Tuesday, August 04, 2009

How To Avoid A Home Foreclosure The Easy Way

A couple of months ago, Stephanie Katich, an attorney with Indiana Legal Services' Foreclosure Defense Unit in Merrillville, delivered a very eye-opening continuing legal education seminar to attorneys in attendance at the Indiana Annual Solo Practitioners Continuing Legal Education Forum on the subject of home foreclosures. Katich laid out some basic defenses a consumer attorney could raise in almost any home foreclosure action, such as real party interest and chain of title. Initially, I thought she was blowing smoke, but I soon realized the wisdom in the points she was raising. Looking at a New Jersey Court's dismissal of a foreclosure action brought by Deutsche Bank last month, it was easy to confirm the viability of Katich's suggestions for successfully defending a client facing a foreclosure on their home. In that case, the bank could not produce the basic documents it needed to prove that it held a note and mortgage for the home upon which it was foreclosing. As one legal observer, Jeff Barnes, explained:

In a stunning victory for borrowers, a New Jersey court has dismissed a foreclosure action filed against the borrowers by Deutsche Bank Trust Company America as alleged trustee for a securitized mortgage loan trust after Deutsche Bank willfully, and despite the entry of three (3) separate court orders, refused to produce documents demanded by the borrowers which included documents setting forth the identity of the true owner and holder of the Note and mortgage, the complete chain of title to ownership of the note and mortgage, payment application histories, and documents as to the securitized mortgage loan trust. The Court had given Deutsche Bank multiple opportunities and extensions of time to produce the documents, but Deutsche Bank continually refused to produce any of the documents requested, resulting in the dismissal of Deutsche Bank’s foreclosure action. The Court also ruled that Deutsche Bank is not permitted to re-file any foreclosure action until it is prepared to produce ALL of the subject discovery.
Attorney Jeff Barnes went on to explain a problem Deutsche Bank was having with other mortgages that it had taken by assignement from MERS, an acronym for the Mortgage Electronic Registration System most mortgage lenders relied upon in these transactions:

Deutsche Bank was also the subject of a recent ruling in a case in New York where the Court denied Deutsche Bank’s Motion for Summary Judgment, finding that a purported assignment from MERS to Deutsche Bank was defective and that Deutsche Bank, with an invalid assignment of the mortgage and note from MERS, lacked standing to foreclose.
Say what? You mean that MERS thing doesn't really accomplish what Professor Debbie Fallender taught me in my law school real estate class at Indiana University School of Law--Indianapolis? Yes, that is the case, and that's precisely what Katich explained to us at that continuing legal education seminar in June. Well, what is it then? MERS offers this explanation:

MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans.”
Don't they wish MERS eliminated the need to prepare and record assignments now after all these years. I'll use Katich's touch in explaining what MERS actually is:

Indeed, MERS is innovative. Look at the mortgage instrument. MERS is often referred to as the “nominee” for Lender A. MERS is not a lender. MERS may “hold” the mortgage in Al Gore’s cyber lockbox, but it usually never physically holds the note, or the mortgage instrument. It is at most what its name suggests, an electronic repository “holding” the electronic information contained in the mortgage instrument on “behalf” of the actual noteholder.

So if MERS is nothing, if it has no beneficial ownership interest in anything, what’s the big deal?

Stay with me, this is where the true innovation comes in. Building on the theme we have been developing in the past two articles, plaintiff-creditors trying to foreclose on your client’s house often cannot get an actual assignment of the mortgage and the note from the originating lender, or from its predecessor in interest. The reasons for this are many, as I described in the earlier articles. Most of it has to do with extremely sloppy business practices tied up in securitization.

However, this does not stop plaintiff-creditors from trying to create an assignment when none exists. The plaintiff-creditor will try to recreate a chain of assignments which will show the court that they are indeed the note holder. Here is the typical situation to show you how this works:

Lender A originates a loan. At the time of the closing, MERS is designated as the “mortgagee” in the Mortgage instrument as “nominee” for Lender A. The loan is later sold to Lender B. Lender B files a Complaint to foreclose. Lender B cannot find the note and/or the originating lender, who is long gone. Lender B gets an “Assignment of Mortgage” from MERS, purporting to assign an interest in the note and the mortgage instruments.

What is the problem? Actually, the problem is two-fold for Lender B at this point. First, an assignment of a mortgage, without an assignment/negotiation of the note, transfers nothing. Remember that the mortgage instrument is merely an “accessory” to the note. As such, a transfer of a mortgage without a corresponding transfer of an interest in the note is a meaningless ceremony. However, MERS in this example never had a beneficial ownership interest in the note to give to Lender B by assignment.

