From Nick at the WSJ.com:
Banks trying to foreclose on homeowners are hitting another roadblock, as some delinquent borrowers are successfully arguing that their mortgage companies can’t prove they own the loans and therefore don’t have the right to foreclose.
These “show me the paper” cases have been winding through the courts for several years. But in recent months, some judges have been siding with borrowers and stopping foreclosures after concluding that banks’ paperwork problems are more serious than previously thought and raise broader ethical questions.
This year, cases in California, North Carolina, Alabama, Florida, Maine, New York, New Jersey, Texas, Massachusetts and others have raised questions about whether banks properly demonstrated ownership.
During the fall, banks temporarily suspended foreclosures to address so-called robo-signing problems, where employees were approving legal documents without properly reviewing them. They said that in weeks they could fix what they considered to be simple clerical errors. But borrowers are uncovering new types of document problems, further delaying banks’ efforts to get foreclosures back on track.
In some cases, borrowers are showing courts that banks failed to properly assign ownership of mortgages after they were pooled into mortgage-backed securities. In other cases, borrowers say that lenders backdated or fabricated documents to fix those errors.
“Flawed mortgage-banking processes have potentially infected millions of foreclosures, and the damages against these operations could be significant and take years to materialize,” said Sheila Bair, chairman of the Federal Deposit Insurance Corp., in testimony to a Senate committee last month .
Last month, the Maine Supreme Court reversed the foreclosure of Dana and Robin Murphy of Auburn, Me., after concluding that the mortgage company, a unit of HSBC Holdings PLC, filed “inherently untrustworthy” documents. An HSBC spokesman declined to comment.
The case began in 2008 when HSBC filed to foreclose on the Murphys, who hadn’t made a mortgage payment in two years. A trial judge initially rejected HSBC’s foreclosure because the bank couldn’t show it owned the promissory note—in effect, the borrower’s IOU. The court later granted the foreclosure after HSBC submitted new paperwork.
However, the Murphys found discrepancies and alleged that the documents were backdated. The court voided the foreclosure and sent the case back to the lower court to determine potential penalties.
Attorneys for borrowers reject the view that they are using arcane legal rules to secure free houses for clients who aren’t paying their bills. Efforts to gloss over incomplete or falsified evidence “can’t be tolerated by a free society,” says Thomas Ice, an attorney in Royal Palm Beach, Fla., who has a similar case before the Florida Supreme Court. “This is a huge assault on our legal system” that risks “turning us into a banana republic.”
Laurence E. Platt, a banking-industry lawyer at K&L Gates in Washington, concedes that banks may have been sloppy. But he says “the real assault on the legal system” are efforts by judges and local officials to strip lenders of their rightful ownership and make foreclosures impossible.
In March, an Alabama court said J.P. Morgan Chase & Co. couldn’t foreclose on Phyllis Horace, a delinquent homeowner in Phenix City, Ala., because her loan hadn’t been properly assigned to its owners—a trust that represents investors—when it was securitized by Bear Stearns Cos. The mortgage assignment showed that the loan hadn’t been transferred to the trust from the subprime lender that originated it.
Specific deal agreements required Bear Stearns to assign the loan within three months of the securitization. Because it failed to do so, Alabama Circuit Court Judge Albert Johnson determined, the trust didn’t own the mortgage. “The court is surprised to the point of astonishment that the defendant trust did not comply with the terms,” of the securitization agreement, he wrote.
The ruling is one of the first in the nation to strip a mortgage trust of an asset it thought it owned. A similar case earlier this year was decided in the bank’s favor when it held that the borrower wasn’t a party to the securitization agreement.
Nick Wooten, the lawyer for Ms. Horace, says the case won’t necessarily influence other decisions unless it is upheld by a higher court. But he says it is “another brick in the wall of trial-court-level cases that clearly show the wheels fell off the bus in the securitization industry during the bubble.”
J.P. Morgan Chase hasn’t appealed the case. A bank spokesman declined to comment.
Curing incomplete mortgage assignments can be tricky because many lenders that originated subprime loans are still listed as the owner but have gone out of business.
Bill Dallas, former chief executive of subprime lender Ownit Mortgage Solutions Inc., receives between 200 and 300 pieces of mail every month at his former company’s California headquarters from companies looking to correct ownership flaws. “Am I surprised? Absolutely not,” says Mr. Dallas, who founded and ran the subprime lender until its collapse in late 2006. “I knew this assignment problem was going to be an issue.”
Loans with botched assignments or no assignment are “really problematic” because “the person that originated the loan is gone, the person that funded it is gone, and your servicers are confused,” he says.
Borrowers may be questioning lender ownership of mortgages, but they are mostly losing in California State Courts.
Just yesterday, a published Court of Appeal decision came down again on the lender side, rejecting a MERS attack, and reaffirming the “tender” rule, meaning that the foreclosed owner has to first offer to pay off the mortgage as a condition of setting aside an improper trustee sale.
FERGUSON v. AVELO MORTGAGE, LLC
http://www.courtinfo.ca.gov/opinions/documents/B223447.PDF
Borrowers have a better shot in Federal Bankruptcy Court than in California State Courts.
Good morning Kingside!
You are an experienced real estate attorney in these matters.
From what you have seen to this point, do you think it’s possible that the whole mortgage-banking system could unravel from the assignment problem, or settlements will fix it?
