Homeowners can stop foreclosed houses by demanding any entity foreclosing on their mortgages to show the original mortgage notes.
In judicial foreclosure states like New York and Florida, homeowners can delay foreclosure proceedings by filing in court a legal request to advise lenders to show original mortgage notes before proceeding with foreclosures.
Because of the modern practice of packaging mortgages into securities for sale to securities investors, lenders now cannot show the original mortgage papers easily. This gives time to distressed borrowers to find money to update their accounts before foreclosure actions are pursued.
There are also many cases where the original mortgage notes cannot be located, giving more flexibility to troubled borrowers. In October 2007, 14 foreclosure cases filed in Ohio were dismissed because the investors who filed the cases could not show original mortgage notes.
The courts cannot proceed with foreclosure if the original mortgage notes are not produced because the law requires entities filing foreclosure cases to submit signed original mortgage documents. These are available at local courthouses, but oftentimes these cannot be found because they are already sold and securitized.
Strict judges and consumer advocates are now using the mortgage documentation argument to stop foreclosed houses. In Florida, Jacksonville lawyer April Charney has been asking lenders to prove they own the loans before they can proceed with the foreclosures.
Additionally, some national and state legislators are now crafting laws to prohibit foreclosures in cases where the lenders or investors cannot show the original mortgage notes and cannot prove that they own the mortgages.
For many homeowners, however, it would not be easy demanding lenders, servicers and investors to produce original mortgage notes before they foreclose because many states are non-judicial foreclosure states.
In these non-judicial states, lenders can foreclose without going through the courts. In the original home purchase contract, there is a clause which allows the lender to proceed with foreclosure to sell the property if the borrower is unable to pay the loan at due dates.
What the lender does is just to send the delinquent borrower with notices of default, foreclosure and sale, as described in the contract that the borrower has signed.
Nonetheless, borrowers in non-judicial states can still make use of the mortgage documentation argument as a way to stop foreclosed houses by filing a lawsuit to force the lenders to produce original mortgage notes or to force the investors to show proofs that they own the mortgage note.