Foreclosure-Gate 4.0    "Fraud-closures" part 2

Adam Levitin: Alabama Mortgage Ruling “doesn’t have precedential value anywhere“ Posted: 07 Mar 2011 03:57 AM PST Georgetown law professor and securitization expert Adam Levitin has weighed in on the ruling in an Alabama case, U.S. Bank v. Congress, in which a state court judge ruled against what we have called the New York trust theory. For readers new to this terrain, the short form is that the parties to mortgage securitizations are governed by a so-called pooling and servicing agreement. The PSA, among many other things, described how the notes (the borrower IOU) were to be conveyed to a trust that would hold them for the benefit of investors. The trust was almost without exception a New York trust. New York was chosen because its trust law is both very well settled and very rigid. New York trusts have no discretion in how they operate. Any measure undertaken that is inconsistent with explicit instructions is deemed to be a “void act”. Now it appears that the notes were not conveyed to the trusts as stipulated in the PSAs on a widespread basis. (You can read the details here). Because the trusts are New York trusts, that means you have a really big mess. You can’t convey the notes in now, that’s not permitted because the trust had specific dates for accepting the assets that have long passed. The party that has the note (someone earlier in the securitization chain) can foreclose, but no one wants to do that. It isn’t just that this would be an admission that that parties to the agreement didn’t fulfill their contractual obligations; there is no way to get the money from the party that foreclosed to the trust and then to the investors. Since the securitization industry has had so little good news of late, and this New York trust issue has the potential to make the chain of title problems that banks are facing in courtrooms all over the US even more acute, Paul Jackson of Housing Wire was quick to jump on this pro-bank decision as a major victory. We argued that it was probably not a significant precedent, and that some of the legal reasoning looked like a stretch, other parts were at odds with decisions in other states (meaning those states were unlikely to change course based on a lower-court decision in Alabama). But we acknowledged that parts of the decision were hard to parse and over our pay grade. Levitin has taken an even more dismissive view of the decision (although since his writing style is more measured than ours, you need to read for substance, not tone). As he reads it, the judge rejected the borrower’s case on procedural grounds. That means it cannot be seen as a ruling against the New York trust theory. So effectively, the New York trust theory remains untested rather than defeated on its initial outing. As Levitin wrote: Perhaps the most important thing to note about the opinion is what isn’t there. There was no consideration of the chain-of-title issue in the opinion. Let me repeat, the court said nothign about whether there was proper chain-of-title in the securitization. Instead, the court avoided dealing with it. That means that this ruling isn’t grounds for sounding the “all clear” on chain-of-title. At best, it is grounds for arguing that homeowners won’t be able to raise chain-of-title problems… The court played on the procedural posture of the case to reject this argument. First, the court explained that because this was an ejectment action, not a foreclosure, the question of ownership of the note was not an issue of standing, but an affirmative defense for which the homeowner had the burden of proof. The trial court here was citing to a recent Alabama appellate court decision (reversing a previous Alabama appellate decision) that concluded that standing is satisfied by virtue of the bank being named party on the foreclosure deed. That’s just crazy given that the foreclosure deed is a nonjudicial sale. [G.S.—maybe this explains why your shop saw your notaries' seal forged on those foreclosure deeds.] Crazy or not, however, this meant that the homeowner wasn’t actually challenging the trust’s standing. From there it was a small step for the court to say that the homeowner couldn’t invoke the terms of the PSA because she wasn’t a party to it….. I don’t think there’s much to get excited about with Congress. If the homeowner had prevailed, the banks would have been saying “it’s just an Alabama state trial court,” and it might well have been overturned on appeal. But that doesn’t mean that the chain-of-title issue isn’t real. It just means that there’s still a search for the proper channel on which to advance the argument. There’s more to his post, and I suggest legal types read it in full. There is an important discussion in it about the differing considerations regarding legal action on the note (the IOU) versus the lien (which is what allows the bank to make the foreclosure) that I want to address that in a separate post. It warrants some unpacking and further discussion. Finally, he points out that investors have been getting their own reading on these legal issues and see them as valid, hence serious, concerns: ….numerous buy-side people (read MBS investors) have told me that they think there’s a serious problem with the securitization documentation. The problem that they have is that they don’t know what to do about it—they are trying to figure out a way that this can be used to put the mortgages back to the banks without it tanking the entire financial system. In other words, the banks are being protected by the too-big-to-fail problem. That’s letting them externalize their violations of their securitization contracts on MBS investors. That suggests that investors are looking for the right leverage point on this matter but have yet to find one that is sufficiently surgical. Given how much they have at stake, I would bet they find it sooner rather than later.

