From: Holland, Peter
Subject: [Lawclinic] Important Victory in GMAC Foreclosure Robo-Perjury
Date: Friday, January 14, 2011, 5:12 PM
I just wanted to share an important victory our Consumer
Protection Clinic won today. Using the affidavit of Mr. Stephan, a GMAC
employee who testified in deposition in an unrelated case that he signed up to
10,000 (yes, ten thousand) affidavits per month without personal knowledge of
their contents, and did not appear in front of the notary who “witnessed”
his signature, the University of Maryland Consumer Protection Clinic partnered
with Civil Justice, Inc. and filed a defensive class action. That is, we
took an existing foreclosure case, and filed a motion to dismiss on a
class-wide basis any foreclosure which relied on the Robo-Perjury Affidavits.
We met some resistance, including all kinds of arguments
that the case was not suitable for class action.
Today we appeared in court and entered a consent motion to
dismiss, based on the representation in open court by GMAC’s lawyer that:
1. GMAC is dismissing without prejudice every single Maryland
foreclosure which relies on the Stephan affidavit, where the sale has not already
been ratified;
2. If and when they refile the foreclosures, they will not
pass to the consumers any of the costs incurred in these bogus foreclosures;
3. Any new refilled foreclosure will be subject to
Maryland’s new foreclosure rules requiring notices, mandatory foreclosure
mediation, and other protections.
GMAC’s lawyer had told us prior to this hearing that
there are about 10,000 affected homeowners.
I think that this litigation strategy could be used in other
states by other law school consumer clinics, because Mr. Stephan’s
affidavits were filed all over the country.
Peter A. Holland
Visiting Law School Assistant
Professor
Consumer Protection Clinic
University of Maryland School of Law
For more on this see…
10,000 GMAC Foreclosures Stopped in Maryland
In a major ruling Friday, a coalition of nonprofit defense lawyers and consumer protection advocates in Maryland successfully got over 10,000 foreclosure cases managed by GMAC Mortgage tossed out, because affidavits in the cases were signed by Jeffrey Stephan, the infamous GMAC “robo-signer” who attested to the authenticity of foreclosure documents without any knowledge about them, as well as signing other false statements.
The University of Maryland Consumer Protection Clinic and Civil Justice, Inc., a nonprofit, filed the class action lawsuit, arguing that any case using Jeffrey Stephan as a signer was illegitimate and must be dismissed. In court Friday, GMAC agreed to dismiss every case in Maryland relying on a Stephan affidavit. They can refile foreclosure actions on the close to 10,000 homes, but only at their own expense, and subject to new Maryland regulations which require mandatory mediation between borrower and lender before moving to foreclosure. Civil Justice and the Consumer Protection Clinic also want any cases with affidavits from Xee Moua of Wells Fargo, who has also admitted to robo-signing, thrown out, but that case has not yet been settled.
Continue reading here…
I wonder if this is going to apply to all the other Robo-signers…
One other note, this is more than just GMAC cases, Stephan has signed affidavits for many other “Banks” as well…
Background info from last November…
Attorneys ask courts to toss out foreclosure cases
Motions focus on ‘robo-signers’ with GMAC, Wells Fargo
More here: http://findarticles.com/p/articles/mi_qn4183/is_20101102/ai_n56231578/
~
Monica Hadley??? Capital One / Chevy Chase Bank? Dismiss ALL of THEM!
Standing in the Wake of the Foreclosure Crisis: Why Procedural Requirements Are Necessary To Prevent Further Loss to Homeowners
Timothy Froehle
Abstract: In the current fallout from the foreclosure crisis and the securitization of mortgages, an old procedural doctrine is becoming increasingly relevant to homeowners facing foreclosure. The doctrine of standing is surfacing in the contexts of judicial foreclosure and bankruptcy proceedings as a defense to the foreclosing party‘s right to foreclose. Defendants and debtors are affirmatively compelling lenders to produce evidence of ownership of the underlying note and mortgage, and lenders are increasingly falling victim to the same haste and lack of foresight that led to the crisis. Additionally, courts are beginning to raise these issues on their own, a sign that they are inclined not to allow lenders to foreclose without properly protecting the homeowners at risk. This protective stance, however, fails to reach the homeowners whose foreclosures occur outside the judicial system. Numerous defects in standing and ownership of the mortgages pass through non-judicial foreclosure without any scrutiny, and homeowners‘ interests in retaining ownership of their property will continue to suffer unless legislators respond with laws requiring proof of ownership of the loan before foreclosure.
Table of Contents
I. INTRODUCTION ……………………………………………………………………………………………………….. 1
II. SECURITIZATION AND THE PAPERWORK PROBLEM …………………………………………… 6
A. Transferring the Note and Assigning the Mortgage………………………………………………. 8
B. Securitization and How Things Fall Apart …………………………………………………………. 10
III. STANDING ……………………………………………………………………………………………………………. 12
A. Real Party in Interest ………………………………………………………………………………………. 13
B. Defects ………………………………………………………………………………………………………….. 16
C. In re Hwang …………………………………………………………………………………………………… 18
IV. SUA SPONTE ………………………………………………………………………………………………………… 19
A. Judicial Foreclosure and Bankruptcy ………………………………………………………………… 20
B. Sua Sponte in the Context of Non-Judicial Foreclosure ………………………………………. 22
V. POLICY RECOMMENDATIONS……………………………………………………………………………… 25
Electronic copy available at: http://ssrn.com/abstract=1695070
A. Legislatures Should Add Record-of-Ownership Requirements to Power-of-Sale Statutes ……………………………………………………………………………………………………………… 26
B. Legislatures Should Add Fee-Shifting Provisions to Their Foreclosure Statutes …….. 28
VI. CONCLUSION………………………………………………………………………………………………………. 31
1
I. INTRODUCTION
In the wake of the widely reported-on foreclosure crisis, an alarming number of families are in danger of losing their homes. In 2009, there were foreclosure filings reported on 2,824,674 U.S. properties (about one in every forty-five houses).1 Additionally, the percentage of homes delinquent on their mortgage payments in 2008 reached 12.07 percent, the highest rate the Mortgage Bankers Association, a national association representing the real estate industry, had ever recorded in its twenty-seven years of surveys.2
The groups that have seemed to benefit from increasing numbers of foreclosures, however, are the law firms and the mortgage servicers they represent in the foreclosure proceedings.3 These firms make their money by processing huge numbers of foreclosures as quickly as possible.4 Their haste, however, has led one bankruptcy judge to write in an opinion, ―[C]oncomitant with the increase in foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system.‖5 One of the most basic legal requirements that is causing lenders no
1 Press Release, Realtytrac.com, Realtytrac Year-End Report Shows Record 2.8 Million U.S. Properties with Foreclosure Filings in 2009 (Jan. 14, 2010), available at http://www.realtytrac.com/contentmanagement/pressrelease.aspx?channelid=9&accnt=0&itemid=8333. ―Filings‖ include default notices, auction sale notices, and bank repossessions. Id.
2 Press Release, Mortgage Bankers Ass‘n., Delinquencies and Foreclosures Continue to Climb in Latest MBA National Delinquency Survey (May 28, 2009), available at http://www.mbaa.org/NewsandMedia/PressCenter/69031.htm. This percentage is the non-seasonally adjusted rate. Id. Additionally, the foreclosure rate in 2008 on prime fixed-rate loans has overtaken the percentage of subprime foreclosures ―for the first time since the rapid growth of subprime lending.‖ Id.
3 See Gretchen Morgenson & Jonathan D. Glater, The Foreclosure Machine, N.Y. TIMES, Mar. 30, 2008, at BU1 (―Behind the scenes in these dramas, a small army of law firms and default servicing companies, who represent mortgage lenders, have been raking in mounting profits.‖).
