Federal bankruptcy judges in Delaware are due to hold separate hearings Monday on requests by two defunct subprime mortgage lenders to destroy thousands of boxes of original loan documents.
The requests, by trustees liquidating Mortgage Lenders Network USA and American Home Mortgage, come despite intense concerns that paperwork critical to foreclosures and securitized investments may be lost.
A series of recent court rulings have increased the importance of original loan documents, holding that they are essential for investors to prove ownership of mortgages and to have the right to foreclose.
In the Mortgage Lenders case, the U.S. Attorney in Delaware has formally objected to the requested destruction because loss of the records "threatens to impair federal law enforcement efforts."
The former subprime lender shut down in February 2007. In a January 6, 2010, motion, Neil Luria, the liquidating trustee, asked Bankruptcy Judge Peter J. Walsh for permission to destroy nearly 18,000 boxes of records now warehoused by document storage company Iron Mountain Inc.
Luria stated that destruction is necessary to eliminate $16,000 per month in storage costs as he disposes of the last assets of the bankrupt company.
In the American Home Mortgage case, the liquidating trustee, Steven Sass, has asked Bankruptcy Judge Christopher Sontchi to approve destruction of 4,100 boxes of loan documents stored in a dank parking garage beneath the company's former headquarters in Melville, Long Island.
AHM had been one of the biggest originators of subprime loans until it abruptly collapsed and closed in August 2007. The boxes are the last still held by AHM. Sass stated that the local fire marshal wants the documents removed as a fire hazard, and he said the cost of moving them would be prohibitive.
In accordance with a 2009 court order, the bankrupt company earlier had destroyed the contents of thousands of other boxes after banks and other loan servicers had been given a chance to request and pick up particular files.
The issue of document destruction is sensitive because in recent months evidence has turned up that vast numbers of original loan documents by major lenders were never transferred as required when the mortgages were securitized and sold to investors.
Lawyers for homeowners have strongly objected to AHM's document destruction, contending that vital evidence borrowers need to defend themselves in foreclosure cases will be lost.
Earlier this month, Massachusetts' highest court voided the foreclosure of two homes by Wells Fargo & Co and US Bancorp after the banks failed to produce records showing that they owned the mortgages at the time they foreclosed.
The decision spooked investors, who feared it could threaten lenders' ability to work through hundreds of thousands of pending foreclosures.
The two companies' bankruptcy cases are unrelated, and the overlapping timing of the two hearings Monday in Wilmington, Delaware, bankruptcy court is coincidental, people involved with the cases said.
In court documents, Sass stated that most of the records AHM still has in storage relate to mortgages issued more than eight years ago. He also said that employees had searched the files and pulled out all vital original records, such as promissory notes, and had handed them over to the appropriate mortgage servicers, and that most of the documents had been electronically imaged and retained in a database.
But people involved in winding down AHM's affairs say that neither the contents of the boxes or the database have been audited, and that it's possible the boxes still contain crucial documents such a promissory notes. Investors must have the original promissory notes, not copies, to be able to foreclose.