Student Scholarship: Unintended Effects and Inadequate Consumer Benefit: Analyzing Federal Home Loan Mortgage Corp. v. Schwartzwald.

In  Federal Home Loan Mortgage Corp. v. Schwartzwald2012-Ohio-5017. a case in which the mortgage company did not own the note or mortgage at the time suit was filed, the Supreme Court of Ohio held that a plaintiff’s standing must be determined at the time suit is filed, because standing is necessary to invoke the jurisdiction of the common pleas court. Lack of standing cannot be corrected before the entry of judgment. Since the mortgage company did not own the paper at the time this suit was filed, it had not suffered any injury, so it did not have standing to bring suit. Read the analysis of the decision here.

Jennifer Dollard, a third year law student at the University of Cincinnati College of Law, and an associate member of the Law Review, has written a casenote  titled “Unintended Effects and Inadequate Consumer Benefit: Analyzing Federal Home Loan Mortgage Corp. v. Schwartzwald,” 82 U. Cin. L. Rev. 1247 (2014).  What follows is a summary of Dollard’s article. You can (and should!) read the entire casenote here. After graduation Dollard will be joining the Cincinnati office of Faruki Ireland & Cox.

This article was written before the Ohio high court’s decision in Bank of Am., N.A. v. Kuchta, 2014-Ohio-4275, which held that although standing is required in order to invoke the jurisdiction of the court of common pleas over a particular action, lack of standing does not affect the subject-matter jurisdiction of the court, and also that when a defendant fails to appeal from a trial court’s judgment in a foreclosure action, a lack of standing cannot be raised as part of a motion for a relief from judgment

Casenote Summary

The Schwartzwald decision brought with it ambiguities which have resulted in unintended consequences, arguably harming consumers and courts more than the intended targets of the opinion. In order to remedy the harm created by the decision while keeping its underlying purpose, further action is required by both the legislature and the judiciary.

The courts, consumer purchasers of foreclosed homes, banks and their investors, as well as the foreclosed-on homeowners have experienced hardship due to the decision. For courts, questions about past foreclosures now occupy docket space that is already clogged with pending foreclosures. This issue of questioning past foreclosures was at the heart of the Kuchta decision, where the foreclosed homeowners tried to collaterally attack standing in their foreclosure action via a 60(B) motion. In addition, problems with the Schwartzwald decision has led to trial courts haphazardly applying it, thus creating splits with the inconsistent application.

Innocent third party purchasers are the  group most negatively affected by the Schwartzwald decision. Where a foreclosure judgment is later found to be void, arguably the subsequent sales of the property are as well. The purchaser at sale did not take good title and cannot convey good title to a future purchaser. Although Ohio has a statute that appears to protect innocent third party purchases, the provision is silent as to void judgments.

The banks and investors have suffered hardship as well. Disputes regarding the actual default of the borrower prior to foreclosure are rare, and it used to be a typical practice for banks to initiate a foreclosure action without having the requisite paperwork in hand. Nevertheless, the industry-wide mistake that banks have made in attempting to foreclose before the actual assignment of the note and mortgage will now cost them a large amount of time and money. Each time an otherwise valid foreclosure action is dismissed and forced into re-filing, the attorneys’ fees, filing fees, and hours spent on that action increase dramatically.

Even though the heart of the Schwartzwald decision was the desire to stand up for the victims of the subprime mortgage crisis, it was not without harmful effects. The most common occurrence after a successful show-me-the-note defense is the bank re-filing the foreclosure action. The defaulting homeowner cannot normally afford the time and effort it takes to defend a foreclosure. Therefore, the bank is typically successful in the second action, which may come as a disappointing surprise to those bringing the show-me-the-note defense in the first place.

