In  Federal Home Loan Mortgage Corp. v. Schwartzwald, 2012-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.