Judge Halts Foreclosures

Says banks must prove they hold mortgages

BY GREGORY KORTE | GKORTE@ENQUIRER.COM

Gloria Byrd, a 66-year-old former Methodist minister with a ballooning adjustable-rate mortgage and a fixed retirement income, was typical of the more than 8,000 local homeowners who faced a foreclosure lawsuit this year.

Until she and her husband, Ellsworth, won.

Last week, a Hamilton County Common Pleas Court judge ruled that Wells Fargo Bank couldn't foreclose on the Byrds' North College Hill home because its lawyers didn't prove that Wells Fargo was the legal owner of the mortgage.

• Foreclosure's Fallout

The judge said the foreclosure lawsuit was filed before Wells Fargo owned the mortgage - thus, the suit was premature.

The ruling - the first of its kind by a state court judge in Ohio since the subprime mortgage crisis erupted this year - could have profound implications on how foreclosures are handled in Ohio, which leads the nation in the percentage of mortgages in foreclosure. The local ruling comes as three federal court judges - in Cleveland, Dayton and Columbus - have issued similar opinions in foreclosure cases in the last month.

In one opinion, a federal judge in Cleveland sought to reverse what he called "a quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process."

Ohio Attorney General Marc Dann has already seized on that decision in an effort to slow foreclosure filings throughout the state.

He filed motions Friday in seven Hamilton County cases - and several more in Butler, Montgomery, Franklin and Delaware counties - asking judges to scrutinize each foreclosure case.

The issue is known as the "real party in interest" rule, which says that a plaintiff must prove that it has a stake in a lawsuit in order to file it.

As millions of subprime mortgages are sold and resold on Wall Street, the real "party in interest" isn't always obvious. Often, the holder of the mortgage note - the legal document that gives a lender the right to take someone's home for not making loan payments - is different from the servicing company, or the bank that takes the mortgage payments.

It's unclear how far-reaching the effect of the orders will be. But a recent analysis by University of Iowa law professor Katherine M. Porter found that 40 percent of the 1,733 foreclosures she studied did not contain proof that the plaintiff owned the mortgage.

Kevin R. Flynn, a lawyer who teaches real estate law at the University of Cincinnati College of Law, said, "If I were a defendant in a foreclosure action, that's the first thing I'd raise."

Though the banks might be guilty of taking shortcuts, in most cases, it's not hard to prove that they own the mortgage, he said.

"As a practical matter, the people aren't paying on their notes. I really do think this is a paperwork issue. It's going to delay things. And it's going to make the lawsuit more expensive. What I've seen recently is with these out-of-town lenders - these trustees of trusts who are so far removed from the original mortgage - they're not interested in making that deal to renegotiate the mortgage. So I'm glad the attorney general's office is forcing the issue."

Take Byrd's case. She said she didn't even know Wells Fargo had bought her mortgage until it filed the foreclosure action in January. Her original mortgage was with Countrywide.

"If Countrywide had told me that my mortgage was sold to Wells Fargo, I would have known who to call to straighten this out," she said.

Byrd's story is not uncommon: She got an adjustable-rate loan when she bought her $67,000 house in 2005. The interest rate started at 9.5 percent, or $487 a month -- Byrd admits that she did not have good credit - and reset this year. Her payment is now $842 a month, at 12.287 percent.

But the real trouble came when she had a plumbing problem last year and had to spend $2,000 in repairs.

She said in a sworn statement that she had agreed to repayment terms with Countrywide and was following the plan even as Wells Fargo filed suit.

The vast majority of homeowners in foreclosure do not contest it - moving out of the property even before the proceedings are completed. Not Byrd.

"When Wells Fargo did this, I said: 'Wait a minute. I can't always be the one in the wrong. There's something stinking here.'

"I thought to myself, 'I've got to fight this. I've got to fight this for all those who are afraid and stand up with this,' " said Byrd, who lives on $1,400 a month in Social Security and a small pension. "I couldn't lose this house. It was the only thing we had. It's small. It's not a big place. We don't live on steak and champagne."

Byrd's legal aid lawyer, Noel Morgan, demanded that Wells Fargo prove that it owned the mortgage. The bank did - two months after filing the lawsuit.

"It is troubling that the plaintiff has filed this case before it had any interest in it," Hamilton County Common Pleas Judge Steven E. Martin said in a letter to Wells Fargo's lawyer.

Martin then took the unusual step of ordering that the bank's law firm must file proof that its clients actually own the mortgages before filing any new foreclosure actions in Hamilton County.

That firm, the Law Offices of John D. Clunk, based in Hudson, Ohio - is the third-largest filer of foreclosure actions in Hamilton County, with 48 properties scheduled for foreclosure sales in the next six weeks.

The Ohio Attorney General has now put this same issue before a number of other judges.

"We're hoping that judges will stop and take a closer look at these pleadings," said Nadine Ballard, the chief of the attorney general's Consumer Protection Section.

The issue is more than just a technicality, she said. Some of the same financial institutions rushing to the courthouse to seize mortgaged property are also claiming that they don't own those abandoned buildings when served with a tax bill or building-code violations.

"They can't have it both ways here," Ballard said.