Court-Appointed Trustees' Search For Faulty Mortgage Loan Documentation Threatens To Leave Lenders Holding The Bag In Consumer Bankruptcy Cases

Buried at the end of a recent story in The Arizona Republic is this excerpt on the aggressiveness of court-appointed trustees in their attempt to void the mortgages on homes owned by individuals filing for Federal bankruptcy protection:

• Faulty deeds that open doors to trustees. As some debtors and creditors are learning, court-appointed trustees, especially in Chapter 7 cases, can be quite aggressive in trying to collect money. Some even look for defects in mortgage paperwork that could allow them to push their claim ahead of a lender's.

• Suppose a person buys a home, stays current on the payments but files for bankruptcy protection. "The trustee can look at all the purchase documentation for problems," [Tucson attorney Daniel J.] Rylander said, citing issues like an insufficient number of witnesses or errors in notarized signatures.

• "Keep in mind the mortgage industry had been insanely busy (during the boom)," he said, so plenty of title companies probably made paperwork errors. In fact, the lender, who would seek permission from a judge to complete a trustee sale, might not even be able to find the original paperwork, perhaps because the note has been sold several times, Nussbaum said.

• "If the lender can't prove its claim, the trustee has an interest in a home that might not have a lien against it," he said. Homeowners usually aren't aware of this and might wind up living free in the property for a while. But they also could see the dwelling sold out from under them if they file for bankruptcy protection.

• "If there's no valid loan, the trustee could just sell the home," [Scottsdale attorney Randy] Nussbaum said. Needless to say, all this can cause quite a surprise. "This is a very scary topic," Rylander said, adding that it also could apply to car loans with faulty paperwork.(1)

For the story, see Attorneys finding vexing issues in bankruptcy cases.

(1) I wonder how this plays out in states like Florida and Texas, where an invalidation of a mortgage that leaves the bank with an unsecured loan, coupled with homeowners' protections under each state's homestead exemption laws that are unlimited as to dollar value, could ostensibly leave a homeowner emerging from bankruptcy with a house unencumbered by a mortgage and an unsecured home loan that gets discharged through the bankruptcy court proceedings.