Defective Mortgages: Variations on a Theme

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Defective Mortgages: Variations on a Theme

Defective Mortgages: Variations on a Theme

Bankruptcy-RealEstate-Insights –

Harker v. PNC Mtg. Co. (In re Oakes), 581 B.R. 500 (6th Cir. B.A.P. 2018) –

A chapter 7 trustee sought to avoid a recorded mortgage with a defective acknowledgment using his strong arm powers. The bankruptcy court ruled in favor of the trustee, and the mortgagee appealed to the Bankruptcy Appellate Panel (BAP).

The consequences of a defective acknowledgment are determined in the first instance by state law. Typically, if a mortgage does not comply with recording requirements (such as being properly acknowledged), it should not be recorded. In many states, if a mortgage is nevertheless accepted and actually recorded, it will still be treated as though it is unrecorded and thus there will be no constructive notice of the mortgage to a purchaser. This in turn means that a bankruptcy trustee will likely be able to avoid the mortgage using the powers of a hypothetical bona fide purchaser of real estate that has perfected its interest.

Mortgages were routinely avoided in Ohio using this approach until the state statutes were amended to provide that the recording of a document “shall be constructive notice to the whole world of the existence and contents of [the document] as a public record and of any transaction referred to in the public record, including, but not limited to, any transfer, conveyance, or assignment reflected in that record.” As a result, under Ohio law as revised (which governs this case) if a mortgage is actually recorded, a bona fide real estate purchaser is no longer able to avoid the mortgage solely because execution or acknowledgment was defective.

[Bankruptcy-RealEstate-Insights]

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One Response to “Defective Mortgages: Variations on a Theme”

  1. Charles Reed says:

    This is something the FBI just does not understand that banks cannot fail to start the recording process, which is asking the State to allow MERS to join in so that non-judicial foreclosures can take place.

    You got a violation in the MERS system where they assigned title in the State of NE to Wells Fargo as if they purchased debt from a correspondent bank that 6yrs prior sold the debt to Washington Mutual Bank (WaMu). However as the original Deed of Trust was defective because it was delivered and recorded after the bank has sold the loan and did not after the fact the ability to approach the court as it had no financial interest in the debt.

    WaMu knew the recording was defective and never in 6yrs submitted an Assignment of that Document because it was a violation of the law. WaMu knew it still had a valid Note however it had already put the loan into their Ginnie Mae MBS and did not ever again possess the Note because it was signed and endorsed in blank taking away the ability for them to act.

    WaMu at best had a non-secure loan and whether or not they could ever collect on the debt is a question, but what, not a question is when the bank was declared a “failed bank”it did not nor FDIC, Ginnie or Wells could approach the court to call the debt due as there was not a party that could present proof of purchase under UCC9!

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