4 Id.
5 In re Maisel, 378 B.R. 19, 20–21 (Bankr. D. Mass 2007); see also Morgensen & Glater, supra note 3, at BU1 (quoting from Judge Rosenthal‘s opinion in the In re Maisel case).
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shortage of headaches is simply proving that the lender has ownership of the underlying loan and therefore has standing to sue the homeowner to foreclose.
The process of securitizing residential mortgages is largely blamed for the collapse of the subprime lending market and the resulting national financial crisis.6 However, securitization itself was merely a financial tool, a hammer that created an almost insatiable appetite in investors and lenders for seeing every potential homeowner as a nail. Through securitization, the once traditional relationship between mortgage lender and borrower was shattered and replaced by a system that turned an illiquid mortgage loan into a ―tradeable security with a secondary market.‖7 This process, highly lucrative and in-demand at the height of the housing bubble, allowed lenders to transfer mortgage loans indefinitely and quickly. The sheer number of transfers between entities, however, made keeping track of the underlying promissory note and mortgage much more difficult and costly for lenders—to the extent that often these legal considerations relevant to ownership of the loan were of a much lower priority than the profit of each transfer.
The question of legal ownership of the underlying note and mortgage is central to the procedural requirements of a party showing standing to sue for foreclosure in a court of law and proving that it is indeed the real party in interest that is entitled to relief from the court system. These procedural requirements are necessary in every civil lawsuit; however, in the foreclosure
6 See Kurt Eggert, The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 CONN. L. REV. 1257, 1264–65 (2009) [hereinafter Eggert, The Great Collapse] (arguing that securitization is one of the primary causes of the ―subprime meltdown‖ and increase in national foreclosure rates).
7 Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 535 (2002) [hereinafter Eggert, Held Up in Due Course] (quoting Joseph C. Shenker & Anthony J. Colletta, Asset Securitization: Evolution, Current Issues and New Frontiers, 69 TEX. L. REV. 1369, 1373 (1991)).
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process, the many complex transactions involved in the process of securitization has made it more difficult for a foreclosing lending to show that it has ownership of the note and has properly been assigned the mortgage through the chain of transfers of the underlying loan.
The difficulty for lenders of proving ownership has led to many reports in the last few years regarding a ―new way to fight foreclosure.‖8 In one CNN broadcast on why homeowners in foreclosure should be asking the bank to ―produce the note,‖ one anchor turned to the reporter and asked, ―Why doesn‘t the judge just start out with something like this and says [sic] can somebody provide me with the proof of ownership of the house?‖9 The reporter answered, ―I think that‘s a great idea.‖10
While it may sound like a ―great idea‖ to the media and the homeowners facing foreclosure, whether a judge may raise the issue of ―who owns the note‖ depends greatly on how a particular case comes before her and how much discretion she has under that particular procedural setting. Whether a court can and should raise such an issue sua sponte, or ―on its own motion,‖11 will depend upon whether the foreclosure comes under judicial foreclosure; in a bankruptcy hearing; or in an attempt to halt foreclosure or get back ownership of his house after a power of sale, commonly referred to as non-judicial foreclosure, has occurred.
Additionally, the attorneys for the foreclosing lenders are financially invested in the efficiency and expediency of each foreclosure lawsuit.12 Foreclosing attorneys have argued that
8 Online Video: Greg Hunter, New Way to Fight Foreclosure, CNN MONEY.COM, June 20, 2008, http://money.cnn.com/video/news/2008/06/20/news.hunter.produce.note.cnnmoney/.
9 Cnn.com, Transcripts, Your Money, http://transcripts.cnn.com/TRANSCRIPTS/0806/21/cnnitm.01.html (last visited Feb. 15, 2010).
10 Id.
11 Black‘s Law Dictionary (8th ed. 2004)
12 See generally Morgensen & Glater, supra note 3, at BU1 (setting out the profit motivation for high-volume foreclosure law firms).
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the procedural requirements should not be so strict under the circumstances, and that after-the-fact affidavits and other ―fixes‖ of the assignment and transfer paperwork should be good enough to allow them to proceed with foreclosures they argue are inevitable.13 This mindset has started to come under fire from judges who strongly feel that the procedural requirements of standing must be adhered to in order to ensure justice within the foreclosure process.14 While this trend among courts is a necessary safeguard to prevent foreclosing lenders from running ―roughshod over borrowers,‖15 what is likely to happen when this safeguard of judicial oversight is absent but foreclosing parties‘ motivations for expediency and profit still exist?
When a homeowner is subject to a non-judicial foreclosure, he must file a lawsuit to enjoin the foreclosure and raise any applicable defenses, including those based upon standing or real party in interest. At best, a homeowner will seek to stop the foreclosure by filing a lawsuit of his own in a court of general jurisdiction; if there is an issue as to whether the creditor is the true owner of the mortgage, he will also raise it in the complaint. At worst, the homeowner does not contest the foreclosure, and in a matter of a few months, can lose the property without a court ever becoming involved and without judicial oversight as to whether the foreclosing party had the right to foreclose. Alternatively in this context, a homeowner may bring suit and contest other issues relating to the foreclosure, such as improper notice, and not raise the issue of whether the creditor is the true owner of the note or has the capacity to initiate foreclosure. In
13 See Jeana Kim Reinbold, “Confirming” a Mortgagee’s Chain of Title: The Case of Gifty Samuels, 28 AM. BANKR. INST. J. 18, 89 (arguing that the court in the case of In re Samuels, No. 06-11656, slip op., 2009 WL 2032121 (Bankr. D. Mass. July 6, 2009), was correct to overlook initial defects that were ―ultimately curable‖).
14 See In re Foreclosure Cases (In re Foreclosure Cases I), Nos. 1:07CV2282 et al., 2007 WL 3232430, at *3 n.3 (N.D. Ohio 2007) (―Plaintiff‘s, ‗Judge, you just don‘t understand how things work,‘ argument reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.‖).
15 Morgensen & Glater, supra note 3, at BU1.
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this situation, the homeowner may waive these defenses and be barred from raising them later in the proceedings—even if he becomes aware of the likelihood that the creditor‘s standing was not valid. Further, a court overseeing these cases will not have the ability to raise these issues on its own motion because the standing of the plaintiff in these lawsuits is not in question.
The problems in these situations when foreclosure is not overseen by a court are quite substantial. If the many judicial foreclosure cases in which courts have dismissed actions, or otherwise denied or conditioned a granting of foreclosure to creditors, are a reflection of the state of affairs among lenders, servicers, and mortgage trusts, the amount of potential violations of common procedural requirements that are occurring outside of judicial oversight may be staggering. When a creditor is able to foreclose on a property without having ownership of the mortgage, or the transfers between assignees contain improprieties, it amounts to an improper foreclosure of a homeowner‘s property interest. Besides the effect on the individual homeowners‘ interests, there are the lingering issues of title that will come back to haunt future buyers long after the creditors have conveyed the property and moved on.16
The need to resolve these issues of proper ownership of the mortgages will undoubtedly arise at some point.17 The longer lenders can remain wholly outside of the judicial spotlight, the
16 See Pam Martens, The Next Financial Crisis Hits Wall Street, as Judges Start Nixing Foreclosures, COUNTERPUNCH, Oct. 21, 2009, http://www.counterpunch.org/martens10212009.html# (―[R]epresentatives for the [securitization] trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without . . . proof that they had legal standing.‖). See generally U.S. Bank Nat‘l Ass‘n v. Ibanez (Ibanez II), Nos. 08 MISC 384283(KCL), 08 MISC 386755(KCL), 2009 WL 3297551 (Mass. Land Ct. 2009) (holding foreclosure sales invalid where lenders were not assigned ownership of the mortgages at issue until after the foreclosure sale; the lenders sued to clear title on the properties when they were unable to obtain insurance due to their lack of interest before the sale).
