During the course of the recent housing bubble, lending institutions bundled thousands of consumer mortgages into complicated securities that were sold many times. The transfer records of each mortgage in the bundled securities became increasingly byzantine. When the mortgage market fell apart in the current recession, some of the investors left holding the mortgage-backed securities discovered that there were unable to prove that they owned the right to collect on the mortgages.
On October 9, 2009, the federal bankruptcy court in the Southern District of New York wiped out a $461,263 mortgage on a debtor’s house after the bank could not prove that it had the right to collect the mortgage. The debtor refinanced a home loan with Mortgage World Banks, Inc. but fell behind. She filed Chapter 13 bankruptcy to restructure her debt. PHH Mortgage showed up at the bankruptcy proceedings as the servicer of the mortgage, which it claimed was held by US Bank. However, PHH could not show the paperwork demonstrating how US Bank ended up with a mortgage that was originally sold to Mortgage World Banks. Thus, the bankruptcy court threw the mortgage out.
However, the debtor still does not own clear title to the house, despite the bankruptcy ruling. There is a mortgage on her house, but it is uncertain who, if anyone, has the right to collect. Her attorney is considering a lawsuit to clear title. It may be the case that in the world of high finance, a house slipped between the cracks.
State courts have dismissed foreclosure cases where the purported creditor could not show it owned the mortgage. However, the recent ruling wiping out a mortgage is significant because the servicer lost the right to collect the debt due to the bankruptcy proceedings.