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 note and foreclosure of the mortgage.

In the Schwartzwald case, Freddie Mac filed a complaint against the borrowers in an attempt to foreclose the mortgage on their house in Xenia, Ohio. The borrowers originally purchased a home in Xenia in November of 2006 using a loan issued by Legacy Mortgage, which loan was secured by a typical mortgage. Shortly thereafter, Legacy Mortgage assigned the note and the mortgage to Wells Fargo.  The borrowers fell behind in payments after one of the borrowers lost their job.  Although the borrowers were able to find another job out of state, the couple was unable to sell the property in question in Xenia, Ohio, and they subsequently defaulted on their loan.  Wells Fargo agreed to allow the home to be purchased in a short sale, but Freddie Mac filed a complaint seeking foreclosure of the mortgage on April 15, 2009, before the short sale closed.  Wells Fargo assigned the note and mortgage to Freddie Mac on May 15, 2009.

The trial court found that the borrowers had defaulted on the note and ordered that the property be sold.  The home was subsequently sold at a Sheriff’s sale in which Freddie Mac was the highest bidder.  Eventually the case was heard by the Supreme Court of Ohio, who determined that Freddie Mac did not have standing to sue the borrowers because it did not hold the note when the complaint was filed.  The Court also found that Wells Fargo’s eventual assignment of the note to Freddie Mac did not cure its initial lack of standing. In order for Freddie Mac to foreclose the mortgage, it will need to start the process from the beginning – by filing the complaint.