Second, and here is the intriguing part, what is MERS in this transaction? MERS never had a beneficial ownership interest in the mortgage either, for that matter. Recall that Lender A owned the note at the time of the loan and MERS was merely the “mortgagee” as “designee” on behalf of Lender A in the Mortgage instrument. The actual mortgagee, however, has always been Lender A because Lender A continued to own the note. MERS cannot give something it never had to begin with. Lender B got a lump of coal from MERS.

Everyone seems to accept that MERS is the “mortgagee” in this transaction because it is designated as such in the Mortgage instrument. Yet, under Indiana law, the one holding the note is the equitable mortgagee. As such, notwithstanding the fact that MERS may be designated as the mortgagee as “nominee” for Lender A, Lender A is still the mortgagee. Any enforceable assignment of interest in the note must come from Lender A to Lender B, not from MERS the “mortgagee” to Lender B.

This is the intriguing issue which arises when the actual noteholder and the “mortgagee” are “separated at birth”. At the moment the loan is consummated (sorry!), the noteholder/note and the mortgage/mortgagee are separated at birth. They are split apart from one another. The original note (and sometimes the mortgage instrument also) goes into some vault, where no doubt the secrets of the universe are also stored, never to be seen again. The mortgage instrument information is “registered” with MERS’ electronic registration system. (Sometimes MERS may actually have physical possession of the mortgage instrument also, but not often).

Then, when some subsequent purchaser, Lender X, buys the “loan” and files suit to foreclose on the real estate, nobody can find the original note/mortgage instrument, or Lender A is out of business, or Lender Z is too lazy to go find Lender A and get an assignment. So Lender X downloads a form from MERS’ innovative website, designates some employee in Lender X’s office as an “assistant secretary” of MERS (I am not kidding, they are always called “assistant secretary”) who has no actual relationship or authority on behalf of MERS, and makes a magical, innovative, but wholly ineffective, “Assignment of Corporate Mortgage”, attempting to assign the note and mortgage, when MERS never had possession of or any beneficial ownership interest in either the note or the mortgage to begin with! You know you have a suspect assignment when the assignment is prepared by the collection law firm which files suit and the assignment is dated days before the Complaint is filed, but the actual “sale” of the loan was years before.

At the time of the consummation of the loan, the lender “separates” the note from the mortgage, when they are inseparable. Or, more accurately, the mortgage instrument/security interest is inseparable from the note. The note is, of course, still evidence of a debt on its own.

The point of which is that while it may have been “innovative” as an electronic method of keeping track of assignments of mortgages when loans were sold at the speed of light this past decade, it is a wholly ineffective way to create a chain of valid assignments when none exists. Do not feel bad for the MERS mortgage. It never had anything to lose to begin with.
And as Paul Harvey used to say, now you know the rest of the story. Go forth and drive mortgage lenders crazy as they desperately search for that paper that is locked away in some far away vault destined never to be found in time to respond to a court-ordered discovery deadline. By the time consumer attorneys across the country catch on to this reality, we could be facing yet another home lending crisis.


Paul K. Ogden said...

Great post, Gary. MERS is such an obscure entity that it was great you were able to dissect things.

I don't feel sorry for those mortgage companies at all. Is it too much to ask that they file a simple assigment when they sell a mortgage?

I have cases now where the mortgage company cannot prove how they came to hold the mortgage. too bad. They need to be more careful in how they do business.

MERS has created a mess that we're all dealing with.

Doug said...

I'm half tempted to raise this defense when I'm representing a judgment creditor who has a judgment lien on a debtor's property. But, I suppose I have enough work to do without screwing around just for the hell of it. Interesting post.

pnixon said...

3 even easier ways to avoid a home foreclosure (and I didn't even have to go to law school to learn these cool tricks):

1) If your mortgage payment is more than you can afford, don't accept the loan.
2) If your paycheck is not variable, neither should your mortgage payment be.
3) Pay your bills when they are due and don't wait for a lawyer or the government to bail you out.

Russell said...

I read awhile back about a legal strategy called "produce the note" where foreclosures were being delayed because the plaintiff couldn't produce the paperwork showing that they owned the mortgage. Is this pretty much the same thing you were talking about? (I tried to follow the legalese as best I could and that's what came of it.)

Just curious because I thought that was a great strategy and was wondering if it was going to work.

POPA said...

I don't practice in this area at all, and I'm REALLY trying to understand it.

Mortgage Lender B buys a loan from mortgage Lender A, and then when Homeowner A defaults. Lender B sues to foreclose but can't because Lender A can't produce the original paperwork (which it never transferred).