Many Foreclosures in Oregon Halted Due to Decisions Against MERS Posted: 07 Mar 2011 02:28 AM PST We pointed last week to an analysis by Lynn Syzmoniak that showed that foreclosures across a number of different servicers were way down in January 2011 versus the same period in January 2010. This was admittedly a tally in only two Florida counties, but she indicated that a quick look at other counties in Florida showed a similar pattern. So the question then becomes: is this a Florida only development, due perhaps in part the fact that all the big foreclosure mills in the state are under investigation by the state AG and are imploding (as in losing clients and shedding staff)? Or is this a broader trend due to the robo signing scandal leading judges being more receptive to arguments about chain of title and validity of transfers? Before, the assumption was “bank right, borrower trying to abuse the law to stay in house”. Now more judges, seeing that banks have run roughshod over legal requirements, are prepared to give borrower arguments a hearing. That forces banks to up their game, which in turn may be the real driver for this apparent slowdown in foreclosure actions. If that was the main driver in Florida, we’d expect to see similar patterns in other states. We are seeing analogous developments, but the drivers appear to be state specific, as judges give adverse rulings on common practices in foreclosure land. Reader wc4d pointed to a report in the Portland Oregonian, that lenders are withdrawing cases because five court decisions have found that lenders that used MERS violated state recording laws. This is a vivid illustration of a point made in an article on MERS yesterday by Gretchen Morgenson: MERS was flawed at conception, those critics say. The bankers who midwifed its birth hired Covington & Burling, a prominent Washington law firm, to research their proposal. Covington produced a memo that offered assurances that MERS could operate legally nationwide. No one, however, conducted a state-by-state study of real estate laws. “They didn’t do the deep homework,” said an official involved in those discussions who spoke on condition of anonymity because he has clients involved with MERS. “So as far as anyone can tell their real theory was: ‘If we can get everyone on board, no judge will want to upend something that is reasonable and sensible and would screw up 70 percent of loans.’ ” As we’ve also noted, recording clerks in single counties in Massachusetts and North Carolina are looking into how to recover recording fees from MERS, but the cost of litigation means they’d need other counties in the same states to join or the state attorney general to take up the matter. By contrast, the Oregon decisions don’t hit small fry MERS; they are a big problem for the banks themselves. As the Oregonian reports: Sales of hundreds of foreclosed homes in Oregon have been halted or withdrawn in recent weeks after federal judges repeatedly questioned their legality, according to a number of real estate attorneys in the state. Lenders have withdrawn more than 300 foreclosure sales since February in Deschutes County alone, one of the Oregon area’s hardest hit by the housing collapse. About 130 of those notices were filed in the past week, attorneys say. Dozens of foreclosure listings by ReconTrust Co., the foreclosure arm of Bank of America Corp., have disappeared from its website, attorneys say… Since October, federal judges in five separate Oregon cases have halted foreclosures involving MERS, saying its participation caused lenders to violate the state’s recording law. Three of those decisions came last month, the key one in U.S. Bankruptcy Court in Eugene. Attorneys say it’s not clear whether lenders in Oregon will simply start over or head to court to foreclose, steps that could prolong the crisis for months and drive up costs, attorneys say. Some suggest lenders might not have access to the documents they need to comply with state law. “A lot of us are questioning whether there is a solution,” said David Ambrose, a Portland attorney who represents lenders in mortgage transactions. “It’s pretty amazing. There are a lot of unanswered questions.” …. In Oregon, lenders can foreclose without going to court. But state law also requires that the loan’s ownership history, or assignments, be recorded with local county governments before proceeding with a nonjudicial foreclosure. In the Eugene court case, Donald E. McCoy III filed for bankruptcy protection in part to block U.S. Bank from foreclosing on his Central Point home. He then sued the bank and MERS, along with his original lender BNC Mortgage Inc., claiming they had not properly recorded BNC’s subsequent sale of the loan to investors. Chief Bankruptcy Judge Frank R. Alley III found McCoy’s allegation persuasive and refused to grant the bank’s request for a dismissal. “Oregon law permits foreclosure without the benefit of judicial proceeding only when the interest of the beneficiary (lender) is clearly documented in a public record,” Alley wrote. “When the public record is lacking, the foreclosing beneficiary must prove its interest in a judicial proceeding.” This looks like an epic fail for the banks, at least in Oregon. To save maybe $50 on recording fees, they are now going to have to go to court to foreclose. And worse for them will be cases where the records don’t pass muster. Recall that servicers advance principal and interest to investors when borrowers become delinquent. They then reimburse themselves out of the foreclosure proceeds. No foreclosure and they are out a lot of dough. As Morgenson’s source indicated, the banks brazenly assumed that the courts would simply roll over rather than block the extra-legal imposition of a new system. But there is enough of a semblance of rule of law in the US to undermine all the cost savings and corners-cutting they engaged in. Recall this recent New York decision: This court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law. The courts are delivering the banks an unrelenting series of deserved unkind cuts. This is getting to be interesting, and for a change, in a good way.