17 See Ibanez II, 2009 WL 3297551, at *1 (stating lenders‘ arguments in action to clear title after defective non-judicial sale).
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longer these complex issues of standing will continue to persist and continue to create havoc in real property titles. Legislatures can take affirmative action to bring more of these foreclosures under judicial oversight or the regulation of state and local governments, and they should. The consequences of waiting until more homes are taken and more defective titles are conveyed will only prolong the fallout from the housing bubble.
Additionally, this Note argues that non-judicial foreclosure states should add statutory fee-shifting provisions to their foreclosure laws to allow homeowners to recoup legal fees for lenders‘ violations of standing requirements. In non-judicial states, this would provide an incentive for more homeowners to seek legal assistance and for attorneys to review the propriety of a lender‘s claim to standing and result in more meritorious cases brought within the judicial system.
In Part II, this Note outlines the securitization process and the problems it has caused in foreclosure proceedings. Part III analyzes the judicial procedural requirements of standing, including real party in interest. Part IV analyzes how judges may raise issues of standing and ownership of the loan on their own motion, and the effect of this lack of judicial oversight in states with non-judicial foreclosure. Part V argues for legislative solutions that would mitigate the harmful effects of lenders foreclosing without proper standing and ownership of the mortgage loan in states with non-judicial foreclosure.
II. SECURITIZATION AND THE PAPERWORK PROBLEM
Securitization of mortgages is a relatively recent development in investment strategies.18 Securitization is ―the process of creating debt instruments (usually bonds) by pooling mortgage
18See Richard J. Rosen, Fed. Reserve Bank of Chi., The Role of Securitization in Mortgage Lending, 244 CHICAGO FED LETTER (Nov. 2007), available at
7
loans, transferring those obligations to a trust, and then selling to investors fractional interests in the trust‘s pool of mortgages.‖19 This process converts a group of mortgages into mortgage-backed securities (―MBSs‖).20 A mortgage servicer conducts the day-to-day, basic tasks of collecting payments from homeowners and then distributes these payments to the appropriate parties, which include ―lenders, investors, taxing authorities, and insurers.‖21 The structure of MBSs is such that the payments by homeowners cover the interest paid to investors in the bonds.22
The securitization process requires the transferring of the notes and assigning of the mortgages as they are sold, pooled, and put into a trust.23 Had the originating lenders held the loans, foreclosure proceedings would be the simple and traditional case of the originating lender still in possession of the borrower‘s promissory note and mortgage pursuing the foreclosure.24 Because of securitization, however, ―the interests in the defaulting loans [have] been sliced and diced, tranched and sold, then often resecuritized, retranched and resold, perhaps several times over.‖25
In order for a party to seek relief from the automatic stay in bankruptcy, and then foreclose on the property, it must establish itself as the real party in interest as owner of the
http://www.chicagofed.org/publications/fedletter/cflnovember2007_244.pdf (stating that thirty years ago the originating bank would have kept the mortgage on its own balance sheet for the term of the loan).
19 Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 TEX. L. REV. 121, 123 (2008).
20 Rosen, supra note 18, at 1.
21 Porter, supra note 19, at 126.
22 Rosen, supra note 18, at 1–2.
23 See generally Rosen, supra note 18 (discussing the complex transfers and assignments of the mortgages as they are securitized).
24 See Eggert, The Great Collapse, supra note 6, at 1264–65 (discussing the differences in effect on the real estate market between originating lenders holding the mortgage and securitization).
25 Id. at 1265.
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mortgage and holder of the note.26 To do so, a party seeking relief from the automatic stay must show that it is the owner of both the original note showing the indebtedness of the debtor and has obtained proper assignment of the mortgage itself.27 Problems particular to securitized mortgages can arise in regards to either of these requirements.
A. TRANSFERRING THE NOTE AND ASSIGNING THE MORTGAGE
The promissory note demonstrates the debtor‘s promise to pay the amount borrowed from the original lender and is generally governed by Article 3 of the Uniform Commercial Code.28 A party is entitled to enforce the note when it is (1) ―the holder of the instrument,‖ (2) ―a nonholder in possession of the instrument who has the rights of a holder,‖ or (3) ―a [party] not in possession of the instrument who is entitled to enforce the instrument pursuant to [instrument is lost, stolen, or destroyed and party can provide proof of terms of the instrument and of the party‘s right to
26 E.g., In re Wilhelm, 407 B.R. 392, 398 (Bankr. D. Idaho 2009) (―Applying these principles [of real party in interest] . . . each Movant must show that it has an interest in the relevant note, and that it has been injured by debtor‘s conduct (presumably through a default on the note).‖); In re Jacobson, 402 B.R. 359, 366 (Bankr. W.D. Wash. 2009) (―The real party in interest in relief from stay is whoever is entitled to enforce the obligation sought to be enforced.‖); In re Nosek, 386 B.R. 374, 380 (Bankr. D. Mass. 2008) (―[T]hose parties who do not hold the note or mortgage and who do not service the mortgage do not have standing to pursue motions for relief . . . arising from the mortgage obligation.‖).
27 See, e.g., Everhome Mortgage Co. v. Rowland, No. 07AP-615, 2008 WL 747698, at *3 (Ohio Ct. App. 2008) (―Without evidence demonstrating the circumstances under which it received an interest in the note and mortgage, Everhome cannot establish itself as the holder.‖); Wash. Mut. Bank v. Green, 806 N.E.2d 604 (Ohio Ct. App. 2004) (holding that Plaintiff had not sufficiently demonstrated that it was the holder of the note and mortgage and thus summary judgment was inappropriate). Additionally, in a bankruptcy proof of claim, where the claim is based on a writing (as all mortgages must be), ―the original or a duplicate shall be filed with the proof of claim. If the writing has been lost or destroyed, a statement of the circumstances of the loss or destruction shall be filed with the claim.‖ BANKR. R. P. 3001(c).
28 See U.C.C. § 3-104 (2002) (defining ―negotiable instruments‖). A note is a negotiable instrument that contains a ―promise,‖ a ―written undertaking to pay money signed by the person undertaking to pay.‖ Id. §§ 3-103(a)(9), -104(b), -(e).
9
enforce the instrument]29 or [certain situations in which an instrument is paid or accepted by mistake]30.‖31
In the first instance, a party is the holder of the note if the note is indorsed to it, or as is common practice in mortgages destined for securitization, indorsed in blank.32 The blank indorsement allows the note to be transferred merely by possession.33 Possession of the note provides evidence of the obligation of the debt, while the mortgage provides security of payment of the debt. The note is thus required for a party to show authorization that it may foreclose on the property.
Proper ownership of the mortgage presents a different kind of analysis. Without a proper showing of a chain of assignments of the mortgage, a lender holding only the note has no lien on the property and only a collection action on the debt.34 Courts have held that foreclosing parties did not have standing to foreclose when the parties were unable to produce sufficient evidence of assignment of the mortgage between the originator of the loan and the party ultimately foreclosing on the property.35
29 Id. § 3-309(a)–(b).
30 Id. § 3-418(d).
31 Id. § 3-301.
32 U.C.C. § 3-205(b) (2002).
33 Id. (―When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.‖).
34 JOHN RAO ET AL., NAT‘L CONSUMER LAW CTR., FORECLOSURES: DEFENSES, WORKOUTS, AND MORTGAGE SERVICING 36 (Supp. 2009). But see CONN. GEN. STAT. § 49-17 (2006) (―Foreclosure by owner of debt without legal title‖).
