Virginia Court Shoots Down “Splitting the Note” and “Double Recovery” Theories

Posted on April 15, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , |

In Forez v. Goldman Sachs Mortgage, Lexis 35099 (E.D Va. 2010) plaintiffs asserted that Defendants lacked “authority” to foreclose under Virginia’s non-judicial  foreclosure statutes. Second, Plaintiffs argued that loan  securitization bars foreclosure because securitization “splits” the Note from the  Deed of Trust or because “credit enhancements” related to securitized notes absolve borrowers of any liability under a  mortgage loan as a “doub1e recovery.”

The only problem was that there was no evidence the subject loan had been securitized. The loan had been originated by CTX Mortgage who had sold it to Goldman Sachs who subsequently sold it to Freddie Mac. The list of usual suspects included MERS as nominee for the lender and Litton as the servicer. Regardless, the court held that under Virginia law negotiation of a note or bond secured by a deed of trust or mortgage carries with it the security instrument without formal assignment or delivery. The court cited to Stimpson v. Bishop, 82 Va. 190, 200-01 (1886) (“It is undoubtedly true that a transfer of a secured debt carries with it the security without formal assignment or delivery.”). And in Williams v. Gifford, the Supreme Court of Virginia ruled:

[I]n Virginia, as to common law securities, the law is that both deeds of trust and mortgages are regarded in equity as mere securities for the debt and whenever the debt is assigned the deed of trust or mortgage is assigned or transferred with it.

139 Va. 779, 784, 124 S.E. 403 (1924).

“Thus, even if, as Plaintiffs assert without any factual support, there has been a so-called “split” between the Note and the Deed, the purchaser of the First Note, in this case GSMC and then Freddie Mac, received the debt in equity as a secured  party.”

The court further noted “federal law explicitly allows for the creation of mortgage-related securities, such as the Securities Act of 1933 and the Secondary Mortgage Market Enhancement Act of 1984. Indeed, pursuant to 15 U.S.C. § 77r-1, “[a]ny person, trust, corporation, partnership, association, business trust, or business entity . . . shall be authorized to purchase, hold, and invest in securities that are . . . mortgage related securities.” Id. § 77r-1(a)(1)(B). Foreclosures are routinely and justifiably conducted by trustees of securitized mortgages. Therefore, the court held “Plaintiffs arguments for declaratory judgment and quiet title based on the so-called “splitting” theory fail as a matter of law.”

According to Plaintiffs “any alleged obligation was satisfied, once the default was declared, because the various credit enhancement policies paid out making any injured party whole.” Plaintiffs averred that foreclosure on the Property to collect on payment owed under the First Note will result in a double recovery prohibited by Virginia statute and case law. However, the court went on to say that Plaintiffs’ double recovery argument against Defendants is based on false assumptions because neither MERS, Litton, nor Goldman own the Notes or securitized the Notes. Therefore, the court concluded, none of the named Defendants could receive a “double recovery,” assuming such claim existed.

Judge Claude Hilton reminded the Plaintiffs “no provision in the U.S. or Virginia Codes supports [their] argument that credit enhancements or credit default swaps (“CDS”) are unlawful. No decision from any court in any jurisdiction supports such a claim.”

Hilton further stated that “Plaintiffs’ double recovery theory ignores the fact that a CDS contract is a separate contract, distinct from Plaintiffs’ debt obligations under the reference credit (i.e. the Note). The CDS contract is a “bilateral financial contract” in which the protection buyer makes periodic payments to the protection seller. See Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 168, 172 (2d Cir. 2004).”

If the credit event occurs, noted Hilton, the CDS buyer recovers according to the terms of the CDS contract, not the reference credit. “Any CDS “payout” is bargained for and paid for by the CDS buyer under a separate contract. See In re Worldcom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 651 n.29 (S.D.N.Y. 2004) (explaining that a premium is paid on a swap contract to the seller for credit default protection, and if the default event does not occur, payer has only lost the premium).”

The court held that “CDS do not, as Plaintiffs suggest, indemnify the buyer of protection against loss, but merely allow parties to balance risk through separate third party contracts. Therefore, Plaintiffs’ “double recovery” argument fails as a matter of law.”

Dean Mostofi

National Loan Audits

301-867-3887

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Would you like a bag of chips with your frozen loan audit?

Posted on March 23, 2010. Filed under: Banking, Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Truth in Lending Act | Tags: , , , , , , , |

Every day I get calls from attorneys or people facing foreclosure asking about my services as a forensic loan auditor and expert witness. Generally the callers are reasonably well informed about my work and know what they can and cannot expect from an audit. But yesterday a nice lady from Ohio called and asked for information on a frozen loan audit! And increasingly I am getting calls from people who begin by asking what I charge, immediately followed by how many pages long my audits are! Maybe I am getting a little sensitive as I am nearing my 49th birthday but I become irritated when I am made to feel like a server at a fast food joint. Not that there is anything wrong with being a server, but what would be an appropriate response to such a dumb question?  Today’s special is all you can read for $299 and a bag of chips at no extra cost. Will that be for here or to go?

What is this fascination with size and quantity that drives the average consumer? He wants a McMansion, a Big Mac, an Extra Large Latte, a Jumbo Dog, a Super Sized Pizza, and a Voluminous Frozen Audit. Or is it forensic? Who cares, as long as you get a lot of pages and one of them money back guarantees. Oh yes, we love a money back guarantee.  But seriously, why would someone facing foreclosure or having difficulty making mortgage payments care about the size of an audit? Are they calling five auditors and going with the cheapest who offers the most words for the money? Is that how you hire a professional these days?

Of course, I can’t place the entire blame on consumers who are simply trying to find the most affordable solution for perhaps the biggest problem they have had to face – losing their home. Understandably they are trying to find a method to measure the value of such an esoteric service as a forensic loan audit, which no one had even heard about until a few months ago. You can’t blame them for wanting to shop and compare products before buying and parting with their hard earned money. It is the service providers who are misleading the public and selling them a thick pile of worthless junk packaged as a forensic loan audit with a guarantee that if no violations are discovered a refund will be issued with no questions asked. I wonder how many refunds on these fake audits have been issued.

There are even law firms now peddling these audits for up to $2500 a pop but delivering nothing more than a standardized list of technical violations with some added legalese and fictitious causes of action thrown in for good measure (such as Rescission and Breach of the Covenant of Good Faith and Fair Dealing, none of which are valid or independent causes of action but they sound good). After all, how can you justify charging $2500 for a template audit, if you don’t embellish it with a few Latin words no one can pronounce or omit citations to inapposite case law inserted to fill space for lack of meaningful research.

This industry has been flooded with unprofessional ex loan officers and underemployed ambulance chasing lawyers who have setup shop as auditors with cheap copycat websites and a subscription to compliance software, representing themselves as experts offering hope to distressed homeowners, who in their desperation for keeping their homes and stopping foreclosure are easy prey.

What these unsavory characters are selling is essentially overpriced data entry and a template report purporting to be a legal analysis of the homeowner’s rights and remedies for alleged violations of the Truth in Lending Act (TILA), Real Estate Settlement Procedures Act (RESPA), Fair Credit Reporting Act, Predatory Lending, Breach of Fiduciary Duty, Negligence, Fraud and Unfair or Deceptive Acts or Practices to name a few. After completion of the audit the borrower is usually encouraged to demand a response from the lender via a Qualified Written Request (QWR), which the auditor/lawyer sometimes offers to draft and submit as an added bonus with the assurance that as soon as the lender is served with their masterfully prepared QWR and sees the auditor’s impressive findings, its lawyers begin trembling with fear of being sued and offer to settle for pennies on the dollar. All that for $399 and a money back guarantee! How can anyone turn down such an offer? Yes please, I will have one audit and a bag of chips to munch on while laying back on my couch watching the bank get on its knees and beg for my forgiveness. I want to watch them grovel before they rescind my predatory loan and hand over the deed to my house free and clear. After all this is America.

