Here… It…. Comes… (Foreclosuregate)
When this entire Foreclosurefraud nonsense got going, and I started digging through documents from various parties, one of the striking findings I kept coming up with was that mortgages had not been timely transferred into the trusts that form the MBS in question.
REMIC law is extremely clear and has no exceptions or exclusions — you either get the actual documents into the trust on time or you can’t do it at all. The reason is that these are pass-through instruments for tax purposes and widespread, indeed trivial fraud would be easy to commit if no such requirement was adhered to (you could substitute only “good” loans later on, you could stuff the trust with “bad” loans posthumeously to generate fake losses, etc.)
I had argued that given the apparent widespread failure to transfer mortgages into these trusts an attempt to later sue for foreclosure in the name of the trust (by the Servicer as a nominee or agent of the Trust, etc) was presumptively invalid because the alleged “owner” of the mortgage in fact was not the owner because they never took their ownership interest in a timely fashion and the law bars them from doing so at a later date.
In this appeal, the borrower contends the trial court erred by sustaining defendants’ demurrer as to all of his causes of action attacking the nonjudicial foreclosure. We conclude that, although the borrower’s allegations are somewhat confusing and may contain contradictions, he nonetheless has stated a wrongful foreclosure claim under the lenient standards applied to demurrers. We conclude that a borrower may challenge the securitized trust’s chain of ownership by alleging the attempts to transfer the deed of trust to the securitized trust (which was formed under New York law) occurred after the trust’s closing date.Transfers that violate the terms of the trust instrument are void under New York trust law, and borrowers have standing to challenge void assignments of their loans even though they are not a party to, or a third party beneficiary of, the assignment agreement.
We therefore reverse the judgment of dismissal and remand for further proceedings.
And why did they take this position? Right here, which is exactly the reason that I argued originally that this was a potentially fatal defect in these trusts:
Despite the foregoing cases, we will join those courts that have read the New York statute literally. We recognize that a literal reading and application of the statute may not always be appropriate because, in some contexts, a literal reading might defeat the statutory purpose by harming, rather than protecting, the beneficiaries of the trust. In this case, however, we believe applying the statute to void the attempted transfer is justified because it protects the beneficiaries of the WaMu Securitized Trust from the potential adverse tax consequence of the trust losing its status as a REMIC trust under the Internal Revenue Code. Because the literal interpretation furthers the statutory purpose, we join the position stated by a New York court approximately two months ago: “Under New York Trust Law, every sale, conveyance or other act of the trustee in contravention of the trust is void. EPTL § 7–2.4. Therefore, the acceptance of the note and mortgage by the trustee after the date the trust closed, would be void.” (Wells Fargo Bank, N.A. v. Erobobo (Apr. 29, 2013) 39 Misc.3d 1220(A), 2013 WL 1831799, slip opn. p. 8; see Levitin & Twomey, Mortgage Servicing, supra, 28 Yale J. on Reg. at p. 14, fn. 35 [under New York law, any transfer to the trust in contravention of the trust documents is void].)
Ratification by fiat of an untimely transfer into the trust forcibly voids the REMIC’s tax pass-through status by that same judicial fiat.
It is manifestly unjust to impose upon the holders of the certificates such a draconian outcome when the harm, if any, that accrues from being unable to foreclose properly falls upon the originators, servicers and their agents who failed to perform their duties according to law.
Now the game is afoot.