Principles of legal standing mandate that a party seeking judicial relief be able to demonstrate a cognizable interest in the matter at issue. Foreclosing on a defaulted mortgage loan usually does not implicate this doctrine: the borrower’s failure to pay provides the holder of the mortgage note with the requisite injury to seek legal redress. A very recent case in Ohio, however, may create additional problems for investors who have already been buffeted with bad news the past several months: the trustee for one pool of securitized mortgage loans could not demonstrate to the court’s satisfaction that it actually owned the mortgages upon which it was seeking to foreclose, and the court dismissed the case for a lack of legal standing.
This case demonstrates that the complexity of mortgage securitizations, and the sheer volume of such instruments that was created over the past few years, may have given rise to some less than adequately documented transfers from the mortgage originators to the securities issuers. In the Ohio case, the securitization pool trustee presented assignment documents that evidenced an intent to convey the rights of the mortgages, but were unable to establish the trustee’s actual ownership. Without that showing, the court ruled against the trustee.
Residential mortgage loan foreclosures are very often uncontested, and courts have usually tended not to require the level of detail regarding ownership that U.S. District Court Judge Christopher A. Boyko did in this instance. That may change, however, with the huge increase in the number of foreclosure actions that is currently taking place. If other courts follow this example, it could mean even greater financial pain for hedge funds and other investors that purchased hundreds of billions of dollars in subprime mortgage backed securities over the past few years. Judge Boyko was unsparing in his disdain for the trustee’s argument that it be allowed to proceed without establishing ownership: “Plaintiff’s, ‘Judge, you just don’t understand how things work,’ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process. . . The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance.”
We will keep an eye out as to whether other courts choose to follow Judge Boyko’s precedent. The full decision can be read here.