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Technical Attack on Foreclosure Proves Successful

Posted by 15789465 on

It must have been "mortgage day" at the Alabama Supreme Court!  Also on September 13, 2013, it decided the case of Harris v. Deutsche Bank, Case No 1110054. This was a MERS mortgage, with a securitized trust. Deutsche Bank was the Trustee. You have to understand that the promissory note is the instrument the borrowers sign, in which they agree to repay the money they borrowed. The mortgage is a separate instrument, in which the borrowers agree their real estate will be collateral for the promissory note.  The term "mortgage loans" generally refers to the entire transaction, note and mortgage. In this case, the mortgage was assigned to the Trustee before the foreclosure. In the post-foreclosure ejectment action, the plaintiffs proved up the default and the assignment of the mortgage. They presented no evidence the promissory note was assigned to the trust. The trial court entered summary judgment in favor of the Trustee, and against the borrower. The Alabama Supreme Court agreed with the borrower, that a foreclosing party must own the promissory note before it is entitled to foreclose. Because the borrowers put this at issue, the Trustee was obligated to present proof that it owned the note. It did not. As a result, summary judgment was improper, and the case was remanded. As an aside, the Court also took the opportunity to reiterate that defenses based on technical defects regarding the PSA--Pooling and Servicing Agreement--cannot be raised by a borrower.  For those of you who do not follow these things, the argument goes like this:
  1. The PSA has an open date, which is the date on which the trust is supposed to receive assignment of all the mortgage loans that will be held in the pool. New mortgage loans cannot come dribbling in at later dates. This is one of the requirements for receiving conduit tax treatment by the IRS. It is also necessary so the trust can create the various tranches and sell them out to bondholders.  You can't slice the pie up, sell pieces to people all over the world, and then keep changing the size of the pie.  It doesn't work.  Because of these issues, the PSA says the trust will close on a certain date, and no more mortgage loans can be added.
  2. BUT, because everyone was so busy making money originating loans "back in the day," a lot of legal niceties were not taken care of.  The entire securitized trust industry was based on the assumption that real estate prices would continue to rise at a steady rate, defaulting borrowers would be able to sell their property and pay off their mortgages, and nobody would get hurt. So, why stock up on bandages, right? Many mortgage loans were not assigned to the trusts until LONG after the close date.
  3. The borrowers argued, as a result, that the subsequent assignment of the mortgage to the trust was illegal under the terms of the PSA, so the trust cannot foreclose on the property. Somebody might be able to foreclose, the borrowers argued, but it was certainly not the trust.
The Alabama Supreme Court said issues about what a trust can and cannot do, under the terms of its PSA, are not issues that can be raised by a borrower. The borrower is neither a party to that agreement, nor a third party beneficiary.  As a result, that argument was kicked out of court.

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5 comments

  • it seems to me that on the face of it they have a valid assignment and it is good until a judgement says otherwise – regardless of the borrower’s personal opinion – and since the borrower has no standing to judicially challenge an agreement between the assignor and assignee, it will stay that way

    howie on
  • Re: standing, the true objection might be a “real party in interest” type of thing, and a motion to require joinder of whoever really owns the loan. On the other hand, it brings up really complicated choice of law questions (if it’s a New York trust organized under the laws of Delaware with mortgages on property in Alabama, whose law applies?) I think courts are reluctant to look at these issues because it could cause a second meltdown.
    Some of the problems come, I think, from lawyers not making the proper objection. Off hand, I’d say a borrower ordinarily has no right to question the PSA because he is not a party and not a 3rd party beneficiary. BUT, what if the borrower asserted he’d been led down the loan mod primrose path by the current servicer, but might have obtained a loan mod with a different servicer representing the true owner of the mortgage? Then, maybe the borrower would have an unintentional fraud claim with reasonable reliance to its detriment?
    Insurance is irrelevant to the loan obligation. In an extreme example where the insurance pays the loan in full, the insurance company then becomes entitled to sue the borrower. So, no benefit to the borrower.
    Not from day one, but from very early, a few people did have this all figured out. As one example, different packages of loans received different ratings, depending on the rating agency used and the particular alogorithms that agency used. Wall Street knew how to manipulate that. Also, the entire system was based on a false premise—that real estate prices would always rise, and that any “flat” or “declining” time periods would be very short duration. When the foundation is flawed, the entire house falls down.
    I agree with the finger pointing that the government, who pushed lenders to make loans, and made it easy for the system to make bad loans. I do not think every American should own a home. I think a very large number should be renters. Our investments and savings accounts should be our nest eggs, not our homes.

    Denise L. Evans on
  • If the loan in question did not make it into the trust during the time that is spelled out under New York trust laws as being the time frame that the trust can accept assets like mortgage loans into the trust, then would it not be void? If so then if the trust is the party bringing action or if others are acting on the orders of that trust would they not be the wrong party to bring court action? As far as standing, I think I understand that if you have not been harmed, then you can not bring action in court. If the trust is not the legal owner of the loan due to it not getting into the trust during the time allowed under New York trust law, then what right do they have to bring action by foreclosing on the homeowner. I don’t understand how the court can say the home owner has no rights to question the pooling and service agreement? When that agreement may hold the key as to who is the real party that has been harmed. Would the court not want to know if the party bringing court action is the real party that has been harmed? If ins payments or other types of credit ins, credit default swaps, were paid to the investors upon the loan defaulting would that not change the amount due on the loan? If the homeowner did not make the payment but then the ins, cdo, kick in to make payment, then how can they be a default? I have read where the cdo market is a gray area where no one knows for sure who holds what, no records of how many cdo’s have been sold and who went short or long. It leads me to think that from day one a few parties knew that the mortgage bonds would get AAA rating no matter how good or bad the loans were that were making up the bonds. so load up the bonds with loans that you knew would go bad, then make the side bets in the cdo’s market that the bonds would go down in value, sit back and watch the billions roll in. Then have the b**ls to say that the govt made us make those loans, we were only doing what those democrats ordered us to do and any homeowner who questions any of this in court is just a dead beat trying to get a free home. A good gig, if you can get it.

    Johnny Rocco on
  • That’s my understanding. So far, the Alabama Supreme Court has said, “we have not heard any viable arguments why the borrower should be allowed to complain.” They leave the door open in case someone is clever enough to come up with a good argument.

    Denise L. Evans on
  • as i understand it the borrower doesn’t have the standing as a defendant to challenge psa irregularities as long as mortgage and note is assigned (and the assignor and assignee don’t complain)

    howie on

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