produce the note

If you need to be amazed and bewildered by the complexity (and stupidity) of the lending business, look no further than the “produce the note” phenomenon. This post may seem different from my usual focus, but I thought it was worth mentioning:

from Action News 6 in Philadelphia (italics and bold fonts are mine – Steve):

“I filed the produce the note and I haven’t heard a word from anybody.”

Kathy learned of the delay tactic from a website called the Consumer Warning Network. On it, attorney Chris Hoyer explains the strategy.

“There was an original iou, an original promissory note that you signed make them produce the original. We’re hearing now that they’re having difficulty doing it,” Hoyer said.

And that goes to the heart of the foreclosure crisis. During the real estate boom, the original note signed by the homeowner may have been lost, trashed, or stored elsewhere, in part because it exchanged hands so many times.

“They would take your debt, package it up with other debt, sell it, resell it, resell it again, put it in a bundle and sell it to investors telling them it was really good stuff. Now the really good stuff is exploding,” Hoyer said.

A lender’s inability to produce the note may force it to modify a mortgage so it’s more affordable. It may also give homeowners time to find a job so they can make payments again. This out of work real estate agent hopes either way the “produce the note” strategy will be her saving grace, too.

“I am requesting the mortgage company give me a copy or provide me proof of the original note that I signed. If they can’t prove I owe them, why should I pay them?”

Talk about an ethical conundrum. I agree, first of all, that if you have a legal system that requires that the mortgage company be able to produce a copy of the note, and they can’t, then the homeowner doesn’t have any legal reason or obligation to pay.  We throw any concept of honor (i.e. paying one’s debts) out the window due to legalese, of course.  I sympathize, because if the situations were reversed I am sure the mortgage company would dot the i’s and cross the t’s without mercy.

This situation may in fact be an interesting fallout from the insanity of the “bundling” of mortgages into investment packages. As someone who’s spent a professional life focused on controls – signatures and countersignatures, authorizations and approvals – I chuckle a bit when I see this story.   I’ve been lectured again and again by business persons about how all of these durn controls were getting in the way of “Bidness” and how they could make a lot more money for the company if only the accountants and controllers and auditors would get out of the way.  Those controls are there for a reason.  Humans are fallible, and controls created by humans are fallible – but controls created by crowds are LESS fallible.  The accumulated wisdom of years and years of business knowledge (two signatures are better than one, making sure that paperwork is filed in duplicate) are there for a reason.  The reason?  People fail.

I doubt this woman will be able to withstand foreclosure for long with this tactic, unless positive media attention helps her. Even so, it should serve as a harsh warning for all of us:  make sure that you keep good documentation related to real estate dealings and business deals.  The tiniest omissions can destroy everything.  This time, it helped the little guy, but the truth is that most of the time, paperwork favors the corporate behemoths.


14 comments

  • Ashley @ Wide Open Wallet

    Interesting as all get out. I have heard of mortgage docs being lost in the shuffle, I'm glad it's actually helping people. It's kind of ironic actually.

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  • When we had to enact SOX controls at my job years back they were really a pain. Many of them were kind of silly too. But there were others that made a LOT of sense and plugged holes in the system we didn't already see.

    You're so right that if it were the other way around there would be a legal team harassing the little guy into submission. If they can't prove the mortgage exists? That's just bad. They are trading phantom money.

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  • Amusing. There is a decent shot that she is right and that the company will not be able to produce the actual note. However, I would assume that if they sue her, they would have the right to ask her to produce her original form of the note…

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  • Jessica Simon

    Here is a bunch of videos that I found that explain how to go about the ‘produce the note’ strategy in a brain-dead simple way:

    http://www.butasforme.com/2009/03/11/produce-th

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  • There is no ethical conundrum here. If you borrow money from a pawn shop, do you have a moral obligation to repay? Of course not. The pawn shop takes your collateral. They have already calculated the risk of loaning you money and they've already locked in their profits the instant you agreed to the loan. The home mortgage is the same situation. The bank loans you money, they get title to your house as collateral. Unless the banks are stupid, (and I am not arguing that they aren't), they've locked in their profit the instant you sign the note.

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  • It's really important to keep all documents in any business deals. Proper documentations prove what was agreed and signed.

  • It's really important to keep all documents in any business deals. Proper documentations prove what was agreed and signed.