But what about when truth becomes fiction?
It can make for great entertainment, of course. In a Dan Brown novel, all of a sudden the history we thought we knew is turned upside down. Or how about “The Matrix,” when Neo discovers that most human beings are living out their lives in a giant computer program?
When that sort of thing happens in real life, however — as it has in the wake of the Ohio Supreme Court’s ruling on Federal Home Loan Mortgage Corp. v. Schwartzwald — the entertainment value goes down considerably. And unlike Neo, those of us in the real estate industry who are affected by this don’t have the option of simply taking a blue pill to make the whole mess go away.
For those unfamiliar with the case, it involved the Schwartzwalds in southern Ohio, who had lost their jobs and were negotiating a short sale with their bank. As often happens with big companies, one hand didn’t know what the other was doing, and at some point during the negotiations, the Federal Home Loan Mortgage Corporation (Freddie Mac), which had bought their loan, filed a foreclosure on the Schwartzwalds before they were able to get an agreement on the short sale.
“What’s so earth-shattering about that?” you may be asking.
Well, here’s where it gets interesting. One of the things lenders really did a bad job of for a long, long time, especially when things were so busy in the mid-2000s, was filing the proper documents to assign mortgages and notes to a new servicer. Most conventional loans, of course, are usually sold to an investor — Freddie Mac, Fannie Mae, another lender — and in the process, they’re supposed to file an assignment of mortgage in the County Recorder’s office showing that the original mortgage is now owned by that new investor. The note is endorsed over to the new owner as well.
In the Schwartzwald case, it turns out, this hadn’t been done until later — there was no proof that Freddie Mac actually owned the mortgage and note when it filed the action for foreclosure.
Initially, both the common pleas court and appellate court sided with Freddie Mac in the case. But on October 31, 2012, the Ohio Supreme Court ruled that Freddie Mac did not have standing, meaning that it hadn’t proven at the moment it filed its complaint for foreclosure that it had ownership of the note in question, or that the lender had assigned it the mortgage.
And down the rabbit hole we go.
The problem with this case, at least for our industry right now, is that the court didn’t say, “This only applies to foreclosures from this date forward.” As a result, real estate professionals are left asking, “Wait a minute, did the court just void every foreclosure that’s ever happened in the state of Ohio where the lender didn’t have an assignment of mortgage filed in the County Recorder’s office?”
This is significant, because I’d venture to guess that, especially during the heyday of lending in the 1990s and 2000s, 50 percent of all mortgages weren’t properly assigned to the current servicer or bank. That means we could have — probably do have — many foreclosures that are currently, as of today, void. What was once true becomes complete fiction. It’s like a foreclosure of foreclosures.
But that’s not all. We also haven’t been told whether — in situations where a lack of an assignment of mortgage has voided a foreclosure — the court’s ruling voids all subsequent ownership of a foreclosed property. If a foreclosure in 1985 is deemed void, does that in turn void the ownership interest of all the people who may have bought the property afterward?
In closing —
How this shakes out is anyone’s guess. We’re currently hoping that the Supreme Court authorizes another case that can tell us a little bit more information, and that it doesn’t apply all the way back to the beginning of time to any and all foreclosures. It’s hard to imagine that purchasers for value who had no idea that there was a faulty foreclosure in their property’s past will simply be told that they don’t own their property anymore.
In any case, it’s just another example of the usefulness of having a title agent in your corner. We’re really the protector of the records here in Ohio. We’re constantly going through them, constantly finding errors and correcting them, and when we get a case like Federal Home Loan Mortgage Corp. v. Schwartzwald dropped in our laps, it’s our job to locate these Schwartzwald-type foreclosures and find a way to go back and cure them.
Whatever happens, just be aware that we’re keeping an eye on the situation and will let readers know whenever any new developments occur.
And that’s the truth.
- Scott Stevenson
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