Adam Levitin, Alabama, Bank of America, Foreclosure, Horace, PSA, Securitization, Uniform Commercial Code
This topic examines how you can effectively use Securitization Issues to your advantage when challenging your wrongful foreclosure.
CASE STUDY 1:
Two years ago, an Alabama judge issued a short, conclusory order that stopped foreclosure on the home of a beleaguered family, and also prevents the same bank in the case from trying to foreclose against that couple, ever again. This may not seem like big news — but upon review of the underlying documents, the extraordinarily important nature of the decision and the case becomes obvious.
No Securitization, No Foreclosure
The couple involved, the Horaces, took out a predatory mortgage with Encore Credit Corp in November, 2005. Apparently Encore sold their loan to EMC Mortgage Corp, who then tried to securitize it in a Bear Stearns deal. If the securitization had been done properly, in February 2006 the trust created to hold the loans would have acquired the Horace loan. Once the Horaces defaulted, as they did in 2007, the trustee would have been able to foreclose on the Horaces.
And that’s why this case is so big: the judge found the securitization of the Horace loan wasn’t done properly, so the trustee — LaSalle National Bank Association, now part of Bank of America (BAC) — couldn’t foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn’t have the right to foreclose, period.
Since the judge’s order doesn’t explain, how should people understand his decision? Luckily, the underlying documents make the judge’s decision obvious.
The key contract creating the securitization is called a “Pooling and Servicing Agreement” (pooling as in creating a pool of mortgages, and servicing as in servicing those mortgages.) The PSA for the deal involving the Horace mortgage is here and has very specific requirements about how the trust can acquire loans. One of the easiest requirements to check is the way the loan’s promissory note is supposed to be endorsed — just look at the note.
According to Section 2.01 of the PSA, the note should have been endorsed from Encore to EMC to a Bear Stearns entity. At that point, Bear could either endorse the note specifically to the trustee, or endorse it “in blank.” But the note produced was simply endorsed in blank by Encore. As a result, the trust never got the Horace loan, explained securitization expert Tom Adams in his affidavit.
But wait, argued the bank, it doesn’t matter if if the trust owns the loan — it just has to be a “holder” under the Alabama version of the UCC (Uniform Commercial Code), and the trust is a holder. The problem with that argument is securitization trusts aren’t allowed to simply take property willy-nilly. In fact, to preserve their special tax status, they are forbidden from taking property after their cut-off dates, which in this case was February 28, 2006. As a result, if the trust doesn’t own the loan according to the PSA it can’t receive the proceeds of the foreclosure or the title to the home, even if it’s allowed to foreclose as a holder.
Holder Status Can’t Solve Standing Problem
Allowing a trust to foreclose based on holder status when it doesn’t own the loan would seem to create yet another type of clouded title issue. I mean, it’s absurd to say the trust foreclosed and took title as a matter of the UCC, but to also have it be true that the trust can’t take title as a matter of its own formational documents. And what would happen to the proceeds of the foreclosure sale? That’s why people making this type of argument keep pointing out that the UCC allows people to contract around it and PSAs are properly viewed as such a contracting around agreement.
I’m sure the bank’s side will claim the judge was wrong, that he disagreed with another recent Alabama case that’s been heavily covered, US Bank vs. Congress. And there is a superficial if flat disagreement: In this case, the judge said the Horaces were beneficiaries of the PSA and so could raise the issue of the loan’s ownership; in Congress the judge said the homeowners weren’t party to the PSA and so couldn’t raise the issue.
But as Adam Levitin explained, the Congress decision was procedurally weird, and as a result the PSA argument wasn’t about standing, as it was in Horace and generally would be in foreclosure cases (as opposed to eviction cases, like Congress). And what did happen to the Congress proceeds? How solid is that securitization trust’s tax status now anyway?
In short, in the only case I can find that has ruled squarely on the issue, a busted securitization prevents foreclosure by the trust that thinks it owns the loan. Yes, it’s just one case, and an Alabama trial level one at that. But it’s still significant.
Homeowners Right to Raise Securitization Issue
As far as right-to-raise-the-ownership issue, I think the Horace judge was just being “belt and suspenders” in finding the homeowners were beneficiaries of the PSA. Why do homeowners have to be beneficiaries of the PSA to raise the issue of the trust’s ownership of their loans? The homeowners aren’t trying to enforce the agreement, they’re simply trying to show the foreclosing trust doesn’t have standing. Standing is a threshold issue to any litigation and the homeowners axiomatically have the right to raise it.
