Foreclosures Hit a Snag for Lenders

The New York TImes ^ | November 15, 2007 | Gretchen Morgenson

[HamiltonJay]

Portends what I have said for a long long time, the size and scope and cost of the housing issues is going to be bigger than ANYONE has predicted to date... it is going to make the S&L crisis look like a day in the park.

Nothing this country has had to deal with in the past 70 years comes remotely close the mess that’s out there. The question is simply how fast will it unwind. The faster it unwinds the uglier it will be.

What it means in the short term is that banks and others are going to have to do what they should have been doing all along, get their paperwork in order. No judge should have ever accepted an option agreement to buy a note as proof that a bank or other entity actually owns the note and the mortgage. Only the holder of the mortgage legally has the right to foreclose if they cannot prove they are the owner they have ZERO standing before the court to foreclose, and if they do foreclose without proof of ownership they have engaged in fraude and I would think would be subject to legal ramifications from it.

What it will mean for the homeowner is a slower foreclosure, they will still wind up foreclosed eventually in most situations, but it will take longer. Secondly when blatant fraud becomes apparent, where the same note was sold in 2 seperate packages.. who can foreclose? If anyone... who’s legally culpable for this screw up, and what if anything will be done to them?

What it surely will do is further unravel the laughable construct of the CDO.... If your CDO you thought was backed by 10MM in assets, you suddenly find out the assets backign it are only 7MM due to property value decreases.. but then find another 1-2 MM of it are out and out fraud as the properties are in other CDO’s as well.. you now have what you thought was 10MM worty 5MM or less.

CDO’s at a basic level were ok, but when you are using CDO’s to back bigger CDO’s, etc etc etc.. you wind up with the mess... the reality is the only real Collateral you can have to anything is REAL PROPERTY... everything else is paper pipe dream. If you bought or invested in a CDO that was made up itself of nothing more than other CDOs... or of debt obligations backed by other CDO’s all you created was a giant house of cards.

When you take 1MM in debt based on real property, and then wind up leveraging it into 10 or 100 MM in debt by these silly things.. when it finally falls down... you only have 1MM of real assets backing all of that leveraged house of cards, so when it collapses, a whole lot of paper wealth evaporates, and the only people smiling are the brokers who made the commissions selling people the nonsense, and the fraude folks who knowingly took advantage of the exuberance.

You cannot seperate risk from lending... and that’s exactly what these people blindly did. They assumed that risk had been mitigated, and of course it hadn’t, just obvuscated and now its all coming home to roost, and they can’t even tell how bad it is going to hurt them because they had no damned idea what they were buying into.

[Pilsner]

To let the mortgagor off because the judge can’t figure out the answer to that tangential question is nonsense.

You think ownership of the note is a "tangential question"???? How would you like it if someone filed a foreclosure against you, and the judge let them take your house without proving that they had any right to do so? How would you like it if, after you lost your home to someone you didn't owe money to, the real mortgage company showed up and sued you for the balance of the note -- and won? Or how would you like it if you bought a house from Bank B after it foreclosed, then a Bank A sued you claiming that they owned the note on the house, not Bank B, and your title is subject to the unpaid note to Bank A, and Bank A won?

I agree with the posters who say this will do nothing but buy the borrowers time, as the mortgage banks track down the notes and mortgages and file proper assignments of each, but the question of who holds the note is hardly tangential.

[GYPSY286]

Correct me if I’m wrong. My mortgage was “sold” to a credit corporation. If the original bank did not provide an assignment of the note to the credit corporation but only my file containing the mortgage and note, the credit corporation can’t foreclose? The reason I ask is the credit corporation told me that they did NOT have the authority to change the terms of my original loan but if it was in fact, assigned to them, wouldn’t they?

[RobRoy]

>>and the only people smiling are the brokers who made the commissions selling people the nonsense, and the fraude folks who knowingly took advantage of the exuberance.<<

...and the borrower still living in the house for free while it all unravels.

[Brilliant]

We know who holds the note. It’s the mortgage which is in doubt, and even that isn’t really in doubt because the mortgage follows the note.

[Brilliant]

Read something called the Uniform Commercial Code. It specifically states that the mortgage follows the note.

[RobRoy]

Wow, just wow: Check this out from over a year ago (sept 26 of 2006)

http://blogs.canadianbusiness.com/advansis/?mod=for&act=dis&eid=1&so=1&sb=1&ps=310

go to the bottom article, “daddy, look at the cute mortgage lenders”.

He even mentions Deutsche Bank and the CDO’s.

BTW, I was linked there from this article:

http://seekingalpha.com/article/54239-ceos-in-subprime-said-apres-moi-le-deluge?source=d_email

[HamiltonJay]

Well I doubt they are smiling, foreclosures in most states is an ugly drawn out process to begin with. Some have rapid, but most don’t.

Fiduciary responsibility cuts both ways, lending money to someone who has no prayer of being able to pay it back is just as immoral as borrowing money you can’t possibly pay back.

