In the world of mortgage lending, a lender provides money to a borrower based on the borrower's promise to repay the money. That promise is backed by a security interest on the borrower's real estate--generally the borrower's primary residence. When a borrower fails to keep his or her promise, the lender usually has the right to enforce its security interest and foreclose on the property. [??] In the case of judicial foreclosures, this means that a lender has the right to take the borrower to court in order to foreclose on the property and take ownership of the real estate. If a lender sells or assigns the mortgage, then the purchaser or assignee of the mortgage takes the place of the lender with regard to the right to receive payment from the borrower or, if necessary, enforce the security interest and foreclose on the property. [??] Usually, when a lender or assignee of a mortgage seeks to foreclose on a property, it files a complaint in the state court best suited to hear the claim. Often, this means filing a foreclosure action in the county court where the real estate in question is located. [??] Because foreclosures on real estate involve state law, state courts are usually the best forum for litigating this issue. However, in recent years, attorneys for lenders and assignees have increasingly filed foreclosures in federal district courts, generally as a way to avoid the lengthy process involved with foreclosing on mortgages in overburdened county court systems.
Unfortunately, when filing a foreclosure in a federal court, the parties to the case are required to abide by federal court rules--which, in some ways, can be less forgiving than state courts with regard to procedural issues, including issues such as standing. This issue became paramount last year in a series of case dismissals out of two federal courts in Ohio.
Ohio federal district court dismissals
On Oct. 10, 2007, Judge Christopher Boyko of the U.S. District Court for the Northern District of Ohio ordered the plaintiffs in a number of foreclosure cases before the court to prove that they had been assigned the mortgages in question as of the date the foreclosure complaints were filed. Several weeks later, after the plaintiffs failed to prove that they had been assigned a number of the mortgages in question before filing the complaints, Boyko issued a scathing ruling dismissing those foreclosure claims. In his final footnote to the order dismissing the foreclosures, Boyko stated that the "jurisdictional integrity of the United States District Court" was priceless.
Quickly following suit, on Nov. 14, 2007, Judge Kathleen O'Malley, a judge in the same district court, dismissed a number of foreclosure cases for the same reasons. The following day, Judge Thomas Rose of the U.S. District Court for the Southern District of Ohio dismissed a number of foreclosure cases on similar grounds, citing Boyko's statement regarding jurisdictional integrity.
These holdings immediately sent shockwaves throughout the mortgage industry. Several newspapers wrote articles trumpeting the holdings, while consumer-advocacy groups began arguing that the holdings marked a new day in the battle between lenders and borrowers. While it might be easy to argue the pros and cons of the courts' actions in sound bites, the reality of the situation is far more intricate.
The issues being raised in the federal district courts in Ohio stem from the practice of making mortgage loans and then selling those loans on the secondary market. Once loans are sold on the secondary market, often to government-sponsored enterprises (GSEs) such as Fannie Mae or Freddie Mac, those loans are generally bundled or pooled together into one entity that issues securities backed by the loans--mortgage-backed securities (MBS). The mortgage-backed securities are then sold to investors. Each bundle or pool of loans is generally managed by a trustee who ensures that when borrowers pay their mortgages, each investor receives a proportionate share of the received funds. …