TILA/RESPA

Of course the reality is markedly different than what is purported by these overenthusiastic yet incompetent advocates. I have seen hundreds of audits and they all have one thing in common – they are worthless. First, many of the so called violations these audits uncover, such as failure to issue a good faith estimate within three days of application, or failure to issue a HUD-1 one day prior to settlement, provide for no private right of action, so their only value may lie in establishing a pattern and practice of misrepresentation, deception or on rare occasions fraud. But even if sufficient facts exist for allegations of broker or loan officer misconduct, liability for such conduct ordinarily remains with the original tortfeasor and not the assignee of the loan, who in all likelihood is a holder in due course, unless you can show, for example, that the holder had notice of your claims prior to purchasing the Note or that the Note was not properly negotiated or for various reasons it does not qualify as a negotiable instrument.

As mentioned ordinarily the holder in due course is not liable for disputes or claims you may have against the originator or mortgage broker who sold you the loan unless certain conditions pursuant to HOEPA have been met, or the TILA violation is apparent on the face of the loan documents, or you are using the claim as a defense in a collection action, or if you can state with particularity facts that would make the note and mortgage void under other legal theories. Some courts, however, have held that you cannot use certain claims in nature of recoupment in non judicial foreclosure proceedings in states such as California, while, on the other hand,  a West Virginia court has said: “Securitization model – a system wherein parties that provide the money for loans and drive the entire origination process from afar and behind the scenes – does nothing to abolish the basic right of a borrower to assert a defense to the enforcement of a fraudulent loan, regardless of whether it was induced by another party involved in the origination of the loan transaction, be it a broker, appraiser, closing agent, or another”. Generally a fraudulent loan is not enforceable regardless of the holder in due course status of the party with the right to enforce. The trick is in providing sufficient facts to prove fraud, which, under normal circumstances is not an easy task to accomplish.

Fiduciary Duty

A popular finding proffered by some practitioners is an alleged violation of fiduciary duty by the lender. In general, however, a lender does not owe a fiduciary duty to a borrower. “A commercial lender is entitled to pursue its own economic interests in a loan transaction. This right is inconsistent with the obligations of a fiduciary which require that the fiduciary knowingly agree to subordinate its interests to act on behalf of and for the benefit of another.” Nymark v. Heart Fed. Savings & Loan Assn., 231 Cal. App. 3d 1089, 1093 n.1, 283 Cal. Rptr. 53 (1991). “[A]bsent special circumstances . . . a loan transaction is at arm’s length and there is no fiduciary relationship between the borrower and lender.” Oaks Management Corporation v. Superior Court, 145 Cal. App. 4th 453, 466, 51 Cal. Rptr. 3d 561 (2006).

Determining the existence of a fiduciary relationship involves a highly individualized inquiry into whether the facts of a given transaction establish that there has been a special confidence reposed in one who, in equity and good conscience, is bound to act in good faith and with due regard to the interests of the one reposing the confidence. Mulligan v. Choice Mortg. Corp. USA, 1998 U.S. Dist. LEXIS 13248 (D.N.H. Aug. 11, 1998).

As such, an audit must inquire in to the circumstances surrounding the borrower’s initial introduction to and meeting with the lender’s agent and the content of all verbal and written communications between them. It is important for the auditor to determine the level and extent of trust and confidence reposed by borrower in the lender’s agent. A lender may owe to a borrower a duty of care sounding in negligence when the lender’s activities exceed those of a conventional lender. For example if it can be shown the appraisal was intended to induce borrower to enter into the loan transaction or to assure him that his collateral was sound the lender may have a duty to exercise due care in preparing the appraisal. See Wagner v. Benson, 101 Cal. App. 3d 27, 35, 161 Cal. Rptr. 516 (1980) (“Liability to a borrower for negligence arises only when the lender actively participates in the financed enterprise beyond the domain of the usual money lender.”).

Vicarious Liability

A lender may be secondarily liable through the actions of a mortgage broker, who may have a fiduciary duty to its borrower-client, but only if there is an agency relationship between the lender and the broker. See Plata v. Long Beach Mortg. Co., 2005 U.S. Dist. Lexis 38807, at *23 (N.D. Cal. Dec. 13, 2005); Keen v. American Home Mortgage Servicing, Inc., 2009 U.S. Dist. LEXIS 100803, 2009 WL 3380454, at *21 (E.D. Cal. Oct. 21, 2009).

Therefore, the audit must propound sufficient facts to establish an agency relationship between lender and broker. An agency relationship exists where a principal authorizes an agent to represent and bind the principal. Although lenders offer the brokers incentives to act in ways that further their interests, there needs to be a showing that a lender gave the broker authority to represent or bind it, or that a lender took some action that would have given borrower the impression that such a relationship existed. I have yet to see an audit that provided facts for such a conclusion but instead they are filled with conclusory allegations unsupported by facts. It is not enough to merely state that lender is vicariously liable through the broker or that broker is lender’s authorized agent without specific facts to support such conclusions.

Civil Conspiracy

Under the conspiracy theory a party may be vicariously liable for another’s tort in a civil conspiracy where the plaintiff shows “(1) formation and operation of the conspiracy and (2) damage resulting to plaintiff (3) from a wrongful act done in furtherance of the common design.” Rusheen v. Cohen, 37 Cal. 4th 1048, 1062, 39 Cal. Rptr. 3d 516, 128 P.3d 713 (2006) (citing Doctors’ Co. v. Superior Court, 49 Cal.3d 39, 44, 260 Cal. Rptr. 183, 775 P.2d 508 (1989)), see also Applied Equipment Corp. v. Litton Saudi Arabia Ltd., 7 Cal. 4th 503, 511, 28 Cal. Rptr. 2d 475, 869 P.2d 454 (1994). The California Supreme Court has held that even when these elements are shown, however, a conspirator cannot be liable unless he personally owed the duty that was breached. Applied Equipment, 7 Cal. 4th at 511, 514.

Civil conspiracy “cannot create a duty . . . . [i]t allows tort recovery only against a party who already owes the duty.” Courts have specifically held that civil conspiracy cannot impose liability for breach of fiduciary duty on a party that does not already owe such a duty. Everest Investors 8 v. Whitehall Real Estate Ltd. Partnership XI, 100 Cal. App. 4th 1102, 1107, 123 Cal. Rptr. 2d 297 (2002) (citing Doctors’ Co., 49 Cal. 3d at 41-42, 44 and Applied Equipment, 7 Cal. 4th at 510-512).

Thus, civil conspiracy allows imposition of vicarious liability on a party who owes a tort duty, but who did not personally breach that duty. Doctors’ Co., 49 Cal. 3d at 44 (A party may be liable “irrespective of whether or not he was a direct actor and regardless of the degree of his activity.”).

Joint Venture

Participation in a joint venture with a broker or other party in a predatory lending context gives rise to liability for such claims under a claim of joint venture. See Short v. Wells Fargo Bank Minnesota, N.A., 401 F. Supp. 2d 549, 2005 U.S. Dist. LEXIS 28612, available in 2005 WL 3091873, at 14-15 (S.D.W.Va. Nov. 18, 2005); see also generally Armor v. Lantz, 207 W. Va. 672, 677-78, 535 S.E.2d 737, 742-43 (2000); Sipple v. Starr, 205 W. Va. 717, 725, 520 S.E.2d 884, 892 (1999); Price v. Halstead, 177 W.Va. 592, 594, 355 S.E.2d 380, 384 (1987).

Similarly, if one party is directing or exercising control over loan origination in the circumstance of securitized lending, it is a factual question as to whether there is a principal/agency relationship sufficient to impose such liability on all the participants. See Short v. Wells Fargo Bank Minnesota, N.A., supra, 2005 U.S. Dist. LEXIS 28612, 2005 WL 3091873, at 14-15; England v. MG Investments, Inc., 93 F. Supp. 2d 718, 723 (S.D.W.Va. 2000); Arnold, 204 W.Va. at 240, 511 S.E.2d at 865.

An audit must inquire in to the relationships between parties involved in the joint venture and determine the level of control exercised by one party over another. Again, it is not sufficient to merely recite legal conclusions such as “Crooked Funding LLC controlled Scam Brokers Inc.”.

Fraud and Deceit

In most jurisdictions, “[t]he elements of fraud, which give rise to the tort action for deceit, are (a) misrepresentation (false representation, concealment, or nondisclosure); (b) knowledge of falsity (or scienter); (c) intent to defraud, i.e., to induce reliance; (d) justifiable reliance; and (e) resulting damage.” Small v. Fritz Companies, Inc., 30 Cal. 4th 167, 173, 132 Cal. Rptr. 2d 490, 65 P.3d 1255 (2003).