35 See, e.g., In re Hayes, 393 B.R. 259, 270 (Bankr. D. Mass. 2008) (holding that party seeking relief from automatic stay had not shown that the originator of the loan had properly assigned it the mortgage); Everhome Mortgage Co. v. Rowland, No. 07AP-615, 2008 WL 747698, at *3 (Ohio Ct. App. 2008) (holding that Plaintiff was not entitled to summary judgment because a genuine material issue of fact remained as to ―how or when it became the holder of the note and mortgage‖); First Union Nat‘l Bank v. Hufford, 767 N.E.2d 1206, 1210 (Ohio Ct. App. 2001)
10
B. SECURITIZATION AND HOW THINGS FALL APART
A typical securitization process begins in the same manner as what one would consider a traditional consumer real estate transaction. A borrower purchasing real property gets a loan from the originating lender, commonly through a mortgage broker; signs a promissory note in favor of the lender; and assigns a security interest to the lender in the form of a mortgage.36 The originating party then sells the loan to an intermediary (known as the ―seller‖) who ―pools‖ together this and other loans, creating a bundle of loans that are finally transferred to the Special Purpose Vehicle (―SPV‖), most commonly a trust, set up to hold onto the loan bundle and issue securities to the seller representing the interests in the bundle.37 The seller then packages these securities according to the desired profiles it wants to create to provide investors with options ―featuring different sets of risk and rewards.‖38
(finding that Plaintiff First Union National Bank did not produce ―sufficient evidence explaining or demonstrating its right to the note or mortgage‖ other than ―inferences and bald assertions‖).
36 See Katherine A. Burroughs et al., Complex Loan Structures, in MORTGAGE AND ASSET BACKED SECURITIES LITIGATION HANDBOOK § 8:29 (Talcott J. Franklin & Thomas F. Nealon III eds., 2009) (describing the parties involved in the securitization of single loans).
37 See Eggert, Held Up in Due Course, supra note 7, at 538–39 (setting out the typical process of securitization). The SPV is often also referred to as a ―special purpose entity‖ or simply just ―trust.‖ See Burroughs, supra note 36, at § 8:29 (using the term special purpose entity trust to refer to what Eggert calls the SPV).
38 Eggert, The Great Collapse, supra note 6, at 1266. Additionally, Eggert discusses how the process of packaging the securities allowed most of the resulting securities (eighty percent) to receive a AAA rating by rating agencies. Id. at 1260. During the height of subprime loan securitization, the mortgage-backed securities rated the most risky (BBB+ or lower) were then transferred to another SPV that pooled and repackaged the risky securities with other pools of mortgages, assets, collateralized-debt obligations, etc. to turn a BBB into a AAA. Id. The fervor Wall Street lent to this process of packaging, repackaging, slicing, and dicing dramatically amplified lenders‘ problems as they now try to trace the path of transfers for a single loan in default. Cf. id. at 1268 (stating that ―even the rating agencies were overwhelmed by the complexity of the securities they were rating‖).
11
The SPV performs what are thought of as the traditional roles of an residential mortgage lender through the trustee, master servicer, and special servicer.39 The trustee conducts the basic administrative functions regarding the trust, including making payments to the investors as the mortgage borrowers make their monthly payments.40 The roles of the master servicer and special servicer depend on the default status of the individual loans.41 If the loan is not in default, the master servicer performs the everyday role of collecting payments from the borrowers and servicing the loan agreement.42 In the event of default, however, the special servicer steps in to service the loan and possibly foreclose on the borrower.43
The process of securitization made mortgage-backed securities extremely attractive to investors seeking to cash-in on the rising housing market by ―unbundling‖ the mortgage-lending industry.44 Where the traditional model of mortgage lending contains a lender conducting the tasks of documenting, funding, holding, and servicing the loan over the course of its life, securitization allows these functional aspects to be separated and distributed among several entities45—each with its own profit mechanism, and each caring very little about the actions and behavior of the others.46 This complex ―house of cards,‖ as Professor Kurt Eggert has referred to it, still relied upon a very simple action at its base—the monthly mortgage payment by the
39 Burroughs, supra note 36, at § 8:29.
40 See id. (describing the role of the trustee).
41 See id. (discussing the roles of the master and special servicer).
42 Id.
43 See id. (stating how the special servicer comes into play upon the ―occurrence and continuance of default or imminent event of default); see also Eggert, The Great Collapse, supra note 6, at 1266 (―A servicer collects the mortgage payments and may foreclose if necessary.‖).
44 Eggert, Held Up in Due Course, supra note 7, at 552.
45 Id.
46 See id. (―This separation of the mortgage process confers on each entity . . . plausible deniability of the actions of the others. The securitizer can claim to be unconnected to the broker and unaware of any of his activities, however improper.‖).
12
homeowners.47 When this simple action did not occur, the mortgage servicers at the end of these chains were the ones who then had to perform the traditional task of foreclosure, a task that, regardless of how complex securitization had made the lending industry, still required the same basic elements of standing and proof of ownership that had existed long before anyone had heard the term collateralized-debt obligation.
III. STANDING
Standing is a requirement in all state and federal courts in the United States.48 While the standing requirements for the federal courts are uniform and based upon constitutional requirements, each state has discretion in deciding upon its own standing threshold.49 However, these differences among states are unlikely to dramatically alter the results in foreclosure cases involving the standing issues discussed herein.50
In order for a lender to foreclose on a debtor‘s property, it must meet certain substantive constitutional requirements, established by the doctrine of standing, and prudential limitations
47 See Eggert, The Great Collapse, supra note 6, at 1268 (―The entire house of cards . . . depended on the payments made by borrowers and the likelihood that the borrowers would continue to make their payments.‖).
48 See Farm Bureau Ins. Co. of Ark. V. Running M Farms, Inc., 237 S.W.3d 32, 36 (Ark. 2006) (―It is fundamental in American jurisprudence that in order to bring a lawsuit against an opposing party, one must have standing to do so. Without standing, a party is not properly before the court to advance a cause of action.‖); see also Robert T. Mowrey et al., Issues Arising in Connection with the Foreclosure or Other Enforcement of the Securitized Loan, in MORTGAGE AND ASSET BACKED SECURITIES LITIGATION HANDBOOK, supra note 36, at § 5:110 (providing a general overview of standing relating to securitization litigation).
49 See Mowrey, supra note 48, at § 5:110 (discussing the basis of state standing requirements).
50 While state standing requirements may differ from one jurisdiction to the next, resulting in differing outcomes on close cases of any area of law involving standing issues, for the purposes of this Note, it is relatively safe to assume that most state courts would not find sufficient standing where a foreclosing party could not demonstrate in at least the most basic manner that it was the proper party to foreclose on a mortgage.
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required by rules of civil procedure.51 Courts have stated that ―[t]he concept of standing subsumes a blend of constitutional requirements and prudential considerations.‖52 Importantly, courts have recognized that failure to satisfy all standing requirements may be dispositive in cases involving foreclosures.53
The common law standing requirements are: proof of injury in fact, causation, and redressability.54 Because standing is a ―threshold question,‖55 courts have stated that ―a defect in standing cannot be waived; it must be raised, either by the parties or by the court, whenever it becomes apparent.‖56
A. REAL PARTY IN INTEREST
The requirement that the party requesting relief be the ―real party in interest‖ is one such ―prudential limitation.‖57 The real-party-in-interest rule is set forth in the Federal Rule of Civil Procedure 17.58 The ―real party in interest‖ is the party entitled to bring suit to enforce a
51 See, e.g., Valley Forge Christian Coll. v. Ams. United for Separation of Church and State, Inc., 454 U.S. 464, 472 (1982) (setting out the minimum constitutional requirements for a plaintiff to state a case in a federal court); Warth v. Seldin, 422 U.S. 490, 498 (1975) (stating that standing ―is a threshold question in every federal case, determining the power of the court to entertain the suit‖); Coyne v. Am. Tobacco Co., 183 F.3d 488, 494 (6th Cir. 1999) (stating that plaintiffs ―bear[] the burden of demonstrating standing and must plead its components with specificity‖).