The counties who claim they have been robbed of recording fees will get some money to go away, but the failure to properly assign mortgages in a timely fashion is where I think there could be problems. But I’m just guessing.
LOL, I am not sure I have any special insight to the politics of what is happening on a National basis, my stomping grounds is in California. Here, the assignment problem is mostly a glitch, not an unraveling. Title Insurance remains readily available.
What I do find a bit disturbing about this whole national focus though is that foreclosure procedures have always been local State regulated, not Federal. I am skeptical that a national settlement will really amount to anything (How is that fund from the BP spill disaster working out?). It would be a bad idea to have foreclosures regulated on a Federal basis IMHO. Leave it to the States and get the Feds out of the picture. I don’t trust the collective “wisdom” of politicized attorney generals.
I find the notion that counties have been “robbed” of recording fees non-sensical. County Recorders provide a service. Its a free country, and if a lender, however unwise, decides not to record a piece of paper, the county has not provided a service and has not lost anything. The notion that local county governments have some sort of “right” to a recording fee for something they did not record to me is just wrong. But it is all to popular to assume they have that right I guess in an environment of declining government revenues.
I think a lot of people get lost in the whole if somebody doesn’t pay they don’t deserve a free house and I agree, but the rule of law has to supersede one’s personal moral opinion. If a lender can’t properly document their security interest in a property and their right to foreclose, then it’s their fault for being sloppy with the paperwork. If we don’t put the burden of proof on the lender, what stops me for issuing foreclosure notice on Jim the Realtor. I’m sure I can find some guy that will lie in front of court to sign an affidavit that I own Jim’s mortgage, assuming I pay him enough.
I know it’s not quite that simple but you start to get into a slippy slope, when you start trying to decide these things with your own moral compass. There’s evidence that some mortgages might have been assigned to multiple MBS pools. In which case the security interest was illegally sold twice. What do you do in that case?
Let the rule of law run it’s course and if it means some people work the system for a free house so be it. Without the rule of law then broken agreements go the way they do in the illegal drug trade, they end in violence.
There are many issues here not discussed. Firstly, the concept and jurisprudence for mortgages is old, and the laws rely on very explicit chains of transfer to ensure that the right of ownership over the note remains unbroken. These are very serious issues that are often forgotten — but the courts do eventually remember.
Secondly, title insurance is available, but has anyone bothered to look at the credit worthiness of those providing this type of insurance. It makes for surprising reading, with companies having tens of million in capital, and not hundreds of million. In other words, should you eventually try to claim under your title insurance protection, there maybe no resources there to meet your claim.
I assure you that should the “law of the land” be applied strictly (it has not been the case so far), then many more Americans will walk away with unsecured debts instead of mortgages. Is it fair, of course not, they did enter into a contract with their lender. It is not their responsibility to ensure that their mortgage claim were properly registered.
On moral grounds the borrowers are on thin ice, but small print has never stopped banks from penalizing their customers, it is not fair, but what is right for the goose has to be right for the gander…
I could possibly see sense in arguing that if nobody can prove ownership of my mortgage I should be making my payments to some sort of escrow account while the parties to the securitization get their acts together, but I fail to see any way that poor securitization would relieve me of my obligation to make those payments or face foreclosure. The courts should just appoint excutors to handle the foreclosures and hold any proceeds until the botched assignments are sorted out and the “real” mortgage owners established.
If the lender has abandoned his security interest through improper procedures, does that interest revert to the property owner? The lender’s interest is supposed to have a finite life and return to the property owner when the mortgage is satisfied, so maybe that is how it should be viewed. The banks didn’t follow the rules to maintain their interest, so they effectively abandoned it. After years pass it isn’t possible to have a “do over” so maybe the banks have lost.
It would suck to be a bank stockholder if it turns out that way.
There are many arcane rules in real estate law that were passed down from common law. This will need to be sorted out by the courts and it may not go in the bank’s favor. The courts are part of the political process and you never know how they may decide.
Assume they can’t foreclose, if they have the note, they still can sue for the balance due, and likley force the owner into bankruptcy, forcing the sale of the house that way. (For the cases of failure to record the transfer of the deed of trust or the equivalent). Get a judgement against the debtor, and unless protected by homestead laws (Like in Tx) attach the home. In Ca it appears the exemption is around 100k. So assuming the security interest vanishes, then the house is free and clear and in BK will be sold if its value exceeds 100k. So there is a way around the issue, but it takes more work for lawyers, and likely more skilled lawyers than the common lawyer.
I think the whole point of the “show me the papers” lawsuits is that because of securitization there is no note for anyone to have; the original note has gone through the legal equivalent of a paper shredder and lots of different people all over the world each have a small handful of shreds but nobody has enough of a share to be able to say “I have the note” and make the decision to foreclose – or, for that matter, to short sale. In the absence of proper assignment by which all the holders of little note shreds have handed their share of the decision process to one party, the only way to make any lender decision about a loan would be to trace all the little shreds to their owners and get them all to vote on it.
All these are due to too many lawyers
chasing for fees. An oversight is an oversight, a glitch is a glitch,a
borrow who cannot pay shall not own a house.
You don’t make the payments, you lose the freaking house. What the **** is so complicated about that??? Too many lawyers looking for work. Disgusting! What a joke!
numbers guy:
You must have or are working for some part of this financial ponzi scheme. Shame on you. How do you sleep at night.