To prove mail fraud, as an example, the auditor must propound facts with particularity as follows:

Johnny Crookland, Crooked Broker’s President, misrepresented his intention to get borrowers the best rate available at their initial meeting in March 2006. The audit should also contain the date and content of all mailings and communications between the Crooked Broker and the borrowers through which the broker with the aid of a warehouse lender (Scam Fundings LLC) effectuated its scheme to defraud: (1) direct mail advertisement from Crooked Broker showing a teaser interest rate of 6.75% with zero broker fees or points (2) a “good faith estimate” of the loan terms mailed by Crooked Broker on March 26 which did not mention anything about a $5,890 fee for origination, (3) the first (rejected) loan document, with an interest rate of 7% which included a $ 5,890 fee, presented to the borrowers on April 13 at the first closing (though presumably mailed or faxed from the warehouse lender’s office in New York shortly before that date) (4) borrowers refusal to sign the closing documents because of the unauthorized fee that appeared on the HUD-1 on closing day, (5) a second good faith estimate mailed by Crooked Broker on April 16, showing 7% interest but this time without the unauthorized fee; and the second (accepted) loan document, which was presented in Baltimore on April 19 but at a higher rate of 7.125% and now subject to a yield spread premium that was never disclosed or explained  as to how it may impact total finance charges over the length of the loan. (6) Crooked Broker’s statement in response to borrowers’ inquiry about the yield spread premium that it was standard practice and paid by lender with no impact on total finance charges payable by borrowers.

Show Me the Note

The template audits invariably omit a detailed inquiry in to the securitization process after the loan was funded by the Originator and sold to investors through securitization. Often the only theory proffered by incompetent auditors revolves around the “show me the note” defense, which has been shot down by almost every court in every jurisdiction because it lacks merit. A lost note affidavit can easily overcome this argument, so by itself as a foreclosure defense strategy this does nothing but cast doubt on a borrower’s credibility.

A skilled auditor will carefully examine all documents including the Note, Mortgage/DOT, Mortgage/DOT Assignment, Note Endorsement/Allonge, Notice of Default and the Pooling and Servicing Agreement to determine the identity of all parties involved in the chain of securitization and their respective interests in the Note and Mortgage.

Once settlement occurs the Note and Mortgage are normally transferred to a document custodian (e.g. Wells Fargo), while numerous book entries record their movement through the securitization chain which normally begins with the Originator (e.g. Mason Mortgage) who then sells them to an aggregator (e.g. Countrywide Home Loans) who then sells them with a thousand other loans to a Depositor (e.g. Asset Securities Inc.) who then deposits them with a Trustee (e.g Wells Fargo) for the benefit of the securitization trust (e.g Asset Securities Trust IV-290989 – 2003) which issues securities backed with the pool of mortgages (MBS).  The trustee also selects a Servicer (e.g Countrywide Home Loans) to collect borrower payments and process foreclosures/short sales on behalf of the investors who own the MBS.

When there is default and in order to effectuate foreclosure, the Servicer asks the document custodian for the collateral file that pursuant to the PSA should contain the original Note indorsed by the Originator (e.g. Mason Mortgage), usually in blank thereby converting it in to a bearer instrument, and the Mortgage/DOT with an executed assignment either already recorded or in recordable form. Usually this is where everything can fall apart for the secured party attempting to foreclose and where the best defense opportunities may be uncovered by a skilled examiner.  Without giving away too much proprietary information here is a list of some questions a diligent auditor should be asking:

  1. Was the execution of the Mortgage/DOT by the borrower properly witnessed and acknowledged?
  2. Was the Note legally negotiated and formally transferred from the Originator to the Aggregator, from the Aggregator to the Depositor and from the Depositor to the Trustee?
  3. Was the Note indorsed by an authorized agent of its holder before each transfer?
  4. Is the Indorsement evidenced by an Allonge while there is room for an Indorsement on the original Note?
  5. Was the Note negotiated to its current holder prior to the date of default?
  6. Did the Mortgage travel with the Note through the chain of securitization?
  7. Is the Mortgage held by MERS?
  8. Has the Mortgage assignment been properly recorded?
  9. Was the Mortgage and Note assigned to the Trustee by MERS?
  10. Was MERS authorized or allowed to assign the Mortgage?
  11. Who signed the assignment on behalf of MERS?

MERS and Splitting the DOT from the Note

The practical effect of splitting the deed of trust from the promissory note is to make it impossible for the holder of the note to foreclose, unless the holder of the deed of trust is the agent of the holder of the note. Without the agency relationship, the person holding only the note lacks the power to foreclose in the event of default. The person holding only the deed of trust will never experience default because only the holder of the note is entitled to payment of the underlying obligation.  The mortgage loan becomes ineffectual when the note holder did not also hold the deed of trust.”  Bellistri v. Ocwen Loan Servicing, LLC, 284 S.W.3d 619, 623 (Mo. App. 2009).

Some courts have found that, because MERS is not the original holder of the promissory note and because there is no evidence that the original holder of the note authorized MERS to transfer the note, the language of the assignment purporting to transfer the promissory note is ineffective. “MERS never held the promissory note, thus its assignment of the deed of trust to Ocwen separate from the note had no force.” 284 S.W.3d at 624; see also In re Wilhelm, 407 B.R. 392 (Bankr. D. Idaho 2009) (standard mortgage note language does not expressly or implicitly authorize MERS to transfer the note); In re Vargas, 396 B.R. 511, 517 (Bankr. C.D. Cal. 2008) (“[I]f FHM has transferred the note, MERS is no longer an authorized agent of the holder unless it has a separate agency contract with the new undisclosed principal. MERS presents no evidence as to who owns the note, or of any authorization to act on behalf of the present owner.”); Saxon Mortgage Services, Inc. v. Hillery, 2008 U.S. Dist. LEXIS 100056, 2008 WL 5170180 (N.D. Cal. 2008) (unpublished opinion) (“[F]or there to be a valid assignment, there must be more than just assignment of the deed alone; the note must also be assigned. . . . MERS purportedly assigned both the deed of trust and the promissory note. . . . However, there is no evidence of record that establishes that MERS either held the promissory note or was given the authority . . . to assign the note.”).

IN CONCLUSION, the value of a forensic loan audit lies not in its word count, size or thickness but rather in the knowledge and expertise of the individual performing the work and examining the documents. Many of the worthless template audits produced by scammers consist of more than 100 pages of garbage and pointless recitations of statutes you can find online or in any library. Moreover, finding a technical violation in loan documents is a virtual certainty, so a money back guarantee is merely a marketing gimmick offered by unscrupulous con artists to gain your trust and to distract you from what really counts. If you are worried about word count and a money back guarantee you are missing the point. And if you are looking for the least expensive audit advertised on the web, you will certainly get what you pay for. An authentic audit done right takes at least 3 hours to complete (a more detailed analysis can take over 8 hours) and a skilled auditor charges between $250 to $300 per hour, so do the math.

Remember an audit is merely a tool that should be handled with care by a seasoned attorney. It does not magically stop foreclosure while you lay back on the couch with a bag of chips. A lengthy template audit attached to a lengthy QWR sent to a lender’s loss mitigation department will most likely end up in the trash. The best way to measure the quality and value of an auditor’s work, short of a referral, is by picking up the phone, speaking to him and making sure he knows what he is talking about. Surround yourself with smart and skilled advocates and you will be a step or two ahead of the bank trying to take your home away.  That I can guarantee.

Dean Mostofi, President

National Loan Audits

Tel: 301-867-3887

E-mail: dean@lenderaudits.com

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In re GIFTY SAMUELS, Debtor

Posted on March 16, 2010. Filed under: Banking, bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , |

In re GIFTY SAMUELS, Debtor

Chapter 11, Case No. 06-11656-FJB

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS, EASTERN DIVISION

415 B.R. 8; 2009 Bankr. LEXIS 1954

July 6, 2009, Decided

CASE SUMMARY:

PROCEDURAL POSTURE: In contested Chapter 11 proceedings, movant creditor, as trustee–under a pooling and servicing agreement–of a mortgage investment trust, sought summary judgment as to an objection filed by the debtor to its secured claim, which was based on a promissory note and a mortgage given as security. The debtor challenged the creditor’s claim that it was the holder of the note and the owner of the mortgage and its standing to enforce its rights.