So does that mean some homeowners can basically squat in a home for his/her natural born life?

If so, that just means Lender B is going to go under because it: (a) can't mitigate loss on the loan by taking and selling the collateral; and (b) it will have to sue Lender A to get its money; and (c) it won't get that money if Lender A is not in existence now.

If this "we ain't got it" refrain is heard a great deal, won't the government have to bail out major banks and lenders because all the homeowners who read your post now knows (s)he can live without a housing payment? In fact, won't they even avoid taking a credit hit because they can legitimately assert to Equifax that they don't have a mortgage with creditor who is reporting all the missed payments?

In short, great....we've just used a byzantine secured transactions loophold so people who bought a house they shouldn't can screw America again....all while living mortgage-free!

Yes, I know that one man's "law" is another man's "loophole," but I call it a "technicality" when you KNOW you entered into a mortgage, you know you're not paying anything, and now you're going to act like you have no idea what the lender is talking about.

(Please tell me I'm reading this wrong; otherwise, I will just use this post as an opportunity to say again, "This is why America hates lawyers!")

Gary R. Welsh said...

Katich doesn't use the loophole in that fashion, Chris. She uses it to gain leverage to rework the terms of the mortgages, particuarly the absurd ARM mortgages by which so many people became trapped. When she raises these defenses, she finds mortgage lenders much more amenable to working out her client's mortgages.

JudgeNot said...

It's not a "loophole", it's the law.

If a party is going to file a lawsuit they must have legal standing to do it. If they have no legal interest, they cannot recover. You can't sue neighbor A for damages neighbor B caused.

It is the responsibility of the lenders to make certain all of the documentation of a property transfer is complete for legal transfer of the mortgage. After all, isn't that what the original lender does to you when you sign all those papers at closing?

A large part of the economic problems lenders are having these days are because ALL of their lending practices for the last 15-20 years have been sloppy and haphazard, whith the primary intent to sell, sell sell. As a result, they must take the (legal) heat.

rose411 said...

Thank you for bringing this topic to your forum. The issue goes much deeper than anyone can imagine.

I don't believe to many people realize that the Banks are the ones committing the fraud. It all starts from the time you sign the Promissory note. Once the bank takes possession of the instrument, they will often times sell it along with the mortgage. Once it has been sold, the bank is able to multiply that dollar figure by 10. Lets see, if your original note was for $100,000.00, that would be $1,000,000.00 for the note and another $1,000,000.00 for the mortgage. On top of it all, they collect monthly payments for the principle and interest, for the next 30 years.

Since the Promissory note belongs to the mortgagee, and the bank sold it, the bank was paid. It doesn't matter who pays the bank; point is, they were paid and made a huge profit off your credit.

There is far more to this mortgage crisis than meets the eye. The fraud is strictly with the leading institutions that sell the notes and mortgages.

So when the bank forecloses on the property, what did the bank lose, Nothing...it was a win, win for them from the get go. The only one harmed was the person who lost everything.

coreywasmyit said...

WELL if you must know your asked not to make any payments while you wait on your loan to be reapproved. Companies are ripping off the gov.

daltonsbriefs said...

Although the talk of how awesome it would be to dodge paying a mortgage and keep your house, in a perverse sort of way. I often said during the big sub-prime blowup that the problem was never sub-prime loans it was that they were priced too low. Many paid great and were good investments but the rates should have been higher ... like health insurance is now ... due to cheating.

The above "cheat" is just another reason that I have to believe rates on all mortgages are going to have to go up. The risk is aweful high if an attorney can claim the client doesn't owe the money because the mortgage company lost the note. (of course the note was recorded and does exist, they just can't find the original)

coreywasmyit said...

well I know for a fact the buyer of the loan from the first company sold my loan to a big bank and the big bank told me not to pay and would not take my money for loan for almost months before now filing for forclosure when they are the ones telling me not to pay. FHA see there side not my side I was asked to put my loan in default but now I'm filing chapter 13.

Barbara said...

This is the best MERS argument

"Everyone seems to accept that MERS is the “mortgagee” in this transaction because it is designated as such in the Mortgage instrument. Yet, under Indiana law, the one holding the note is the equitable mortgagee. As such, notwithstanding the fact that MERS may be designated as the mortgagee as “nominee” for Lender A, Lender A is still the mortgagee. Any enforceable assignment of interest in the note must come from Lender A to Lender B, not from MERS the “mortgagee” to Lender B."

Can you give me a specific citation to Indiana law that says this...