Bankers like to portray the latter as scum, and their own actions they like ignored. But they are absolutely no less culpable, and engaged in no less immorality than the borrower.

I have no pity for them having to now eat their own dog food.

[Iwo Jima]

I haven't looked at the UCC in almost 20 years. Please cite the provision which you say provides that "the mortgage follows the note."

Thanking you in advance.

[Brilliant]

They amended the UCC in 2001. Here’s part of what it says:

§ 9-203. Attachment and Enforceability of Security Interests; Proceeds; Supporting Obligations; Formal Requisites

*****

(f) Proceeds and supporting obligations. The attachment of a security interest in collateral gives the secured party the rights to proceeds provided by Section 9-315 and is also attachment of a security interest in a supporting obligation for the collateral.

(g) Lien securing right to payment. The attachment of a security interest in a right to payment or performance secured by a security interest or other lien on personal or real property is also attachment of a security interest in the security interest, mortgage, or other lien.

The comments say:

8. Supporting Obligations. Under subsection (f), a security interest in a “supporting obligation” (defined in Section 9-102) automatically follows from a security interest in the underlying, supported collateral. This result was implicit under former Article 9. Implicit in subsection (f) is the principle that the secured party’s interest in a supporting obligation extends to the supporting obligation only to the extent that it supports the collateral in which the secured party has a security interest. Complex issues may arise, however, if a supporting obligation supports many separate obligations of a particular account debtor and if the supported obligations are separately assigned as security to several secured parties. The problems may be exacerbated if a supporting obligation is limited to an aggregate amount that is less than the aggregate amount of the obligations it supports. This Article does not contain provisions dealing with competing claims to a limited supporting obligation. As under former Article 9, the law of suretyship and the agreements of the parties will control.

9. Collateral Follows Right to Payment or Performance. Subsection (g) codifies the common-law rule that a transfer of an obligation secured by a security interest or other lien on personal or real property also transfers the security interest or lien. See Restatement (3d), Property (Mortgages) § 5.4(a) (1997). See also Section 9-308(e) (analogous rule for perfection).

Under the revision, the same law applies to a sale of a mortgage as a security interest in it. You really don’t need to read these provisions though to see that the judge was just playing a game of “gotchya.” The rule requiring proof that you own the mortgage is designed to prevent the mortgagor from being required to pay the mortgage more than once. There is no danger of that happening if the proceeds of the foreclosure sale go into the trust for the bondholders who have a right to payment of the proceeds from the notes. As long as you know who ultimately is entitled to get the money, the fact that it’s ambiguous who the agent is ought to be beside the point. The agent isn’t representing himself anyway. He’s representing the bondholders.

I’m an attorney. I’ve foreclosed hundreds of mortgages, and I’ve defended foreclosures. I’ve also helped write some of the agreements that they use to securitize mortgages. Everytime I get one that is ambiguous as to who the proper party to sue might be, I try to fix it. It’s sometimes hard to convince lenders to change their form documents, which they’ve been using for years, though. As a practical matter, these ambiguities don’t prejudice the rights of the mortgagors. Personally, I don’t know why the attorneys handling the foreclosure did not simply get a new assignment and fix the problem. One answer is that some of these judges feel that not only must you show that you own the mortgage, but you must show that you owned the mortgage before you filed the lawsuit. And they don’t seem to understand that the recording of the assignment of mortgage is not important for that purpose. We’ve got a case here in Florida where the judge ruled that not only must the mortgagee prove that he had an assignment of the mortgage, but he must actually record the assignment before filing the lawsuit. It’s like they are going out of their way to find against the mortgagee.

[Iwo Jima]

Thanks for that info. I am an attorney, too, but this is not my area of practice. I'll read what you have referenced and see what I think it says.

Thanks again for giving me direction.

[montag813]

And bankers will soon be jumping out of windows over it. ;)

Is this really a tactic which could work for many foreclosures? Is this a common issue?

[RobRoy]

It can be an effective short term solution.

[AndyJackson]

What they did not have is a piece of paper signed by the original mortgagee, clearly assigning it to the plaintiff.

Statute of frauds my friend. No paper, no contract.

[redgolum]

Indeed. Fraud investigations and class action lawsuits would abound!

I had wondered about the “selling” of the loan. Who in the end has the paperwork for the mortgage?

A friend of mine had his loan sold three times, and each time the new servicer didn’t pay the taxes. He came close to losing his house because of some paper work screw up.

Now he makes sure to pay it himself.

[redgolum]

What it will mean for the homeowner is a slower foreclosure, they will still wind up foreclosed eventually in most situations, but it will take longer. Secondly when blatant fraud becomes apparent, where the same note was sold in 2 seperate packages.. who can foreclose? If anyone... who’s legally culpable for this screw up, and what if anything will be done to them?

I have a related question. Say someone with a mortgage that has been split up in such a fashion pays off their loan. How would they get a clear title to the property when no one has any idea where the paper work is?

