On Halloween, the Supreme Court of Ohio issued a ruling that should scare lenders who do not do their own due diligence before filing a foreclosure action, particularly with respect to loans pooled into mortgage-backed securities, or that have otherwise been assigned one or more times from the originator of the loan.
The Court, in Federal Home Loan Mortgage Corporate v. Schwartzwald, 2012-Ohio-5017, found that Freddie Mac had no standing to commence a foreclosure action against the debtors’ property because Freddie Mac did not hold the note at the time its complaint was filed, despite the fact that it became the holder of the note by the time the Court considered the case. Basing its decision on U.S. Supreme Court precedent, as well as similar decisions in other jurisdictions, the Supreme Court of Ohio ruled that standing is determined as of the time the complaint is filed, without regard to subsequent events. Consequently, Freddie Mac’s complaint was dismissed, with leave to refile the complaint at a later time.
What the Schwartzwald case means for lenders is potentially significant delays in obtaining judgment against debtors because although a lender may refile a complaint once it holds the note, the original suit must first be dismissed and the entire process must begin anew. Furthermore, refiling is expensive because it means paying court fees and legal counsel twice. Luckily, a lender can avoid these pitfalls by making sure it actually holds the note and mortgage prior to filing a complaint seeking judgment on that …
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