As Nick Wooten, the Horaces’ attorney, said:
“This is just one example of hundreds I have seen where servicers were trying to force through a foreclosure in the name of a trust that clearly had no interest in the underlying loan according to the terms of the pooling and servicing agreement. This conduct is a fraud on the borrower, a fraud on the investors and a fraud on the court. Thankfully Judge Johnson recognized the utter failure of the securitization transaction and would not overlook the fact that the trust had no interest in this loan.”
All that remains for the Horaces, a couple with a special needs child and whose default was triggered not only by the predatory nature of the loan, but also by Mrs. Horace’s temporary illness and Mr. Horace’s loss of overtime, is to ask a jury to compensate them for the mental anguish caused by the wrongful foreclosure.
Perhaps BofA will just want to cut a check now, rather than wait for that verdict. (As of publication BofA had not returned a request for comment.)
No one is suggesting the Horaces get a free house; they still owe their debt, and whomever they owe it to has the right to foreclose on it. Wooten explained to me that the depositor –in this case, the Bear Stearns entity –i s probably that party. Moreover if the Horaces wanted to sell and move, they’d have to quiet title and would be wise to escrow the mortgage pay off amount, if that amount can be figured out. But for now the Horaces get some real peace, even if a larger mess remains.
Much Bigger Than A Single Foreclosure
The Horaces aren’t the only ones affected by the issues in this case.
Homeowners everywhere that are being foreclosed on by securitization trusts — many, many people — can start making these arguments. And if their loan’s PSA is like the Horaces, they should win. At least, Wooten hopes so:
“Judge Johnson stopped a fraud in progress. I am hopeful that other courts will consider more seriously the very serious issues that are easily obscured in the flood of foreclosures that are overwhelming our Courts and reject the systemic and ongoing fraud that is being perpetrated by the mortgage servicers. Until Courts actively push back against the massive documentary fraud being shoveled at them by mortgage servicers this fraudulent conduct will not end.”
The issues stretch past homeowners to investors, too.
Investors in this particular mortgage-backed security, take note: What are the odds that the Horace note is the only one that wasn’t properly endorsed? I’d say nil, and not just because evidence in other cases, such as Kemp from New Jersey, suggests the practice was common. This securitization deal was done by Bear Stearns, which other litigation reveals was far from careful with its securitizations. So the original investors in this deal should speed dial their lawyers.
And investors in bubble-vintage mortgage backed securities, the ones that went from AAA gold to junk overnight, might want to call their attorneys too; this deal was in 2006, and in the securitization frenzy that followed processes can only have gotten worse.
Some investors are already suing, but the cases are at very early stages. Nonetheless, as cases like the Horaces’ come to light, the odds seem to tilt in investors’ favor — meaning they seem increasingly likely to ultimately succeed in forcing banks to buy back securities or pay damages for securities fraud connected with their sale. And that makes the Bank Bailout II scenario detailed by the Congressional Oversight Panel more possible.
The final, very striking feature of this case is what didn’t happen: No piece of paper covered in the proper endorsements –an allonge — magically appeared at the eleventh hour. The magical appearance of endorsements, whether on notes or on allonges, has been a hallmark of foreclosures done in the robosigning era. And investors, as you pursue your suits based on busted securitizations, that’s something to watch out for.
My, but the banks made a mess when they forced the fee-machine of mortgage securitizations into overdrive. The consequences are still unfolding, but one consequence just might be a whole lot of properties that securitization trusts can’t foreclose on.
CASE STUDY 2:
In the fall of 2012, a Michigan state court issued an important decision that may affect thousands of foreclosures, HSBC Bank, USA v. Young, No 11-693 (Cir. Ct. Mich. Oct. 16, 2012). HSBC filed an action for possession of Mary Young’s home after a mortgage foreclosure by advertisement. The district court granted HSBC’s motion for summary disposition and defendant Young was granted leave to appeal. The Court reversed the trial court’s summary disposition order and remanded for further proceedings. HSBC filed a motion for reconsideration.
Young refinanced her home with Wells Fargo Home Mortgage on April 22, 2004. Young defaulted and received notices of default from Wells Fargo in February, April and August of 2008. In January 0f 2009, Wells Fargo and Young entered into a Loan Modification Agreement. The Agreement was on Wells Fargo letterhead and signed by an officer of Wells Fargo which was described as the lender.
Young did not keep up with her payments. On March 11, 2010, HSBC commenced foreclosure by advertisement and bought the house at sheriff’s sale. On November 8, 2010, HSBC filed a complaint for possession in the district court.