52 In re Village Rathskeller, 147 B.R. 665, 668 (Bankr. S.D.N.Y. 1992) (citing Warth, 422 U.S. at 498).
53 See In re Hwang, 396 B.R. 757, 769 (Bankr. C.D. Cal. 2008) (discussing how a party in a bankruptcy motion seeking relief from the automatic stay may fulfill one requirement and still fail the other).
54 Valley Forge Christian Coll., 454 U.S. at 472.
55 Warth, 422 U.S. at 498.
56 United States v. AVX Corp., 962 F.2d 108, 116 n.7 (1st Cir. 1992) (emphasis added); see also Pershing Park Villas Homeowners Ass‘n v. United Pac. Ins. Co., 219 F.3d 895, 899-900 (9th Cir. 2000) (noting that standing is a threshold based on the ―case or controversy‖ requirement of Article III of the Constitution and cannot be waived).
57 In re Hwang, 362 B.R. at 769.
58 Federal Rule of Civil Procedure 17(a)(1) states:
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substantive right under the applicable substantive law.59 The purpose of this requirement is to ―avoid prejudice and the possibility of duplicate lawsuits60 and to ―ensure that the outcome of the case will be res judicata,‖61 which means ―conclusive of rights, questions, and facts in issue, as to the parties.‖62 In the case of a foreclosure hearing on a securitized mortgage, the real-party-in-interest requirement is needed to ensure that the proper owner of the loan is the party seeking foreclosure. If courts did not hold lenders to this requirement, there would be a possibility that, after a foreclosure, the true owner of the loan could come forward rightfully seeking foreclosure on its interest and subject the homeowner to ―double jeopardy.‖ Standing and real party in interest requirements, while similar, arise from different sources of law.63 While these procedural requirements are separate and distinguishable, foreclosure defenses by homeowners based upon these requirements ultimately stem from the inability of the foreclosing party to provide proof that it properly obtained ownership and assignment of the note and mortgage.64
What courts have determined to be procedural requisites for a party to pursue a claim in foreclosure proceedings or seek relief from the automatic stay to foreclose in bankruptcy are
An action must be prosecuted in the name of the real party in interest. The following may sue in their own names without joining the person for whose benefit the action is brought: (A) an executor; (B) an administrator; (C) a guardian; (D) a bailee; (E) a trustee of an express trust; (F) a party with whom or in whose name a contract has been made for another‘s benefit; and (G) a party authorized by statue.
FED. R. CIV. P. 17(a)(1) (internal paragraph structure altered).
59 Swanson v. Bixler, 750 F.2d 810, 813 (10th Cir. 1984); Scheufler v. Gen. Host Corp., 895 F. Supp. 1416, 1418 (D. Kan. 1995) (citing Whelan v. Abell, 953 F.2d 663, 672 (D.C. Cir. 1992)).
60 Verizon N.J., Inc. v. Ntegrity Telecontent Servs., 219 F. Supp. 2d 616, 635 (D.N.J. 2002).
61 Ezra Charitable Trust v. Rent-Way, Inc., 136 F. Supp. 2d 435, 443 (W.D. Pa. 2001); see also JACK H. FRIEDENTHAL ET AL., CIVIL PROCEDURE: CASES AND MATERIALS 600–02 (9th ed. 2005) (discussing the purposes of the real-party-in-interest rule and its rationale).
62 BALLENTINES‘S LAW DICTIONARY (3d ed. 1969).
63 See supra note 51 and accompanying text (describing the sources of law for standing and real party in interest).
64 See supra Part II.A (discussing ownership of the note and assignment of mortgages).
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related to what is typically thought of as ―standing.‖ The jurisdiction of the court as well as the nature of the proceeding will determine how and when these issues arise, and whether the homeowner must raise them, or the court, on its own motion, may raise them as reasons for not allowing the lender to foreclose on a property.
If a plaintiff in the foreclosure case cannot prove that it had proper ownership of the note and mortgage at the beginning of the action, or as is actually a fairly regular practice, the mortgage was assigned to the plaintiff after the commencement of the foreclosure proceeding, a court can determine that the plaintiff has not shown that the plaintiff has standing in the case.
Some federal courts in Ohio have done just that, throwing out or ordering plaintiffs to produce evidence they had proper standing to foreclose at the commencement of the lawsuit.65 In a widely remarked upon decision, Judge Boyko of the Northern District of Ohio stated, ―[T]he federal judicial system need not, and will not, be ‗forgiving in this regard.‘‖66
The reasoning behind these decisions is, as Judge Bokyo argues in the In re Foreclosures Cases, relatively simple: ―[T]his Court possesses the independent obligations to preserve the judicial integrity of the federal court and to jealously guard federal jurisdiction. Neither the fluidity of the secondary mortgage market, nor monetary or economic considerations of the parties, nor the convenience of the litigants supersede those obligations.‖67
65 See In re Foreclosure Cases (In re Foreclosure Cases II), 521 F. Supp. 2d 650, 653—655 (S.D. Ohio 2007) (discussing diversity jurisdiction requirements and stating that the plaintiffs in twenty-seven foreclosure cases ―have submitted evidence that indicates that . . . subject matter jurisdiction may not have existed when the foreclosure complaint was filed‖); In re Foreclosure Cases (In re Foreclosure Cases I), Nos. 1:07CV2282 et al., 2007 WL 3232430, at *2 (N.D. Ohio 2007) (―[N]one of the Assignments show the named Plaintiff to be the owner of the rights, title and interest under the Mortgage at issue as of the date of the Foreclosure Complaint.‖).
66 In re Foreclosure Cases I, 2007 WL 3232430, at *3.
67 Id. at *2.
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Additionally, as these cases in Ohio illustrate, a federal court may raise the issue of subject matter jurisdiction at any time.68 When a question of subject matter jurisdiction in a foreclosure case comes up because a plaintiff has not convinced a judge that it is the proper owner of the note and mortgage at issue, a judge may dismiss the case or stay the proceedings until the plaintiff can sufficiently demonstrate that it has satisfied the requirements.69
B. DEFECTS
Defective transfers of notes and assignments of mortgages can come in many shapes and sizes. The most common are reflective of the confusion that securitization of mortgages has had on keeping track of the ownership of the mortgage.
The securitization of mortgage loans has led to what prominent bankruptcy attorney O. Max Gardner has referred to as ―the alphabet problem.‖70 This problem refers to the assignment of the mortgage from entity ―A‖, the originator, to other entities (―B‖ and up) along the chain of securitization.71 The problem becomes relevant to standing requirements as courts call on the foreclosing lender to show proof of the chain of transfers in order to foreclose on the property (i.e., A to B to C to D, the foreclosing party).72 Because of the complexity of maintaining proper documentation and complying with all the legal requirements for proper conveyances up the chain, it has become frequent practice for the a party to skip a step in the process and directly
68 Plyler v. Moore, 129 F.3d 728, 732 n.6 (4th Cir. 1997) (citing North Carolina v. Ivory, 906 F.2d 999, 1000 n.1 (4th Cir. 1990)).
69 See In re Foreclosure Cases II, 521 F. Supp. 2d at 655 (giving plaintiffs thirty days to comply with court order to produce evidence of standing); In re Foreclosure Cases I, 2007 WL 3232430, at *3 (dismissing the consolidated cases in the action).
70 Posting of O. Max Gardner III to Credit Slips, http://www.creditslips.org/creditslips/2009/08/the-alphabet-problem-and-the-pooling-and-servicing-agreements.html (Aug. 14, 2009, 12:59 p.m.).