In order to remedy the harmful, unintended effects of the Schwartzwald decision while also upholding its purpose, the standard should be modified. The Ohio judiciary should amend the pleading requirements for foreclosure actions to provide for more uniformity. In addition, the Ohio Legislature should clarify the requirements an entity must satisfy to enforce a mortgage loan, and amend its bona fide purchaser statute to protect innocent third party purchasers affected by clouded title because of Schwartzwald issues.


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2 Responses to Student Scholarship: Unintended Effects and Inadequate Consumer Benefit: Analyzing Federal Home Loan Mortgage Corp. v. Schwartzwald.

  1. Richard Davet says:

    “However, it became an industry-wide practice in Ohio for The Enterprises and other large-scale banks to bring a foreclosure action before actually acquiring the official endorsement of the mortgage or promissory note. These practices lead to increased foreclosure litigation featuring the show-me-the-note defense.”

    As one being accused by several as the father of the show-me-the-note defense, let me share with your readership the logic behind the effort.

    As a business person who worked with accounts receivable for years when I was personally hit with a foreclosure action in 1996. The Plaintiff, Nationsbanc Mortgage Corp. (nka Bank of America (BAC)) sued me as “owner and holder” of my mortgage. From my long time experience in business accounts receivable, I simply knew that that the owner of the debt had to be in court in order to collect. Long story short, BAC fraudulently invoked the jurisdiction of the Cuyahoga County Court of Common Pleas by claiming to be the owner and holder.

    Years later Eighth District Court of Appeals judge Sean Gallagher said in court “we know Davet has been far ahead of us (Eighth District) on this foreclosure thing, however, what do we do with this thing?”

    I bring this up as a result of this post which may mislead some as to the fundamental reasoning gone askew in the foreclosure debacle. MA Judge Keith Long of Ibanez, Bevelaqua cases lamented as to the loss of the foreclosure tool as a result of the financial institutions misuse in recent years.

    People should be aware that the mortgage industry was hijacked some 20 odd years preceding the crisis with the privatization and roll out of the GSE Business Model. I was told a long time ago by a lawyer friend of mine that lawyers have little business sense due to inexperience in the area. Business logic told me that the jet fuel inserted into the GSE Business Model was the government guarantee that propelled the Model into the stratosphere. Without the “guarantee” the entire Model would have gone nowhere.

    Every creditable scholar on the subject calls the GSE Business Model “fatally flawed” and “simply does not work”. The fact that the GSE Business Model funds the vast majority of mortgages is indeed the elephant in the room.

    I for one would like to see Ms. Dollard’s Casenote to be amended to include the fact that the “GSE Business Model was/is “fatally flawed” with its shortcomings all wrought by financial institutions partnering in that Model that included the fact that only in the case of an implosion would the taxpayers need to be tapped.

    We have very good laws. We do not need legislation to support what all agree to be a “fatally flawed” Model. To do so would be to support the wrongdoing…..indeed a slippery slope.

  2. Going through a financial hardship does not give a bank the right to walk all over you. Missing a payment because you lost a job, your spouse died, or you suffered some debilitating injury does not mean you forfeit your right to hold the foreclosing bank to its standard of proof. Our judicial system is not about “the ends justifying the means,” or looking to concerns about title issues years later to justify the glazing over of a bank’s obligation to bring a lawsuit based on an actual obligation that it has rights to enforce. If the bank can’t prove it has rights at filing, then that is the bank’s fault – not that of the consumer.

    Too frequently people forget that the judicial system is about a process where one side presents evidence and the other side tests it. In this case, if a bank cannot prove its standing at filing, then it has only itself to blame. Consumers facing foreclosure have too much to worry about in their lives to lay at their feet the future title issues banks face due to their own negligence.

    My comment belies the significant hardships and devastation that people going through foreclosure experience, and how little the banks have helped those who are doing everything they can to get back on track. Any suggestion that it is just “too bad” for the little guy who missed a payment demonstrates a lack of understanding and empathy for those facing this kind of hardship, as well as the concept that the rules should apply to everyone – even the big banks.


    Troy Doucet, Esq.

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