I know how popular this topic is, so I wanted to devote a bit of insight on a discrete thread.
In California, there are a handful of lawyers doing nothing but fighting the banks over the fraud and predatory lending that went on during the bubble. Most of these hardy attorneys work for legal aid organizations, and are dedicated to the core. There are also private lawyers who are exceptionally bright, and who also do this work, with a specialty in doing appellate issues.
One such attorney has taken a most interesting position. This attorney has focused squarely upon a narrow issue: to whom does the borrower owe the monthly payments? Real simple, huh? You would think, but not so fast . . .
California does not use the term "mortgage." Instead, there is the term Deed of Trust. Don't get hung up on the jargon. The concept is the same. The borrower signs the dotted line, promising to repay the lender. The lender wants collateral for the promise to pay back the loan, so the lender takes a security interest in the real property. Some states call it a lien, mortgage, whatnot. Remember the concept is simple: borrower either pays as agreed, or the bank takes the collateral, and that is that.
So, now we have the interesting situation where it is not the neighborhood bank that takes back the house from the deadbeat who defaults on the loan payments. Now, we have securitization. Original lender lends money, then transfers the right to be paid back to someone else, who then pools thousands of these rights to be paid back, into a single security, then sells the security to investors. The entity which collects the monthly payments from the borrower, and then sends the payments on to the proper investors, is called the "servicer." The problem is, that the original lender never provided the borrower with any proof that the loan was assigned. Instead, the original lender just tells the borrower to "send your payments to xxxxx."
Well, who is xxx? Why do they get the money? In California, the borrower has the right to demand that the lender provide such proof.
What happened in one case, this attorney filed a declaratory relief action (a lawsuit). The borrower was current on the payments, but just wanted to know to whom were the payments really owed? This makes sense, since what if someone came in later and said they never got paid?
The attorney asked the court to enforce that provision of California law, requiring the lender to provide the documents proving to whom the monthly payments are owed. The bank cried foul, and said no way. The court then threw out the lawsuit, claiming that since there was no foreclosure action, since the borrower was current on all payments, the court had no authority to force the "servicer" to prove that it was entitled to collect the monthly payments.
This case is now on appeal. In the reply to this post, are the Appellants Opening Brief, and the Reply Brief. This paints a very clear picture of the case, the issue, and the arguments. It is a VERY interesting case, one seemingly impossibly simple, yet profoundly significant since if the borrower wins the case, the servicer has to provide documents showing that the original note was properly assigned. We all know they can't do that in millions of cases (robosigners, remember), so if this one little, tiny, insignificant borrower wins this case, then there will be a clear, simplified process to challenge EVERY SINGLE MORTGAGE IN CALIFORNIA. Holy mother of job security (for lawyers, that is)!!!!
Anyhow, let's see what shakes out. The Court of Appeal is very slow. It takes around a year or so for the decision to come down. If the borrower loses, oh well, since it does not change the dynamic, it only eliminates a possible streamlined method to challenge a mortgage. Stay tuned!