[Freedom_Is_Not_Free]

Doesn’t work that way. One company is still responsible to collect your loan. It is their probably who to pay, not yours. If they negotiate a reduced payment for a buyer, it is their problem who gets cut out of the pie, if anyone.

[Brilliant]

The statute of frauds only protects the parties to the contract. In other words, if the guy who really “owned” the mortgage came forward and argued that the assignee did not, then the statute of frauds might protect him if there were a statute of frauds. It does not protect a third party, in this case the mortgagor who is not a party to the assignment anyway.

Besides which, there really is no statute of frauds for this particular issue, at least in most states.

[ex-Texan]

Foreclosures are Symptomatic of Deeper Problems

U.S. Foreclosure Map as of July, 2007. Click the map for more info.

Deutsche Bank Foreclosures Tossed Out of Ohio Federal Court - “They Own Nothing!”

Excerpt:

Judge Boyko issued an order requiring the Plaintiffs in a number of pending foreclosure cases to file a copy of the executed Assignment demonstrating Plaintiff (Deutsche Bank) was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the court would enter a dismissal.

The Court’s amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a “conflict” and they “do not satisfy” the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the “legal” note holder.

* * * Jacksonville Area Legal Aid Attorney, April Charney says:

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged “sale” to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don’t really, legally own these bad loans .

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.

I agree with the FR posters who say that the Judge's order in this case leaves a door open for news cases to be filed. Judge Boyko never had reason to reach the larger issue of deeper fraud by the mortgage companies and/or Deutsche Bank. In point of fact, DB could have been just another victim of fraud is this case . . . I mean fraud by Wall Street . . . not the home buyers !

Spreaking hypothetically -- IF Deutsche Bank was sold bogus mortgage paper by Wall Street.

There have been rumors on WS for months about packages of securitized mortgages selling the same bad paper over and over and over again. Perhaps this is the single most important judicial decision to come down the pike in years. If it exposes bogus paper being marketed on Wall Street hidden in piles and piles of junk paper!

Personally, I believe the lawyers for DB must have advised their clients about potential adverse consequences. But given the fact that more attorneys are owned by organized crime today . . . Who knows what was known and what was shared between rich men in confidence.

Which gives rise to another meaning of the term 'confidence men' . . . LOL, LOL !

[seacapn]

Out of curiosity, I went ahead and looked up Judge Boyko's actual order in this case, which appears here:

PDF file - six pages - 'In Re: Foreclosure Cases'

The crux of the case seems to come down to this paragraph:

In each of the above-captioned Complaints, the named Plaintiff alleges it is the holder and owner of the Note and Mortgage. However, the attached Note and Mortgage identify the mortgagee and promisee as the original lending institution — one other than the named Plaintiff. Further, the Preliminary Judicial Report attached as an exhibit to the Complaint makes no reference to the named Plaintiff in the recorded chain of title/interest. The Courts Amended General Order No. 2006-16 requires Plaintiff to submit an affidavit along with the Complaint, which identifies Plaintiff either as the original mortgage holder, or as an assignee,trustee or successor-in-interest. Once again, the affidavits submitted in all these cases recite the averment that Plaintiff is the owner of the Note and Mortgage, without any mention of an assignment or trust or successor interest. Consequently, the very filings and submissions of the Plaintiff create a conflict. In every instance, then, Plaintiff has not satisfied its burden of demonstrating standing at the time of the filing of the Complaint.

These seem like serious defects. The judge is unable to establish a clear chain of title here. As others have noted, if you want the court system to compel someone to pay a debt obligation to another party, you have to make sure that the party being paid has an unambiguous legal claim to that payment. Otherwise, you might have a third party eventually stepping in and asserting a claim on the same obligation.

So, yes, it comes down to paperwork, but some very important paperwork - and as long as that paperwork is missing, I don't see how the claimants in this case can establish an unambiguous claim on these particular mortgage obligations.

The ruling also notes that:

Ohio law holds that when a mortgage is assigned, moreover, the assignment is subject to the recording requirements of R.C. § 5301.25. Creager v. Anderson (1934), 16 Ohio Law Abs. 400 (interpreting the former statute, G.C. § 8543). “Thus, with regards to real property, before an entity assigned an interest in that property would be entitled to receive a distribution from the sale of the property, their interest therein must have been recorded in accordance with Ohio law.” In re Ochmanek, 266 B.R. 114, 120 (Bkrtcy.N.D. Ohio 2000) (citing Pinney v. Merchants’ National Bank of Defiance, 71 Ohio St. 173, 177 (1904).

So we are also getting into the state law of Ohio, which may or may not go beyond the recording requirements of the UCC (and I'm not an Ohio law expert, so I don't know which components of the UCC Ohio has or hasn't adopted).

I understand your fundamental argument as 'the payments are not being made on these mortgages; clearly SOMEONE is owed, and SOMEONE should hold the foreclosure rights.'

And while that is true, the burden is on the party seeking foreclosure to establish proper title, and to present paperwork that complies with state law.