71 Id.
72 Id.
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endorse a transfer to the foreclosing party to attempt to show legal ownership of the loan and the right to foreclose.73 Gardner suggests that such a transfer essentially amounts to fraud.74
Coinciding with the ―alphabet problem,‖ often a foreclosing party simply cannot produce the original note in its initial pleadings and instead attaches affidavits of averment purportedly from either the originator of the loan or an intermediate assignee that the plaintiff is the owner of the note and mortgage.75 These affidavits are falling under increasing levels of suspicion by courts who suspect these are submitted not out of necessity, but as a response to a failure to maintain proper documentation of the assignments and of the inconvenience and costs of a post hoc attempt to fulfill the legal requirements.76
Assignments of the mortgages along the chain of titles must show a proper conveyance of the note and mortgage from originator to the final party seeking to foreclose on the homeowner. In the process of securitizing a mortgage, the originating lender will typically assign the mortgage to a trustee who then combines the one mortgage with a bundle of other similar mortgages to form a single secured asset.77 The originating lender usually retains the right to
73 Id.
74 Id.
75 See, e.g., In re Foreclosure Cases I, 2007 WL 323430, at *1 (stating that in all of the consolidated complaints, there were attached affidavits ―recit[ing] the averment that Plaintiff is the owner of the Note and Mortgage without any mention of an assignment or trust or successor interest‖); Wells Fargo Bank, NA v. Davilmar, No. 6464-2006, 2007 WL 2481898, at *3 (N.Y. Sup. Ct. 2007) (threatening sanctions because of plaintiff‘s repeated violations of local rule by continually submitting affidavits by an alleged attorney in fact for the plaintiff with no actual knowledge of the assignments of the note or mortgage).
76 See sources cited supra note 75 (illustrating cases in which judges have strongly questioned the after-the-fact affidavits supplied by foreclosing lenders).
77 See supra Part II.B (discussing the securitization process in detail).
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service the mortgage, but the interest in the property (and status as real party in interest) has been transferred to the trustee.78
To collect on the mortgage note, the creditor must ―(1) be the holder of the note, (2) have constitutional standing, and (3) be the ‗real party in interest.‘‖79 A problem in these proceedings arises because of the increase in the practice of securitization of residential mortgages in which the entity seeking foreclosure on the mortgage may not ultimately fulfill one or more of the elements of this three-part test due to the complex structure of the securitization process.80
C. IN RE HWANG
An illustrative example of this complexity appears in the bankruptcy court case of In re Hwang.81 The beneficiary of the mortgagor‘s deed of trust was initially a broker, Mortgageit, Inc.82 At some point before the bankruptcy petition was filed, Mortgageit transferred the mortgage to IndyMac Bank.83 The deed of trust named Mortgage Electronic Registration Systems, Inc. (―MERS‖)—―a nationwide electronic registry of mortgage loans‖84—as the beneficiary; however, MERS had transferred the deed of trust back to IndyMac by the time of the case and was no longer a party of interest to the mortgage.85 IndyMac likely sold the note to
78 In re Hwang, 396 B.R. 757, 766 (Bankr. C.D. Cal. 2008).
79 Gregory G. Hesse, Who Has the Right to Prosecute a Securitized Mortgage in Bankruptcy Court?, AM. BANKR. INST. J., Mar. 2009, at 16 (summarizing the test provided in In re Hwang, 362 B.R. 757).
80 Id.
81 In re Hwang, 362 B.R. 757.
82 Id. at 760.
83 Id. at 761.
84 Id. at 761 n.2.
85 Id. at 761. Several issues regarding MERS as a player in the securitization of mortgages have arisen recently, and it is uncertain as to what role it has in regards to its own standing to prosecute its interests in foreclosure and bankruptcy proceedings. See generally In re Mitchell, No. BK-S-07-16226-LBR, 2009 WL 1044368 (Bankr. D. Nev. Mar. 31, 2009)(holding that MERS ―may not enforce the notes as the alleged beneficiary. . . . [but] may have standing to
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Mr. Hwang‘s mortgage through Freddie Mac into a securitization trust.86 At the time of filing its motion for relief from the automatic stay, ―IndyMac [did] not know who own[ed] the note today, although it still ha[d] possession of the note and there [wa]s nothing on the note to indicate that it ha[d] been transferred.‖87 Freddie Mac and the investors in the securitization trust had not been joined in the motion for relief, and IndyMac ―failed to provide any documents showing its sale of the note or its status as a servicing agent for the note‘s new owner.‖88 The court was satisfied that IndyMac was the holder of the original note and that it had sufficient constitutional standing due to its ability to show that Mr. Hwang‘s failure to make payments on the mortgage debt constituted an injury to IndyMac.89 However, on the issue of ―real party in interest,‖ the court determined that, because it was a securitized mortgage, only the trustee of the securitization trust, and not IndyMac as the servicer, could be the ―real party in interest‖ as the owner of the note.90 The court denied IndyMac‘s motion to avoid the stay on Hwang‘s property until it could discover and join the proper trustee in the action for relief from the automatic stay.91
IV. SUA SPONTE
prosecute the motion [for relief from the automatic stay] in the name of its Member as a nominee . . . .‖); Christopher L. Peterson, Foreclosure, Subprime Mortgage Lending, and the Mortgage Electronic Registration System (Sept. 7, 2009) (unpublished manuscript), available at http://ssrn.com/abstract=1469749 (discussing ―(1) whether MERS actually has standing to bring foreclosure actions, (2) whether MERS should be considered a debt collector under the federal Fair Debt Collection Practices Act, and (3) whether loans recorded in MERS‘ name should have priority in various collateral competitions under state law and the federal bankruptcy code.‖). For the purposes of this Note, I will assume that MERS has standing in the same capacity as any other lender and will only address the underlying issue of whether the facts support any foreclosing lender having standing in the same circumstances.
86 In re Hwang, 396 B.R. at 761.
87 Id.
88 Id.
89 See id. at 762–66 (holding that the bank was the qualified holder of the physical note and that it was entitled to enforce the note).
90 Id. at 767.
91 In re Hwang, 396 B.R. at 772.
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An important secondary consideration by the court in In re Hwang involved the propriety of the trial court‘s raising of the real-party-in-interest issue sua sponte.92 A bankruptcy court may raise an issue sua sponte to prevent an abuse of the bankruptcy system,93 just as a court of general jurisdiction may raise the issue of standing and subject matter jurisdiction.94 While it is settled law that a party may not waive objections to subject matter jurisdiction,95 a question arises in regards to whether the real-party-in-interest requirement is one that judges should raise sua sponte when a defendant does not object on its own volition.96 This becomes an especially difficult question when the homeowner does not appear to contest the foreclosure proceeding or is representing herself pro se in either foreclosure or bankruptcy.
A. JUDICIAL FORECLOSURE AND BANKRUPTCY
All of the ―standing‖ issues described in the previous Part occur in the context of judicial foreclosure or a motion to seek relief from the automatic stay in bankruptcy.97 As discussed previously in Part III.C, the bankruptcy case of In re Hwang illustrates the power of judicial oversight in ensuring that creditors are the proper owners of the note and mortgage and sufficiently evince they are the real party in interest to foreclose.98
92 Id. at 769–70.
93 In re Brown, 399 B.R. 162, 165 (Bankr. W.D. Va. 2009) (citing 11 U.S.C. § 105(a)).
94 See generally In re Foreclosure Cases (In re Foreclosure Cases I), Nos. 1:07CV2282 et al., 2007 WL 3232430 (N.D. Ohio 2007) (raising the issue of standing and subject matter jurisdiction on the court‘s own motion).