OVERVIEW: The debtor alleged that defects existed in the creditor’s proof of chain of title to the promissory note and the mortgage. The creditor argued that it held the documents as a successor-in-interest to the original bankruptcy claimant. The court agreed, finding that the loan originator had endorsed both the note and the mortgage in blank–converting them into bearer instruments–then delivered them to the creditor as pool trustee. In 2008, an assignee acting under a limited power of attorney (LPA) executed a confirmatory assignment of the mortgage, which it recorded. Although the documents submitted with the proof of claim did not show a valid assignment of rights, depriving the claim of prima facie validity, the creditor met its burden of showing that it held rights to the note and the mortgage. Under Mass. Gen. Laws ch. 106, § 3-205(b) the creditor was the holder of the note, which it had standing to enforce under Mass. Gen. Laws ch. 106, § 3-301. The assignee retroactively ratified the mortgage through the 2008 LPA. The postpetition transfer of the recorded mortgage did not constitute a transfer of an estate asset in violation of the automatic stay in 11 U.S.C.S. § 362(a).

OUTCOME: The court granted summary judgment in favor of the bank.

JUDGES: Frank J. Bailey, United states Bankruptcy Judge.

OPINION BY: Frank J. Bailey

OPINION

MEMORANDUM OF DECISION ON MOTION OF DEUTSCHE BANK FOR SUMMARY JUDGMENT ON DEBTOR’S OBJECTION TO ITS PROOF OF CLAIM

By the motion before the Court, Deutsche Bank National Trust Company,  [*11]  as trustee under a pooling and servicing agreement of a certain mortgage investment trust (“Deutsche Bank”), seeks summary judgment as to the objection filed by Chapter 11 debtor Gifty Samuels to its secured claim. Deutsche Bank’s claim is based on the contention that Deutsche Bank is the present holder of a promissory note given by Samuels to Argent Mortgage Company, LLC (“Argent”), and the owner of the mortgage given by Samuels to Argent to secure the promissory note. By her objection, Samuels now challenges not the validity of the underlying note and mortgage but only Deutsche Bank’s claim to be the holder of the note and owner of the mortgage and thus its standing to enforce these. Finding the motion for summary judgment to be well-supported, the Court will grant summary judgment and overrule the objection to claim.

PROCEDURAL HISTORY

Gifty Samuels filed a petition for relief under  [**2] Chapter 13 of the Bankruptcy Code on June 1, 2006, thereby commencing this bankruptcy case. Upon discovery that her debt exceeded the eligibility limits for Chapter 13, she moved to convert her case to one under Chapter 11, and the Court granted that motion on August 10, 2006. She has remained a debtor in possession under Chapter 11 since that time.

AMC Mortgage Services, Inc., as loan servicer for Argent, filed a proof of a claim in the case on June 23, 2006 for $ 292,206.37, and an amended proof of claim on September 18, 2006 for $ 294,466.50. 1 Both indicated that the claim in question was secured, but neither included an attached promissory note or mortgage or identified the property securing the debt.

1   The original proof of claim appears on the claims register as number 3-1, the amended as -2.

The property securing this debt was certain real property owned by Samuels and located at 316B, Essex Street, Lynn, Massachusetts. AMC Mortgage Services, Inc., as loan servicer for Argent, moved for relief from the automatic stay as to this property on April 2, 2007. [Doc. # 143] After a hearing, the court denied the motion without prejudice to renewal but, in the same order, expressly permitted  [**3] AMC Mortgage Services, Inc. to file an affidavit of noncompliance seeking further court action if the Debtor, commencing in July 2007, failed to make timely monthly mortgage payments. [Doc. # 198]

On November 9, 2007, Citi Residential Lending, Inc. (“Citi Residential”), by Mario Vasquez, a duly authorized agent, filed such an affidavit of noncompliance. [Doc. # 239] In the affidavit, Mr. Vasquez stated that Citi Residential “is now the servicer for Argent Mortgage Company” and that Samuels had failed to make her monthly mortgage payments. On November 23, 2007, the Court held a hearing on the affidavit and the underlying motion for relief, resulting in entry of an agreed order of that same date, granting Citi Residential relief from the automatic stay to foreclose, effective January 31, 2008. [Doc. # 251]

On February 1, 2008, in an Omnibus Objection to claims, Samuels objected to the amended claim of AMC Mortgage Services (Claim No. 3-2), stating that “[t]his claim alleges a security interest but fails to identify the property securing the claim or to attach a copy of any documentation in support of the claim.” [Doc. # 267] Citi Residential Lending filed a response to the objection [Doc.  [**4] # 294] that identified the property in question as the real property at 316B Essex Street, Lynn, Massachusetts,  [*12]  and included as attachments the relevant promissory note and mortgage. Just prior to the preliminary hearing on the objection, the Debtor filed a report and hearing agenda that, with respect to this claim, stated:

A response was filed by Citi Residential Lending, Inc. regarding this claim []. The response includes a copy of the Note and Mortgage, as requested in the objection, but fails to demonstrate that AMC or Citi Residential is the actual holder of the note and mortgage, such as by attaching a copy of an assignment(s). The response also fails to provide a complete Loan History or to provide an affidavit of the keeper of records regarding the amount owed as of the date of the response.

The Debtor thus essentially retracted her original grounds for objecting–failure to identify the property and lack of supporting documentation–and raised new grounds: lack of evidence that AMC or Citi Residential was the actual holder of the promissory note and mortgage. The court held a preliminary hearing on the objection as so amended on April 15, 2008 and a continued hearing on June  [**5] 20, 2008. The court then issued a procedural order requiring (i) that the claimant file documentation establishing true ownership of the note and mortgage that form the basis for its claim and then (ii) that the Debtor file a response indicating whether it accepts the evidence as establishing the validity of the claim, including (in the event of rejection) an explanation as to why.

The documentation required by the first prong of this order was filed by Deutsche Bank National Trust Company, as Trustee, in trust for the registered holders of Argent Securities Inc., Asset-Backed Pass-Through Certificates, Series 2005-W3 (“Deutsche Bank”). In the response to which the documentation was attached [Doc. # 363], 2 Deutsche Bank claimed to be the present holder of the mortgage at issue. The Debtor filed a response indicating that she did not accept the documents adduced as evidence establishing the validity of the lien. [Doc. # 366]

2   Deutsche Bank also filed a Supplemental Response [Doc. # 364].

On August 19, 2008, Citi Residential, as loan servicer and attorney-in-fact for Deutsche Bank, then moved to amend proof of claim No. 3, stating that AMC Mortgage Services, Inc. had incorrectly named  [**6] Argent as the creditor in that proof of claim. [Doc. # 377] Citi Residential said in the motion that in fact the loan is held by Deutsche Bank, and therefore that the proof of claim should name Deutsche Bank as the creditor. The motion further stated that effective October 1, 2007, Citi Residential had replaced AMC Mortgage Services, Inc. as servicer of the loan. On October 21, 2008, and over the Debtor’s objection, the court granted this motion. Accordingly, on October 24, 2008, Deutsche Bank National Trust Company, as Trustee, in trust for the registered holders of Argent Securities Inc., Asset-Backed Pass- Through Certificates, Series 2005-W3, filed proof of claim No. 14-2, complete with supporting documents, as an amendment to claim No. 3-2. The supporting documents, filed as exhibits to the proof of claim, included (i) the Samuels Note, (ii) the Samuels Mortgage, (iii) on the Samuels Mortgage, a registry stamp constituting evidence that the Mortgage was recorded on August 23, 2005; (iv) a Confirmatory Assignment of the Samuels Mortgage and Note from Argent to Deutsche Bank, dated August 4, 2008, bearing a registry stamp constituting evidence that the Confirmatory Assignment was  [**7] recorded on August 11, 2008; and (v) a Limited Power of Attorney from Argent  [*13]  to Citi Residential, dated October 18, 2007 (the “2007 LPA”).

