Mortgage Lenders Network USA told loan documents are protected

Some failed mortgage lenders are destroying original loan documents, causing long-term legal problems. Image: Flickr / nerdcoregirl / CC-BY-SA

A U.S. bankruptcy judge has handed down an order preventing mortgage documents from being destroyed. The judge ruled that the mortgage documents could potentially be evidence and must therefore not be destroyed. This specific ruling was against Mortgage Lenders Network USA, but could affect most mortgage lenders.

The ruling against Mortgage Lenders Network USA

A federal bankruptcy judge ruled on Monday that Mortgage Lenders Network USA would not be allowed to destroy 18,000 boxes of original loan files. These files include everything from initial loan documents to servicing files. The stay issued by the judge lasts for 30 days. After that, the documents are again at risk of destruction. These documents may be destroyed as part of the liquidation of the sub prime mortgage company, which closed in February of 2007. The company serviced loans in Maryland, Delaware, Connecticut and other East Coast states.

Why original loan documents are important

The judge issued the stay on destroying loan documents because they may be evidence in criminal investigations. Original loan documents have become increasingly important in court cases about foreclosure. Numerous lenders have been unable to prove their ownership of loans, which means they have no legal standing to foreclose on the homes. This is leaving millions of mortgages in a legal limbo — nobody can prove ownership of the mortgage or foreclose on homes that may or may not be paid on. Some people have managed to turn this fact into a free bad credit loan. They take out a bad credit mortgage, then simply quit paying because the lender can’t prove they owe money.

Why loan documents are destroyed

In a separate ruling on Monday, American Home Mortgage, another defunct mortgage company, was allowed to destroy original loan documents. While original loan documents are incredibly important for providing proof of debt, they are not kept around forever. After a certain length of time, the expense of keeping documents is outweighed by the potential benefit of keeping them around.