Lenders must have their paperwork in order before filing a foreclosure, the Supreme Court of Ohio ruled Wednesday.
The unanimous ruling dismissed a lawsuit against Duane and Julie Schwartzwald, homeowners in Xenia, Ohio, by Freddie Mac, which contended the couple owed $245,000 after defaulting on a mortgage loan they received from Legacy Mortgage in 2005.
Freddie attached a copy of the mortgage identifying the Schwartzwalds as borrowers and Legacy as lender to its complaint, which the company filed in April 2009, but did not attach a copy of a promissory note the Schwartzwalds had also signed, claiming it was unavailable.
In Ohio, lenders need a promissory note and mortgage to foreclose, according to Troy Doucet, an attorney in Columbus, Ohio, who represents homeowners in foreclosure proceedings but did not represent any of the parties in Wednesday's ruling.
A month later, Wells Fargo (WFC), to whom Legacy had sold the mortgage and endorsed the note, transferred both to Freddie. Freddie then filed a copy of the transfer with the court and asked for a default judgment.
The Schwartzfelds contended that Freddie lacked standing to foreclose on their property because the company had not obtained both the note and the mortgage until after it filed the complaint.
"It is fundamental that a party commencing litigation must have standing to sue in order to present a justiciable controversy and invoke the jurisdiction of the common pleas court,"
The court overturned a ruling by the appeals court that the transfer of the Schwartzwalds' mortgage and note from Wells Fargo to Freddie after the suit was filed remedied Freddie’s initial lack of standing.
"Thus, receiving an assignment of a promissory note and mortgage from the real party in interest subsequent to the filing of an action but prior to the entry of judgment does not cure a lack of standing to file a foreclosure action," O'Donnell wrote.
"The banks do everything they can to hold their customers to every single 'T' and 'I' in a massive amount of documents," Doucet told American Banker. "What the Supreme Court of Ohio said today is that banks are obligated to do the same thing."
A spokesman for Freddie, which the court said remains free to refile the lawsuit, declined to comment.
