willing to toss out foreclosure suits when the mortgagee is unable to produce various original mortgage documents.
The defense du jour
is “show me the note!” A series of recent decisions in foreclosure cases emphasizes the importance of producing original loan documents, holding that they are essential for investors to prove ownership of the mortgages and that the have the right, known as “standing'” to pursue foreclosure. This is something I wrote about a year ago: Mortgage Companies Entitlement to Bring Foreclosure Proceedings: Prove It or Lose It .
If a mortgage which was originated by American Home Mortgage is foreclosed upon (and many tens of thousands are in the foreclosure process now), then it may become easier for the homeowner to defend if the current mortgagee is unable to adequately produce sufficient paperwork.
On the other hand, such document destruction can be the equivalent of a get-out-of-jail card for those business executives in the mortgage industry who took illegal shortcuts. Destroying thousands of files means that valuable evidence that can be used in criminal investigations will be forever gone.
The wholesale destruction of mortgage files has become big news in several other areas of the country this week. A Bankruptcy Judge temporarily blocked the trustee of sub-prime lender Mortgage Lenders Network USA from destroying 18,000 boxes of original loan files after federal prosecutors pleaded that they may be needed as evidence in more than 50 criminal investigations.