Mortgage giant Freddie Mac's decision to foreclose on a Dayton-area house without having all the necessary paperwork could have implications across Ohio and possibly the country.
The state Supreme Court yesterday weighed whether a bank or mortgage company can file a foreclosure lawsuit in Ohio without having proof at the time that it actually holds the mortgage or note.
The practice is a byproduct of the real-estate boom days when loans were repackaged, bundled and sold off, resulting in sloppy paperwork and other problems.
Banks and mortgage arms such as Freddie Mac and Fannie Mae -- which undertook a flood of foreclosure filings when the economy went south -- often did so without having the proper documents on hand.
Typically in foreclosure proceedings, banks want to speed up what can be a costly process. Homeowners try to slow it down.
"We find these two interests in conflict in this case," Justice Robert R. Cupp said.
The high court is involved because Ohio appellate courts have issued conflicting decisions on whether a bank needs all the paperwork in order initially or can "catch up" by filing it before the judge rules.
Justice Yvette McGee Brown questioned why the high court should soften the requirement that a party have legal standing before filing suit, noting that banks are known to strictly enforce their own rules on customers.
"Why should this court find a more relaxed rule for Freddie Mac than Freddie Mac would otherwise give to its customers?" she asked.
McGee Brown later wondered why Freddie Mac simply did not wait to sue until it had the note and mortgage in hand.
"There was no urgency. The house wasn't simply going to get up and leave," she said.
In November 2006, Duane and Julie Schwartzwald bought a house in Xenia for $335,000, securing a $251,250 loan. After Duane Schwartzwald lost his job, they moved to Indiana for a new job and put their home on the market, according to a ruling from the 2nd District Court of Appeals that went against the couple.
They no longer could make the mortgage payments by early 2009 and spoke to Wells Fargo about a loan modification or short sale. They had a short-sale buyer, with the closing set for June 2009, but Freddie Mac filed a foreclosure suit in April.
In its suit, Freddie Mac said it was the "holder" of the promissory note but did not attach a copy of the note. It also said it had obtained an assignment of the mortgage but did not attach documentation of the assignment.
Those documents were not filed until later in the year.
Freddie Mac attorney Scott King said to have the legal right to sue, a plaintiff just needs to allege facts giving the court jurisdiction to rule. Down the line, he said, a bank can back up its suit with the necessary documents.
Andrew Engle, the Schwartzwalds' attorney, said "it's ironic that one of the biggest actors in the U.S. residential mortgage market is coming in and asking the court to loosen the standards, to deviate from what this court has repeatedly said."
The case -- which drew friend-of-the-court briefs from a host of legal-aid and homeowner-rights groups -- could have implications nationally because few state supreme courts have ruled on the issue.
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