On September 29, 2008, while the motion to amend proof of claim was pending, and pursuant to FED. R. BANKR. P. 3001(e)(2), Citi Residential filed evidence–essentially a notice–of transfer of claim No. 3 (as amended) other than for security [Doc. # 396]. The notice indicates that Claim No. 3 was transferred from AMC Mortgage Services, Inc., as loan servicer for Argent, to Citi Residential, as loan servicer and attorney in fact for Deutsche Bank. The clerk promptly then notified AMC Mortgage Services, Inc. of the evidence of transfer and established a deadline for the alleged transferor to object, failing which the transferee would be substituted for the original claimant without further order of the court. AMC Mortgage Services, Inc. filed no objection, and the time to object has long since passed.

On December 11, 2008, Deutsche Bank then filed the present Motion for Summary Judgment as to Claim No. 14 [Doc. # 415]. 3 Deutsche Bank construes the Debtor’s objection to Claim No. 3 as in fact an objection to Claim No. 14 (because Claim No. 14 is an  [**8] amendment to Claim No. 3) and, by its motion for summary judgment, seeks an order overruling the objection and allowing Claim No. 14. In support of the motion, Deutsche Bank submitted the affidavits of Ronaldo Reyes, Diane E. Tiberend, and Margarita Guerreo and the exhibits authenticated by these affiants. The Debtor has filed an opposition to the motion and, in support of her opposition, an unauthenticated deposition of Tamara Price. 4 Price is a Citi Residential employee that was deposed in another case. The court held a hearing on the motion on March 31, 2009 and took the matter under advisement.

3   A motion for summary judgment may appropriately be filed as to an objection to claim. An objection to claim is a contested matter. Pursuant to FED. R. BANKR. P. 9014(c), Rule 7056 of the Federal Rules of Bankruptcy Procedure applies to contested matters. Rule 7056 in turn makes FED. R. CIV. P. 56 applicable.

4   In her opposition, the Debtor also asks the court to take judicial notice of the entire record of this case, but she fails to identify particular documents or parts of the record of which she would have the court take judicial notice.

ARGUMENTS OF THE PARTIES

This contested matter has  [**9] evolved in two significant respects since its inception with the Debtor’s filing of her objection to Claim No. 3. First, the underlying claim has been amended, such that the claim in issue is no longer Claim No. 3, filed by AMC Mortgage Services, Inc., as loan servicer for Argent, but Claim No. 14-2, filed by Deutsche Bank, with Deutsche Bank claiming to be the successor in interest to Argent as holder of the same promissory note and mortgage that formed the basis of the Claim No. 3. Second, the grounds of objection have changed: the Debtor’s original objection–that the proof of claim “alleges a security interest but fails to identify the property securing the claim or to attach a copy of any documentation in support of the claim”–has been satisfied, the note and mortgage having been adduced and the property having been identified. Instead, the objection has now become a challenge to Deutsche Bank’s contention that it holds the promissory note and owns the mortgage on which the claim is based. It is this particular objection, as it is leveled against Claim No. 14-2, that is presently before the court as the subject of Deutsche Bank’s motion for summary judgment. Neither party disputes  [**10] that the issue so framed is properly  [*14]  before the Court, the lack of a formal objection to Claim No. 14-2 notwithstanding.

Deutsche Bank’s argument in support of summary judgment is as follows. Pursuant to a certain Mortgage Loan Purchase and Warranties Agreement, the following sequence of transfers occurred: Argent, as the originator of the loan and payee and original holder of the note, sold the loan in question to Ameriquest Mortgage Company LLC, which, in turn sold the loan to Argent Securities, Inc., which deposited the loan into the ARSI Series 2005-W3 Pool subject to the Pooling and Servicing Agreement (“PSA”) dated as of October 1, 2005 between Argent Securities, Inc. as Depositor, Ameriquest as Master Servicer, and Deutsche Bank, as Trustee. Accordingly, Argent endorsed the original promissory note in blank, without recourse–thus converting it into a bearer instrument, negotiable by transfer of possession alone–and delivered it to Deutsche Bank as pool Trustee, which has had actual physical custody of the note since August 18, 2005. The mortgage followed a similar path, twice: first on August 18, 2005, when Argent Mortgage Company LLC, the original mortgagee, assigned the mortgage  [**11] in blank and delivered it to Deutsche Bank as pool Trustee; and a second time on August 4, 2008, when Citi Residential, acting under a limited power of attorney from Argent, executed on behalf of Argent a confirmatory assignment of the mortgage to Deutsche Bank as pool Trustee and recorded the same in the applicable registry of deeds. In addition, Deutsche Bank argues, Argent ratified the assignment of the mortgage to Deutsche Bank by raising no objection to the court’s notice of evidence of transfer of claim.

The Debtor argues that Deutsche Bank must show that it is the lawful owner of both the note and the mortgage. The Debtor does not dispute that the promissory note was indorsed in blank and transferred to Deutsche Bank and that Deutsche Bank is now, and since August 18, 2005 has been, in possession of the note. The Debtor instead concentrates her opposition on the mortgage, arguing that there exist several defects in Deutsche Bank’s chain of title, or at least in Deutsche Bank’s proof of the chain of title. First, the Debtor argues that Argent’s original assignment of the mortgage in blank was ineffective because a mortgage is an interest in land that, under the statute of frauds,  [**12] requires a conveyance in writing that identifies the assignee; Argent’s conveyance in blank, though in writing, does not identify an assignee and therefore, the Debtor concludes, was ineffective.

Second, the Debtor contends that the PSA required that all mortgages acquired thereunder had to be funneled to Deutsche Bank, as pool trustee, through the entity designated by the PSA as “depositor,” ARSI. A failure to follow this protocol–such as by direct assignment of the mortgage from the loan originator to the pool trustee, bypassing the depositor–would, the Debtor contends, constitute a breach of the PSA, a breach of fiduciary obligations under the PSA to investors, a breach of federal regulations, and an act giving rise to unfavorable tax consequences for the investors. The Debtor argues that because the mortgage assignments described by Deutsche Bank do not indicate that title passed to Deutsche Bank through the depositor, the assignments of the mortgage must be invalid.

Third, the Debtor argues that the confirmatory assignment is invalid because the vice-president of Citi Residential who executed that assignment, a Ms. Tamara Price, indicated in a deposition in an unrelated case that  [**13] (1) she signs documents  [*15]  presented to her for signing without knowing what she is signing and (2) she signs these documents outside the presence of a notary, after which the documents are forwarded to a notary for completion. The Debtor further argues that Price patently lied when she recited in the Confirmatory Assignment that the original assignment “was lost”; the assignment in blank was produced in this proceeding and therefore was not lost. The Debtor does not elaborate on the consequences or import of these allegations. Nor does he dispute that Ms. Price had authority to execute the assignment and that she actually did execute it.

Fourth, the Debtor argues very briefly that, because the execution and recording of the confirmatory assignment occurred after she filed her bankruptcy petition, these acts constituted violations of the automatic stay and of 11 U.S.C. § 549 (permitting a trustee to avoid certain postpetition transfers). In support of this argument, the Debtor cites In re Beaulac, 298 B.R. 31 (Bankr. D. Mass. 2003) without elaboration. She offers no explanation as to how the postpetition transfer of a mortgage already in existence and previously recorded can constitute  [**14] a transfer of an asset of the estate or a violation of the automatic stay. She further suggests that she has the power to avoid the “unauthorized postpetition conveyance” but does not explain how or on what grounds and has not moved to avoid the conveyance.

SUMMARY JUDGMENT STANDARD

[HN1] A party is entitled to summary judgment only upon a showing that there is no genuine issue of material fact and that, on the uncontroverted facts, the movant is entitled to judgment as a matter of law. FED R. CIV. P. 56(c). Where, as here, the burden of proof at trial would fall on the party seeking summary judgment, that party must support its motion with evidence–in the form of affidavits, admissions, depositions, answers to interrogatories, and the like–as to each essential element of its cause of action. The evidence must be such as would permit the movant at trial to withstand a motion for directed verdict under FED. R. CIV. P. 50(a). Anderson v Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). If the motion is properly supported, the burden shifts to the adverse party to submit evidence demonstrating the existence of a genuine issue as to at least one material fact. If the adverse party does not so respond,  [**15] “summary judgment, if appropriate, shall be entered against the adverse party.” FED. R. CIV. P. 56(e); Jaroma v. Massey, 873 F.2d 17, 20 (1st Cir. 1989). The court makes no findings of fact but only determines whether there exists a genuine issue of material fact and, if not, whether, on the uncontroverted facts, the moving party is entitled to judgment as a matter of law.

