Surprise Ruling by Southern District of New York
Justice Department, Monitor of Nation’s Bankruptcy Courts, Takes Notice

Borrowers are getting the opportunity to turn the tables on bank creditors. The recent financial engineering and resulting financial instruments required by the securitization of mortgages has created a defense to the lenders attempting to foreclose on those defaulting borrowers.

On Oct. 9 in federal bankruptcy court in the Southern District of New York. A judge ruled that a alleged lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order. If the lender can’t come forward with proof of ownership, then borrowers may have a stronger argument in court and, may even be able to stay in their homes mortgage-free.

Securitizations allowed for large pools of bank loans to be bundled and sold to legions of investors, but some of the nuts and bolts of the mortgage game — notes, for example — were never adequately tracked or recorded during the boom. In some cases, that means nobody truly knows who owns what. Click here to learn more.