Young argued that HSBC lacked standing because neither the mortgage nor the note had been validly and effectively transferred to HSBC.
Young claimed that a purported mortgage assignment to HSBC as Trustee for Wells Fargo Home Equity Loan Trust 2004-2, dated October 8, 2008, was void because it did not agree with the terms of the Pooling and Servicing Agreement (“PSA”) that governed the trust and because HSBC also did not have an ownership interest in the note.
Young argued that HSBC did not own the note because HSBC produced a copy of the note in discovery on February 14, 2011, that showed the note was payable to Wells Fargo as lender and there were no endorsements or allonges. About one month later, HSBC produced another copy of the same note, this one with a stamped and typed endorsement to Wells Fargo, with no date indicating when the endorsement occurred.
HSBC argued that Young lacked standing to challenge the assignment because Young was not a party to the PSA or a third-party beneficiary, arguing that Michigan law was well-settled. But Circuit Court Judge Melinda Morris found that argument to be erroneous, and the issue undecided by the Michigan Court of Appeals or Supreme Court. Noting conflicting authority in other jurisdictions, Judge Morris relied on the decision in Butler v. Deutsche Bank Trust Co. Americas, ___F Supp 2d___, ___; 2012 WL 3518560, *6-7 (D Mass 2012):
Courts in this district are in agreement that a mortgagor lacks standing to challenge the assignment of his mortgage directly if he is neither a party to nor a third-party beneficiary of the assignment contract…
However, “the question of whether [a mortgagor has] standing to challenge [an] assignment is different form the question of whether [he has] standing to challenge the foreclosure on the basis that [the foreclosing entity] did not properly hold the mortgage at the time of the foreclosure.” …A number of decisions have held that mortgagors have standing to challenge a foreclosure sale as void due to an allegedly invalid assignment…
* * *
Mortgagors challenging foreclosure sales that are void due to invalid assignments have standing to do so because they have demonstrated “a concrete and particularized injury in fact, a causal connection that permits tracing the claimed injury to the defendant’s actions, and likelihood that prevailing in the action will afford some redress for the injury.” …
I do not, however, hold that a mortgagor has standing to challenge a foreclosure on the basis of just any potentially invalidating deficiency in an assignment. Massachusetts case law distinguishes between void and voidable assignments…If an assignment is voidable, but has not been avoided, then the assignee has legal title to convey to the purchaser at a foreclosure sale. If an assignment is void, then the assignee was assigned nothing and has nothing to convey to the purchaser at the foreclosure sale. Where a “grantor has nothing to convey…[t]he purported conveyance is a nullity, notwithstanding the parties’ intent.”…
Here, however, Butler fails to allege facts or present legal argument sufficient to establish that the assignments to Deutsche Bank were void due to their failure to comply with the Pooling and Servicing Agreement…
This distinction is very important because in most foreclosure cases, the homeowner is not trying to enforce the PSA, but to present evidence that an assignment was invalid. The vast majority of foreclosures involve cases with unendorsed notes or with endorsements that are not dated. Like the Young case, the vast majority of foreclosures by trusts also involve mortgage assignments created years after the trust closing date and an assignment of a non-performing loan. Assignments after the closing date and assignments of non-performing loans, and particularly the combination – assignment of a non-performing loan after the closing date – are almost always violations of trust PSAs.
The simple truth is that trusts were established (and sold) with rules to protect investors from such foolhardy action on the part of a trustee such as suddenly acquiring non-performing loans years after the trust closing date. When trust rules are violated, there can be serious negative tax consequences for the trust: the IRS could decide that the trust does not qualify for favorable REMIC status.
In the vast majority of cases, there is no real underlying financial transaction as reported in the mortgage assignment. If the records of the loans entering and leaving the loan pool of the trust are examined, they simply do not match up with the assignments. These later dated assignments were almost always made by document mills, mortgage servicers and foreclosure law firm employees solely to provide some proof to the courts that the trustee has standing to foreclose. In other words, these later dated assignments are almost always fraudulent.
It is also important to note that these assignments are not just robo-signed, that is, signed by someone with no knowledge of the underlying facts, or signed by someone who is signing his or her (or someone else’s name) several thousand times a day. These assignments falsely state the date on which the trust acquired the mortgage.
Because most note endorsements are non-existent or non-dated, the only date in most cases involving mortgages claimed by mortgage-backed trusts is the false date on these assignments.
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