COURT RULING COULD HAVE BROAD IMPACT ON FORECLOSURES – Banks Must First Prove Ownership At Filing Of Lawsuit

By Lou Grieco Staff Writer Dayton Daily News
A unanimous Ohio Supreme Court ruling that invalidated the foreclosure of a Xenia couple’s home could have broader implications, effecting hundreds, if not thousands of closed cases across the Dayton region, according to local real estate attorneys.
“I think it’s going to be monumental,” said Randall Smith, staff attorney for the Miami Valley Fair Housing Center. “It’s now going to require lenders to be responsible.”
For years, the standard practice across Ohio and other states has allowed lenders to file foreclosures even if they don’t have the proper paperwork in order — and can’t show that they own the property, according MVFHC Executive director Jim McCarthy. With mortgages being repackaged and resold repeatedly, the process has become sloppier and harder to track. But local courts have allowed the lawsuits to go forward, with the understanding that the proper paperwork will eventually catch up with those lawsuits.
“We, as consumer advocates, have been arguing that its improper, all along,” McCarthy said. “Just fundamentally, that sounds wrong.”
On Oct. 31, the Ohio Supreme Court agreed, ruling that a party’s standing to initiate a mortgage foreclosure lawsuit is determined at the time of the filing — meaning that if the lender did not have proper paperwork to show ownership at the time of filing, that lawsuit can be voided.
It’s unclear what the exact impact will be, and attorneys are trying to determine that. McCarthy called that “the multi-million dollar question.”
Montgomery County has seen 5,000 mortgages filed annually since 2003, and the MCFHC has handled about 600 per year. Smith and McCarthy estimated that, in one third of those, the proper paperwork was not filed with the original complaint.
“Up until now, lenders have had carte blanche,” Smith said.
The underlying case involves Duane and Julie Schwartzwald, who bought a house in Xenia in November 2006, receiving a $251,250 mortgage loan from Legacy mortgage. The promissory note was made payable to Wells Fargo Bank.
In Sepember 2008, Duane Schwartzwald lost his job and the couple moved to Indiana so that he could accept a new position. They continued to make mortgage payments as they tried to sell the Xenia house, but they went into default on Jan. 1, 2009, according to the Supreme Court’s decision.
Two months later, Wells Fargo agreed to list the property for a short sale, and on April 8, 2009, the Schwartzwalds entered into a contract to sell it for $259,900. Closing was set for June 8, 2009.
But on April 15, the Federal Home Loan Mortgage Corporation, known commonly as Freddie Mac, filed for foreclosure, stating that the Schwartzwalds had defaulted. Freddie Mac attorneys attached a copy of the mortgage, but not a promissory note, stating “a copy of (the note) is currently unavailable.”
Wells Fargo did assign the note to Freddie Mac on May 17 and Freddie Mac’s attorneys filed it with the court on June 17.
This process jeopardized and eventually destroyed the Schwartzwalds’ short sale agreement, as repeated delays caused the buyer to rescind the offer, according to the court’s decision.
Eventually, Greene County Common Pleas Judge Stephen Wolaver found in Freddie Mac’s favor, and the Ohio 2nd District Court of Appeals agreed. But, because those decisions conflicted with some in other appeals court districts, the Supreme Court agreed to hear the case.
“Here, it is undisputed that Federal Home Loan did not have standing at the time it commenced this foreclosure action,” Justice Terrence O’Donnell wrote in the Oct. 31 decision, which over-ruled the appeals court and caused dismissal of Freddie Mac’s case.
“This is kind of ‘first-year law school stuff,’” said attorney Andrew Engel, who represented the Schwartzwalds, who said the lenders took a “file first, clean up the paperwork later” approach unheard of in other civil actions.
But the result of this decision is that people who lost their homes in a foreclosure case the original complaint did not have the proper ownership documents could re-open those cases, Engel said. If the lenders still own the homes, those people might have a chance to get them back. It could be more complicated should the lenders have sold those properties.
“Potentially, it does open up some problems with land titles,” Engel said.
Engel said he is unsure of what will happen with the Schwartzwald case, but that he will be doing a lot of legal research to determine the next step. Freddie Mac purchased the house at sheriff’s sale, but then sold it.
“I’m going to be going into uncharted waters,” Engel said. “There are many unsettled questions.”
But Smith said that there may be some “bona fide purchaser protections” that would help innocent parties who purchased those properties in good faith.
“I’m don’t know how that is going to play out,” Smith said.
Jonathan Hung, an attorney with Green and Green who is vice chair of the Dayton Bar Association’s Real Property Committee Committee, called the high court’s ruling “a really important holding” with “a lot of wide-ranging ramifications.” But he said he doubted it would impact people who had already lost their homes, in part because, if the lawsuits were voided, the lenders could always re-file.
But the ruling would definitely improve the due process rights of home owners in future actions, Hung said.
“It does clarify the law,” Hung said. “It does more to protect people going forward.”

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