95 See FED. R. CIV. P. 12(h)(3) (―If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action.‖); see also In re Foreclosure Cases I, 2007 WL 3232430, at *1 (discussing requirement of proof of diversity jurisdiction).
96 U.S. Fid. & Guar. Co. v. Slifkin, 200 F. Supp. 563, 573–74 (D.C. Ala. 1961).
97 See supra Part III.A (discussing issues of standing).
98 In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal. 2008).
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The action arose in the context of non-judicial foreclosure, where the debtor filed for bankruptcy (perhaps not even intending to protect his home99) and the foreclosing lender provided copies of the note, the deed of trust, and a declaration of a vice president of IndyMac in support of its action to avoid the automatic stay and foreclose on Hwang‘s property.100 The court on its own motion called for an evidentiary hearing, and in that hearing, the defects of the standing of the lender were exposed.101 In striking down IndyMac‘s argument that this action by the court was improper, the judge in his opinion quoted Judge Learned Hand, ―A judge is more than a moderator; he is charged to see that the law is properly administered, and it is a duty which he cannot discharge by remaining inert.‖102
In re Hwang demonstrates a ―catch‖ by the courts in which a vigilant jurist had seen a number of motions seeking relief from bankruptcy‘s automatic stay with questionable supporting documentation.103 Because of the foreclosure crisis, judges in state, federal, and bankruptcy courts are seeing a remarkable influx of foreclosure actions, and so they are learning as they go
99 The debtor in In re Hwang filed a Chapter 7 petition which calls for liquidation of debtor‘s assets. Id. at 760.
100 Id. at 761.
101 See id. at 761–62 (describing the testimony of the vice-president of IndyMac who stated that she did not know who owned the note and who also could not produce evidence of a servicing agreement that allowed IndyMac to foreclose on Hwang‘s property).
102 United States v. Marzano, 149 F.2d 923, 925 (2d Cir. 1945). At least one other court has also related this quote in response to a party‘s questioning of the judge‘s ability to raise an issue sua sponte. In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325, 335 (S.D.N.Y 2008) (rejecting a similar attack on the bankruptcy court‘s requiring of an evidentiary hearing that led to a ruling unfavorable to the attacking party). For further support of a court‘s ability to raise the issue of real party in interest on its own motion, see generally the only federal appellate court review of the issue, Weissman v. Weener, 12 F.3d 84, 85–86 (7th Cir. 1993) (holding that the trial judge could raise the issue of real party in interest before going on to discuss why the plaintiff was not).
103 In re Hwang, 396 B.R. at 761 n.4 (stating that the court ―ha[d] found that numerous declarants . . . [were] not competent to testify as to the information included in their declarations‖).
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(and as defendants‘ lawyers educate them) and are catching more and more of these irregularities.104 As the number of irregularities caught continue to rise, however, there is a question looming on the horizon: How many defects and improper assignments are passing through the process in non-judicial foreclosure states?
B. SUA SPONTE IN THE CONTEXT OF NON-JUDICIAL FORECLOSURE
In states that allow non-judicial foreclosure,105 mortgage lenders may foreclose on a property and sell the property without any kind of court action.106 This type of foreclosure is permitted pursuant to a ―power of sale‖ clause in the mortgages that permits a trustee—a non-court employee—to serve notice of the default and initiate the foreclosure sale. Although there is no required judicial action or oversight, these sales must follow the statutory guidelines of each state.107 While the details of the laws vary from state to state, the basic structure is that if the homeowner defaults on the mortgage (or deed of trust), the lender will give the homeowner the notice required either by the terms of the mortgage or statute, a time period in which the
104 See, e.g., In re Foreclosure Cases (In re Foreclosure Cases I), Nos. 1:07CV2282 et al., 2007 WL 323430, at *3 (N.D. Ohio 2007) (dismissing fourteen foreclosure proceedings after raising real party in interest issue on the court‘s own motion); In re Schwartz, 366 B.R. 265, 269–70 (Bankr. D. Mass. 2007) (holding that lender could not evict debtor after its carelessness in documenting assignment from previous holder of mortgage led to an improper foreclosure sale).
105 States allowing non-judicial foreclosure include: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, North Carolina, Oregon, Rhode Island, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wyoming, and the District of Columbia. JOHN RAO, ODETTE WILLIAMSON & TARA TWOMEY, NAT‘L CONSUMER LAW CTR., FORECLOSURES: DEFENSES, WORKOUTS, AND MORTGAGE SERVICING app. B.5.2 at 525 (2nd ed. 2007).
106 Id. at 76.
107 E.g., CAL. CIV. CODE § 2924 (2009) (providing requirements for power of sale); MICH. COMP. LAWS §§ 600.3101–.3180, 600.3201—.3280 (2000) (setting out ―Foreclosure of Mortgages and Land Contracts‖ and ―Foreclosure of Mortgage by Advertisement,‖ respectively).
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homeowner may cure the amount in default, and then may sell the home by auction or through a sheriff sale.108
While there are several potential defenses that a homeowner can raise in a non-judicial foreclosure, the homeowner will have file a lawsuit to enjoin the foreclosure sale in order to raise the defense,109 and most foreclosures go uncontested.110 If homeowners do not take affirmative action and either contest the foreclosure or file for bankruptcy, the likelihood is that they will lose the property without ever going before a judge. In the current climate of securitized mortgages, in which lenders are having difficulty in providing evidence of ownership of the note and mortgage when attempting judicial foreclosure,111 there is a strong inference that in many of these sales there is (1) a lack of evidence that the lender has the standing to foreclose and (2) that without the ability of a lender to prove ownership, the lenders are foreclosing the homeowners‘ property interest without the proper evidence of ownership of the note and mortgage.
In the recent case of U.S. Bank National Association v. Ibanez, a Massachusetts land court recognized that a lender who had conducted a power-of-sale foreclosure had not acquired proper ownership of the mortgage before commencing the non-judicial foreclosure action and
108 RAO, WILLIAMSON & TWOMEY, supra note 105, at 76.
109 For example, lack of proper notice, invalid mortgage, and contract law actions are all potential defenses. See, e.g., Bank-Fund Staff Fed. Credit Union v. Cuellar, 639 A.2d 561, 563 (D.C. Cir. 1994) (holding that notice to homeowners was invalid); G.E. Capital Mortgage Serv. v. Baker, No. CV 980167089S, 1999 WL 511156, at *3 (Conn. Super. Ct. 1999) (holding that defendants had a valid defense where lender sent demand letter stating that defendants had thirty days to cure default, and the mortgage specifically provided for sixty days); Mason v. S. Mortgage Co., 828 So. 2d 735, 739 (Miss. 2002) (holding that mortgage company attempted to foreclose on an invalid mortgage).
110 RAO, WILLIAMSON & TWOMEY, supra note 105, at 79.
111 See supra Part III (describing the issues of subject matter jurisdiction, standing, and real party in interest in the context of judicial foreclosure).
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extinguished the homeowner‘s property interest.112 The action by the lenders arose in the context of attempting to remove a cloud of title on the foreclosed property (which the lender had itself purchased at the foreclosure sale) in order that the lender could obtain insurance on the title it had purchased.113 A title insurance company had denied to insure the title due to its concern that the assignment of the underlying mortgage had not been ―executed or recorded until after the exercise of the power of sale,‖ and there was a question as to whether the lender had the right to foreclose at that time.114 The court held that the foreclosure sales were invalid because of the assignment executed fourteen months after the sale.115
On an additional note, the plaintiff-lenders were seeking relief after a default judgment in the underlying case, which means that, as is unfortunately typical, the homeowner had for whatever reason failed to appear to contest the ownership issue.116 In the process of reviewing the plaintiffs‘ motion for a default judgment, the main issue of which was a statutory notice requirement, the land court hearing the initial case raised the issue of the after-the-fact assignment sua sponte117 and declared as invalid the foreclosures resulting from these
112 See generally U.S. Bank Nat‘l Ass‘n v. Ibanez (Ibanez II), Nos. 08 MISC 384283(KCL), 08 MISC 386755(KCL), 2009 WL 3297551 (Mass. Land Ct. 2009) (holding foreclosure sales invalid where lenders were not assigned ownership of the mortgages at issue until after the foreclosure sale).