DISCUSSION

a. Burden of Proof

The present motion seeks summary judgment as to a proof of claim. The burdens with respect to proofs of claim were summarized by Judge Somma in In re Long, 353 B.R. 1, at 13 (Bankr. D. Mass. 2006):

[HN2] A proof of claim executed and filed in accordance with the Federal Rules of Bankruptcy Procedure constitutes prima facie evidence of the validity and amount of the claim. FED. R. BANKR. P. 3001(f); see also Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir. 1993). In order to rebut this prima facie evidence, the objecting party must produce “substantial evidence.” United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D. Mass. [*16] 2000) (Hemingway Transport, 993 F.2d at 925). If the objecting party produces substantial evidence in opposition to the proof  [**16] of claim and thereby rebuts the prima facie evidence, the burden shifts to the claimant to establish the validity of its claim. Hemingway Transport, 993 F.2d at 925 (“Once the trustee manages the initial burden of producing substantial evidence . . . the ultimate risk of nonpersuasion as to the allowability of the claim resides with the party asserting the claim.”). Where the proof of claim is not filed in accordance with the Federal Rules of Bankruptcy Procedure, the proof of claim does not constitute prima facie evidence of the validity and amount of the claim, and therefore the burden of proof rests at all times on the claimant.

In order for a proof of claim to be executed and filed in accordance with the Federal Rules of Bankruptcy Procedure, it must satisfy (among other things) two requirements set forth in Rule 3001 itself. First, “when a claim . . . is based on a writing, the original or a duplicate shall be filed with the proof of claim.” FED. R. BANKR. P. 3001(c). Second, “[i]f a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by evidence that the security interest has been perfected.” FED. R. BANKR. P. 3001(d).

Deutsche Bank contends  [**17] that its amended proof of claim (No. 14-2) enjoys prima facie validity, and that the Debtor has not rebutted this prima facie validity with substantial evidence or any evidence at all. The Debtor disagrees, arguing that the proof of claim was not supported by documents showing a complete chain of title and therefore does not constitute prima facie evidence of the claim, such that the burden rests from the start on the claimant.

The Court agrees with the Debtor: the documents attached to Proof of Claim No. 14-2–in relevant part, the Note, the Mortgage, the Confirmatory Assignment, and the 2007 LPA–do not, by themselves, establish the necessary chain of title. The Note and Mortgage are in fact the underlying documents on which the claim is based, but they identify Argent as payee and mortgagee, not Deutsche Bank. Deutsche Bank attempted to show that it now holds the rights originally given to Argent by attaching the Confirmatory Assignment to its proof of claim. The Confirmatory Assignment, being an assignment in writing from Argent to Deutsche Bank of all rights under the Note and Mortgage, would suffice but for one problem: its validity is contingent on the limited power of attorney  [**18] pursuant to which Citi Residential executed it for Argent, but the 2007 LPA that was attached to the proof of claim does not authorize the particular type of mortgage assignment that was involved in the Confirmatory Assignment.

The 2007 LPA expressly authorizes Citi Residential to execute, on behalf of Argent, only two kinds of mortgage assignment: (i) “the assignment of any Mortgage or Deed of Trust and the related Mortgage Note, in connection with the repurchase of the mortgage loan secured and evidenced thereby,” and (ii) “the full assignment of a Mortgage or Deed of Trust upon payment and discharge of all sums secured thereby in conjunction the refinancing thereof.5 The Confirmatory Assignment was not executed in connection with the repurchase of a mortgage loan or the refinancing of  [*17]  this loan, and the 2007 LPA does not authorize mortgage assignments of any other kind. A further paragraph in the 2007 LPA authorizing Citi Residential to foreclose on mortgages is not an authorization to execute assignments of mortgages, even where the assignment would facilitate a foreclosure of the mortgage. 6 Where the 2007 LPA narrowly circumscribed the two types of mortgage assignment it did  [**19] authorize Citi Residential to execute, the further grant of authority to foreclose should not be construed broadly to authorize additional types of mortgage assignment.

5   2007 LPA (attached as Exhibit 4 to Proof of Claim No. 14-2), at PP 6 and 7 (emphasis added).

6   Judge Feeney reached this same conclusion with respect to identical language in another limited power of attorney from Argent to Citi Residential. See In re Hayes, 393 B.R. 259, 268, 270 (Bankr. D. Mass. 2008).

Consequently, the documents submitted with the proof of claim do not by themselves show a valid assignment of rights from Argent to Deutsche Bank and do not fully support the asserted claim. It follows that the proof of claim is not supported by documents adequate to establish the assignment of rights on which it is based, and therefore that the claim does not enjoy prima facie validity. In the alternative, whatever prima facie validity the claim initially enjoyed was rebutted by the Debtor’s pointing out of the defect in the chain of title that was evident in the documents submitted with the proof of claim. Either way, for purposes of the present motion, the proof of claim does not enjoy prima facie validity, and the  [**20] burden is on the claimant, Deutsche Bank, to establish that it now holds the rights given by the Debtor to Argent in the Note and Mortgage.

b. The Factual Record

The evidence adduced in support of summary judgment, when construed in the light most favorable to Samuels, shows the following. There are no genuine issues as to the material facts.

On August 18, 2005, Samuels, as owner of the real property located at 316B Essex Street, Lynn, Massachusetts (“the Property”), executed in favor of Argent Mortgage Company LLC, as lender, a promissory note (“the Note”) in the original principal amount of $ 272,000 and, to secure repayment of the note, a mortgage on the Property (“the Mortgage”). The Mortgage was recorded with the Essex South Registry of Deeds on August 23, 2005.

On the same day that it originated the Samuels loan, Argent endorsed the Note in blank and also executed a written assignment in blank–i.e., without designation of an assignee–of the Note and Mortgage (“the Assignment”). Also on the same day, Argent transmitted the Note, Mortgage, and Assignment to Deutsche Bank in its capacity as custodian of Argent’s original collateral files.

Under a Mortgage Loan Purchase and Warranties  [**21] Agreement (“MLPWA”) 7 dated January 2, 2003 between Argent and its affiliate, Ameriquest Mortgage Company, Inc., Argent regularly and systematically sold and transferred the loans that it originated to Ameriquest for securitization purposes. The MLPWA did not itself effectuate conveyance or sale of any specific loan; under section 2(a) of the MLPWA, a further act would be necessary to effectuate a sale pursuant to the MLPWA: specifically, the execution of an Assignment and Conveyance Agreement. From the affidavit of Diane Tiberand, a senior vice president of ACC Capital Holdings Corporation, the parent company of both Argent and Ameriquest, it is clear that both Argent and  [*18]  Ameriquest believe that the Samuels loan was conveyed by Argent through Ameriquest to Argent Securities, Inc. (“ARSI”) to Deutsche Bank. However, Deutsche Bank has adduced no evidence that the Samuels loan was among those that Argent sold and transferred to Ameriquest, either under the MLPWA or otherwise.

7   Tiberand Affidavit [Doc. 420], Exhibit 1.

Ameriquest securitized its mortgage loans through one of two corporate vehicles; in the case of the Samuels loan, the vehicle Ameriquest used was ARSI. Pursuant to and through  [**22] a Mortgage Loan Purchase Agreement dated October 26, 2005 (“MLPA”) between Ameriquest and ARSI, 8 Ameriquest sold the Samuels loan–or at least whatever interest Ameriquest had therein–to ARSI for subsequent deposit by ARSI into the ARSI Series 2005-W3 pool trust. The sale and transfer of the loan from Ameriquest to ARSI was effectuated by the MLPA itself, which was not merely an agreement to sell but also the actual written instrument of conveyance. Thus, section 1 of the MLPA states, “[t]he Seller hereby sells, and the Purchaser hereby purchases, as of October 28, 2005, certain . . . residential mortgage loans.” The loans in question were identified in a Closing Schedule executed pursuant to Section 2 of the MLPA. The Samuels loan was listed on the closing schedule as Loan No. 83442632, which is the loan number that appears on both the Note and the Mortgage.

8   The Mortgage Loan Purchase Agreement of October 26, 2005 is attached as Exhibit C to the affidavit of Ronaldo Reyes [Doc. 418].

