New rule says banks must prove ownership before foreclosing

Foreclosure filings have backed off this year compared to 2009, but it may not be a brightening economy causing the decline.

A new Florida Supreme Court rule requires lenders to verify they are the actual owners of a home before making the initial case for foreclosure.

Show me the “note,” in other words.

The problem is the notes — legal promises from borrowers to repay a debt — have been sold and resold, bundled into securities, scanned into computers, sealed in unknown vaults and lost in various other ways as homes got caught up in the puzzling markets of the real estate boom.

“The original note is something very significant, and they just seem to have lost thousands of them,” said Boca Raton attorney Marlyn Wiener, who handles real estate cases. “Nobody knows where the stuff is.”

The new rule was approved in February with the intention of unclogging the foreclosure courts, which have an estimated statewide backlog of 500,000 cases. It also gives judges power to sanction plaintiffs who make false accusations on the ownership of notes, or missing notes.

Law firms handling the foreclosure overload, sometimes called foreclosure mills, have routinely filed a “lost note” claim with the original default notice, regardless of whether they looked for the note, said Miami-Dade Circuit Court Judge Jennifer Bailey.

The legal move gives lenders a statutory out if the original note truly can’t be located. When asked what efforts were made to find the note, however, such excuses as “searched file cabinet” and “searched fire proof safe” have appeared on several court records.

“It was very confusing. How can you foreclose on the note if the note is lost?” Bailey said. “The judges would be trying to track the note and they’re saying they own it, but don’t have it and don’t know where it is.”

But if a borrower didn’t protest the foreclosure, the cases often sailed through.

Judges were also finding, according to a statewide foreclosure task force that recommended the verification rule, that two different lenders would sometimes file suit on the same note at the same time because it wasn’t clear who the true owner was.

Defense attorneys, too, got keyed in on the lost note strategy, challenging the veracity of a lender’s claim to a home, and further stalling the process.

“There was just an abuse of the lost note statute,” said Scott Hast, an attorney with LaBovick & LaBovick, which has offices in Jupiter and West Palm Beach.

Hast said at least half of his foreclosure defense cases include lender pleas of lost notes. He almost always asks for evidence of the original document.

“They can say it’s a stalling tactic, but how can I not defend my client and seek out every route in his defense?” Hast said.

“Now the courts are saying you have to do your due diligence before filing,” he added.

Anthony DiMarco, executive vice president for government affairs for the Florida Bankers Association, said he doesn’t believe the new rule is causing the slowdown.

He attributes it more to an increase in loan modification workouts between borrowers and banks, and banks’ increased willingness to approve short sales.

It is another hoop for banks to jump through, he acknowledged, but something that was supposed to be happening all along.

Bailey, who was on the foreclosure task force, said the rule wasn’t needed before the real estate boom when home loans were more straightforward and foreclosures fewer.

“There’s some weird stuff going on,” she said.