113 Id. at *1.
114 Id. This after-the-fact assignment is the same ―defect‖ that many bankruptcy courts and judicial foreclosure courts have held to demonstrate as a lack of standing. See In re Foreclosure Cases (In re Foreclosure Cases I), Nos. 1:07CV2282 et al., 2007 WL 323430, at *3 (N.D. Ohio 2007) (describing how none of the captioned plaintiffs could show that the assignment of the note and mortgage were executed before the date of the complaint).
115 Ibanez II, 2009 WL 3297551, at *9, *12.
116 See U.S. Bank Nat‘l Ass‘n v. Ibanez (Ibanez I), Nos. 384283(KCL), 386018(KCL), 386755(KCL), 2009 WL 795201 (Mass. Land Ct. Mar. 26, 2009) (―Memorandum and Order of Plaintiffs‘ Motions for Entry of Default Judgment‖).
117 Ibanez II, 2009 WL 3297551, at *3 n.18.
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assignments.118 This sua sponte decision was upheld in the subsequent appeal119 with the reviewing court stating, ―[T]he court is not bound by the legal conclusions in [Plaintiffs‘] complaint. Rather, ‗it has the duty to enter a judgment that is lawful in light of the facts established even in the absence of a contest before him‘ and even when that judgment may be unfavorable to the moving party.‖120
This case illustrates how far into the process a non-judicial foreclosure may run before a judge is able to step in and declare that ―to accept the plaintiffs‘ arguments is to allow them to take someone‘s home without any demonstrable right to do so, based upon the assumption that they ultimately will be able to show that they have that right.‖121 At this point, the property at issue had already been taken from the homeowner, and the court‘s finding of improper ownership left the proper title to the land (and the titles to any similarly foreclosed property in Massachusetts) in limbo. This is too far. The court in Ibanez acknowledged that the lenders had violated the ―protections given to homeowners and borrowers by the Massachusetts legislature,‖122 but it is clear that these protections arrived too late in the game to sufficiently mitigate the result.
V. POLICY RECOMMENDATIONS
Because of the extra-judicial nature of foreclosures in states authorizing power-of-sale foreclosure, the responsibility falls upon the legislature to enact or amend power-of-sale statutes to safeguard against the injustice of a foreclosing lender taking an individual‘s home without proper proof of ownership. This Note argues for two legislative responses that may prove
118 Ibanez I, 2009 WL 795201, at *8.
119 Ibanez II, 2009 WL 3297551, at *12.
120 Id. at *4.
121 Id. at *12.
122 Id.
26
effective—especially when used in concert: (1) the addition of a filing of proof-of-ownership by foreclosing lenders prior to the commencement of the foreclosure proceedings, and (2) the addition of fee-shifting provisions to allow prevailing plaintiffs the ability and the incentive to contest foreclosures and increase the review of the foreclosing lender‘s ownership by courts and consumer attorneys.
A. LEGISLATURES SHOULD ADD RECORD-OF-OWNERSHIP REQUIREMENTS TO POWER-OF-SALE STATUTES
In the non-judicial context, state legislatures should adapt their power-of-sale-foreclosure laws to reflect this on-the-ground reality. Some states, such as Michigan, require that a party who is not the original mortgagee must show a ―record chain of title . . . prior to the date of sale . . . evidencing the assignment of the mortgage to the party foreclosing the mortgage.‖123 Simply addressing the subgroup of power of sale foreclosures that are most responsible for these irregularities (securitized mortgages) and asking them to provide more documentation than required in the classic foreclosure-by-originator model could provide both a degree of protection for the homeowners and a reviewable record in the case of future conflicts arising from messy titles.
The Michigan statute has provided homeowners with a substantial basis for regaining ownership of their property in cases where a lender‘s ownership is defective.124 In a recent case before the Michigan Court of Appeals, the court overruled the lower court‘s decision that the assignment of the mortgage to the foreclosing lender after the commencement of foreclosure was
123 MICH. COMP. LAWS § 3204(3) (2009).
124 See Davenport v. HSBC Bank, 739 N.W.2d. 383, 384–85 (2007) (overruling trial court‘s holding that lender who was assigned the mortgage after the commencement of the foreclosure proceeding had not violated the Michigan statute).
27
only ―technically deficient.‖125 The lower court stated, ―‗[I]t would be laughable . . . to upset this whole arrangement because of that hair breadth of a thread that the plaintiff is hanging on.‘‖126 The appellate court struck back in strong terms responding, ―[W]hat is at issue . . . is not a mere notice defect. Instead, it is a structural defect that goes to the very heart of [the lender‘s] ability to foreclose . . . in the first instance. . . . Quite simply, [the lender] did not yet own the indebtedness that it sought to foreclose.‖127 This case is illustrative of the impact a record-of-ownership statute can have in protecting homeowners at risk of losing their property to lenders in non-judicial foreclosure states.
Georgia provides another example of how non-judicial foreclosure states should address this issue. In 2008, the state adopted an amendment to its power-of-sale statute, adding the provision that ―[t]he security instrument or assignment thereof vesting the secured creditor with title to the security instrument shall be filed prior to the time of sale in the office of the clerk of the superior court.‖128 This amendment requires that the foreclosure sale ―be conducted by the current owner or holder of the mortgage, as reflected by public records.‖129 While it remains to be seen whether statutes such as in Michigan and Georgia are effective in reducing the number of wrongful foreclosures, they provide an important step in accountability and an information trail that courts may find useful in resolving claims brought by homeowners alleging lack of standing. Additionally, bills such as the Georgia amendment are signs that state legislatures are recognizing the risks posed by securitized mortgage foreclosures that go unchecked by the judicial system.
125 Id. at 384.
126 Id.
127 Id.
128 GA. CODE ANN. § 44-14-162(b) (1935) (amended 2008) (emphasis added).
129 S.B. 531, 2008 Gen. Assemb., Reg. Sess. (Ga. 2008).
28
B. LEGISLATURES SHOULD ADD FEE-SHIFTING PROVISIONS TO THEIR FORECLOSURE STATUTES
Statutory fee-shifting, or attorney fees, provisions are common to many consumer protection statutes in the United States.130 The underlying force
Does anyone know how to find out if your note has been securitized via a CUSIP #?
Also, how to find out if the Original Loan Application has a cusip and if it has been monetized??
Brokers? Investigators?
Any point in the right direction would be greatly appreciated.
why are they allowed to re file and not be prosecuted for fraud in the 1st place just like you and me if we went and falsely accused ?abuse of process. 1 million in 10 more in 11 so it seems whatever they can steal away with.
I need help and I’m in a Foreclosure battle but filed a case and now have convinced the BK court to re-open their claims. Any suggestions cause I’m a non-judicial state Georgia. Help as soon as possible.
Jerry jurden ttcb77@yahoo.com
this a very good website to help you also there is attorney you can talk to free consultationcall 561-568-2135 or 954-677-8888. I hope this helps
This is good news. However, I would have preferred the case be heard by the court and had the court rule similarly. The voluntary nature of this on the part of GMAC isn’t nearly as powerful.
Still good news though.
Can any of you bright attorneys out there figure out how to use this case in a non-judicial state?
If so, please, share with the rest of us!