ARSI then deposited the Samuels Loan, or whatever interest ARSI had in that loan, into the ARSI Series 2005-W3 pool trust by transfer to Deutsche Bank as trustee. The deposit into the pool trust was  [**23] done pursuant to a Pooling and Servicing Agreement dated October 1, 2005 (“the PSA”) among ARSI, Ameriquest, and Deutsche Bank. Under the PSA, ARSI, as Depositor, deposited certain designated mortgage loans, including the Samuels loan, into the pool; Ameriquest, as Master Servicer, agreed to be responsible for servicing of the loans, either itself or through one or more subservicers; and Deutsche Bank agreed to serve as trustee to hold legal title to the pooled mortgage loans for the benefit of investors in the pool. ARSI sold and deposited the Samuels loan (and 9,909 other mortgage loans) into the ARSI Series 2005-W3 pool on October 28, 2005. The PSA itself, in conjunction with the schedule of mortgages deposited through it into the pool trust, served as a written assignment of the designated mortgage loans, including the mortgages themselves. Thus in section 2.01, the PSA states: “The Depositor [ARSI], concurrently with the execution and delivery hereof, does hereby transfer, assign, set over and otherwise convey to the Trustee [Deutsche Bank] without recourse for the benefit of the Certificateholders all the right, title and interest of the Depositor, including any security interest  [**24] therein for the benefit of the Depositor, in and to the Mortgage Loans identified on the Mortgage Loan Schedule[.]” (Emphasis added.) Per Section 2 of the MLPA, the Mortgage Loan Schedule for the PSA was the same document as the Closing Schedule executed pursuant to Section 2 of the MLPA, on which was listed the number of the Samuels Loan.

Except only as set forth in the following sentence, Deutsche Bank has had and continues to have possession of the Note and Mortgage evidencing the Samuels loan since August 18, 2005, first as custodian of Argent’s original collateral files and then, from and after October 28, 2005, as trustee  [*19]  of the ARSI Series 2005-W3 pool for the benefit of certificate holders of the trust. In August 2008, Deutsche Bank relinquished physical custody of the collateral file, including the Note, to Citi Residential for purposes of an evidentiary hearing scheduled for August 20, 2008. Citi Residential had by then become servicer of the loan for Deutsche Bank. The collateral file, including the Note, remains in Citi Residential’s physical custody for the benefit of Deutsche Bank.

On October 18, 2007, Argent executed a limited power of attorney (“the 2007 LPA”) under which  [**25] it made Citi Residential its attorney-in-fact for certain purposes. In relevant part, the 2007 LPA gave Citi Residential

full power and authority to sign, execute, acknowledge, deliver, file for record, and record any instrument on its behalf and to perform such other act or acts as may be customarily and reasonably necessary and appropriate to effectuate the following enumerated transactions in respect of any of the mortgages or deeds of trust (the “Mortgages” and “Deeds of Trust”, respectively) and promissory notes secured thereby (the “Mortgage Notes”). 9

The enumerated transactions include, in relevant part:

(6) The assignment of any Mortgage or Deed of Trust and the related Mortgage Note, in connection with the repurchase of the mortgage loan secured and evidenced thereby.

(7) The full assignment of a Mortgage or Deed of Trust upon payment and discharge of all sums secured thereby in conjunction the refinancing thereof.

(8) With respect to a Mortgage or Deed of Trust, the foreclosure, the taking of a deed in lieu of foreclosure, or the completion of judicial or non-judicial foreclosure . . . . 10

9   2007 LPA.

10   2007 LPA, PP 6, 7, and 8.

On August 4, 2008, Argent, acting through Citi Residential  [**26] as attorney in fact for Argent, executed a confirmatory assignment of the Samuels Mortgage to Deutsche Bank. The document was signed for Citi Residential by its vice president Tamara Price. The Confirmatory Assignment states that it was effective as of April 14, 2006. In the confirmatory assignment, Ms. Price also stated that the confirmatory assignment was being executed with intent “to replace the original assignment which due to inadvertence and/or mistake was lost[.]” 11 Citi Residential recorded this confirmatory assignment in the Essex South Registry of Deeds on August 11, 2008. Though the Mortgage itself had previously been recorded, no earlier assignment of the Mortgage had been recorded.

11   Aside from this statement, Deutsche Bank has adduced no evidence that an assignment of the mortgage has been lost; nor does Deutsche Bank allege that there exists a lost assignment or rely on any lost assignment in this motion. There is evidence of only one assignment that predates the Confirmatory Assignment: the assignment in blank that was executed immediately after origination of the loan. That assignment is in evidence here, and there is no evidence that it was ever lost. There exists  [**27] a genuine issue as to whether the original assignment was lost and as to whether Ms. Price’s representation to that effect was knowingly false, but, as explained below, the Court also concludes that these facts are not material to resolution of the present controversy. They present no genuine issue of material fact.

On December 5, 2008, Argent executed another limited power of attorney (“the 2008 LPA”) under which it made Citi Residential its attorney-in-fact for certain purposes. The 2008 LPA stated that it was  [*20]  effective retroactively to September 1, 2007, and that Argent ratified any and all actions theretofore taken by Citi Residential within the scope of the powers granted by the 2008 LPA from and after September 1, 2007. The 2008 LPA expressly stated that the powers it conferred on Citi Residential included the power to execute and record the assignment of any mortgage and the related mortgage note.

Since the recording of the Confirmatory Assignment, record title to the Mortgage has stood in the name of Deutsche Bank. Neither Argent nor Ameriquest claims any interest in the Samuels Mortgage and Note.

c. The Promissory Note

The uncontroverted evidence shows, and the Debtor does not  [**28] dispute, that the Samuels Note was endorsed in blank by its named payee, that possession of the note was thereafter transferred to Deutsche Bank, and that Deutsche Bank is now, and since August 18, 2005 has been, in possession of the note. As a negotiable instrument, the Note may be transferred in accordance with Article 3 of the Uniform Commercial Code as enacted in Massachusetts: [HN3] “When indorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” G.L. c. 106, § 3-205(b). By virtue of its possession of a note indorsed in blank, Deutsche Bank is the holder of the note and as such has standing in this case to seek payment thereof. G.L. c. 106, § 3-301 ([HN4] “Person entitled to enforce” an instrument includes the holder of the instrument.”); First National Bank of Cape Cod v. North Adams Hoosac Savings Bank, 7 Mass. App. Ct. 790, 797, 391 N.E.2d 689 (1979) (“As the holder of the note, [plaintiff] also would be entitled to all payments to be made by the mortgagors on the note.”).

d. The Mortgage

In order to establish that it holds not only the Samuels Note but also the Samuels Mortgage, Deutsche Bank follows two alternate paths. The  [**29] first relies on showing a chain of three assignments of the mortgage: from Argent to Ameriquest, then Ameriquest to ARSI, and then ARSI to Deutsche Bank. The problem with this strategy is that Deutsche Bank has adduced no writing evidencing the first of these transfers, from Argent to Ameriquest. [HN5] A mortgage is an interest in real property, and the statute of frauds accordingly requires that an assignment of a mortgage be in writing. Warden v. Adams, 15 Mass. 233 (1818) (“By force of our statutes regulating the transfer of real estates and for preventing frauds, no interest passes by a mere delivery of a mortgage deed, without an assignment in writing and by deed.”). Deutsche Bank has adduced evidence of an agreement pursuant to which Argent agreed to transfer mortgage loans to Ameriquest, but it has adduced no writing evidencing the assignment of the Samuels Mortgage from Argent to Ameriquest. Consequently, the chain of title is incomplete, and Deutsche Bank must, as it anticipated, fall back on its alternate strategy.

In the alternative, Deutsche Bank relies on the Confirmatory Assignment from Argent to Deutsche Bank, executed for Argent by Citi Residential on August 4, 2008 under  [**30] a limited power of attorney. The Confirmatory Assignment expressly and in writing conveys from Argent to Deutsche Bank both the Samuels Mortgage and the Samuel Note.

The Confirmatory Assignment was not executed by Argent itself but by Citi Residential purporting to act under a limited power of attorney. Deutsche Bank contends that this action by Citi Residential  [*21]  should be deemed a valid and effective act by Argent for three independent reasons: Argent authorized it by the 2007 LPA; Argent ratified it by the 2008 LPA; and Argent further ratified it by not objecting to the evidence of transfer of claim filed by Citi Residential in this bankruptcy case. For the following reasons, the Court rejects the first, accepts the second, and, having accepted the second, does not address the third.

The first is that, prior to the Confirmatory Assignment, Argent had executed a limited power of attorney, the 2007 LPA, that empowered Citi Residential to execute this assignment for Argent. This reliance on an already-existing limited power of attorney is unavailing for the reasons articulated above (in the section on Burden of Proof): the 2007 LPA did not authorize Citi Residential to execute the Confirmatory  [**31] Assignment.

Second, and in the alternative, Deutsche Bank relies on the 2008 LPA, executed by Argent on December 5, 2008, some four months after the confirmatory assignment. The 2008 LPA was expressly retroactive to September 1, 2007, and ratified any and all actions theretofore taken by Citi Residential within the scope of the powers granted by the 2008 LPA from and after September 1, 2007. The 2008 LPA expressly conferred on Citi Residential the power to execute and record the assignment of any mortgage and the related mortgage note, which powers, I conclude, include the power to execute the Confirmatory Assignment. By its ratification through the 2008 LPA of actions undertaken before it was issued, Argent remedied any lack of authority that may have existed when Citi Residential executed the Confirmatory Assignment. Linkage Corp. v. Trustees of Boston University, 425 Mass. 1, at 18, 679 N.E.2d 191 (1997) (“Where an agent lacks actual authority to agree on behalf of his principal, the principal may still be bound if the principal acquiesces in the agent’s action[.]”).

The Debtor argues that the Confirmatory Assignment should nonetheless be deemed ineffective for three reasons. First she argues that  [**32] the confirmatory assignment is invalid because the vice-president of Citi Residential who executed that assignment, a Ms. Tamara Price, indicated in a deposition in an unrelated case that (1) she signs documents presented to her for signing without knowing what she is signing and (2) she signs such documents outside the presence of a notary, after which the documents are forwarded to a notary for completion. The Debtor further contends that Price patently lied when she recited in the Confirmatory Assignment that the original assignment “was lost.” The Debtor does not elaborate on the consequences or import of these allegations. The Court sees no reason that these alleged facts, if true, should invalidate the assignment. There is no evidence that Price signed this Confirmatory Assignment without knowing what she was signing, much less that Citi Residential did not know what it was doing by having her sign the Confirmatory Assignment on its behalf, but even if neither Price nor Citi Residential knew what they were doing, that would not invalidate the assignment. Nor does it matter that Price signed documents outside the presence of a notary and then forwarded them to the notary for completion,  [**33] where the Debtor neither disputes that Price did in fact sign the Confirmatory Assignment nor offers argument that this practice was contrary to applicable law and constitutes a defect in the assignment. And any falsity or lie as to the purpose of the confirmatory assignment is immaterial: the Court knows of no requirement that an assignment contain a  [*22]  statement of purpose, truthful or otherwise.

Second, the Debtor argues that the PSA required that all mortgages acquired thereunder to be funneled to Deutsche Bank, as pool trustee, through the entity designated by the PSA as “depositor,” ARSI. A failure to follow this protocol–such as by direct assignment of the mortgage from the loan originator to the pool trustee, bypassing the depositor–would, the Debtor contends, constitute a breach of the PSA, a breach of fiduciary obligations under the PSA to investors, a breach of federal regulations, and an act giving rise to unfavorable tax consequences for the investors. The Debtor argues that because the Confirmatory Assignment is a direct assignment from Argent to Deutsche Bank that bypasses the depositor, it must be invalid. This argument falls far short of its goal. Even if this direct  [**34] assignment were somehow violative of the PSA, giving rise to unfavorable tax, regulatory, contractual, and tort consequences, 12 neither the PSA nor those consequences would render the assignment itself invalid. In fact, under the Debtor’s own argument, the unfavorable consequences could and would arise only if, and precisely because, the assignment were valid and effective.

12   The Court does not conclude that the Confirmatory Assignment violates the PSA or gives rise to unfavorable tax, regulatory, contractual, or tort consequences; the debtor’s argument is so lacking in detail on all these points as to constitute no real argument at all, certainly none permitting the conclusions she urges on the Court.

Third and last, the Debtor argues very briefly that, because the execution and recording of the confirmatory assignment occurred after she filed her bankruptcy petition, these acts constituted violations of the automatic stay and of 11 U.S.C. § 549 (permitting a trustee to avoid certain postpetition transfers). In support of this argument, the Debtor cites In re Beaulac, 298 B.R. 31 (Bankr. D. Mass. 2003) without elaboration. She offers no explanation as to how the postpetition transfer  [**35] of a mortgage already in existence and previously recorded can constitute a transfer of an asset of the estate or a violation of the automatic stay. She further suggests that she has the power to avoid the “unauthorized postpetition conveyance” but does not explain how or on what grounds and has not moved to avoid the conveyance.

I find no merit in this argument or any of its parts. The postpetition assignment of a mortgage and the related note from one holder to another is not a transfer of property of the estate. The mortgage and note are assets of the creditor mortgagee, not of the Debtor. Nor is the postpetition assignment of a mortgage and the related note an act to collect a debt; the assignment merely transfers the claim from one entity to another. The Debtor cites no particular subsection of 11 U.S.C. § 362(a), the automatic stay, that she contends such an assignment violates, and the court is aware of none.

I need not address the Debtor’s further unsupported contention that the postpetition recording of an assignment of mortgage is a violation of the automatic stay 13 or of 11 U.S.C. § 549(a). 14 As the  [*23]  Debtor herself acknowledges, [HN6] an assignment of mortgage need not be recorded  [**36] in order to be valid against the mortgagor or her grantees. Lamson & Co. v. Abrams, 305 Mass. 238, 241-242, 25 N.E.2d 374 (1940); O’Gasapian v. Danielson, 284 Mass. 27, 32, 187 N.E. 107 (1933). Therefore, even if the recording were void and ineffectual, the assignment to Deutsche Bank would still be valid.

13   The recording of an assignment of mortgage by the assignee of the mortgagee creates a record chain of title for anyone taking through the mortgage and protects the assignee from subsequent transfers by or through the assignor. The Debtor offers no explanation as to how the recording might be an act to collect a debt or a violation of some other section of the automatic stay. In Beaulac, which the Debtor cites without discussion, the mortgage in question had been given to the debtor, not by the debtor; Beaulac is therefore wholly inapposite.

14   The debtor invokes the automatic stay and § 549(a) only defensively.

CONCLUSION

For the reasons set forth above, the Court concludes that there are no genuine issues of material fact and that, on the uncontroverted facts, Deutsche Bank has established that it is in possession of the note and the owner of the mortgage securing it and therefore is entitled to summary judgment  [**37] as a matter of law. A separate order will enter allowing Deutsche Bank’s Motion for Summary Judgment and overruling the Debtor’s objection to its proof of claim, No. 14-2.

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Lenders Increasingly Facing Forensic Loan Audits

Posted on February 4, 2010. Filed under: Foreclosure Defense, Loan Modification, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending, Refinance, RESPA, right to rescind, Truth in Lending Act | Tags: , , , , , , , , , |

For the past couple of years, it has become a fairly common practice for lenders and servicers to employ forensic loan audits on pools of mortgages, with the goal of uncovering patterns of noncompliance with federal and local regulations, the presence of fraud and/or the testing of high fee violations. Unfortunately, for these same lenders, the practice of forensic loan auditing has slipped over to the consumer side of the market and is now being used against the lenders themselves.

Homeowners, many of whom are facing foreclosures, have begun hiring forensic loan auditors to review their loan documents, and if violations are found, they are hiring attorneys to bring their case against the lenders. What do they hope to gain? At the very least, the homeowners are trying to forestall a foreclosure, push for a loan modification or, at the end of continuum, try to get the loan rescinded.

“The forensic loan review as we know it today came about two years ago, when the mortgage market started to melt down,” explains Jeffrey Taylor, co-founder and managing director for Orlando-based Digital Risk LLC. “The idea of the forensic review was to look for a breach of representations and warranties so the investor or servicer could put the loan back to the originator. This is when you had all the big banks reviewing nonperforming assets to see if there was any fraud material or breaches so as to put them back to the entity that sold the loan.”

Originally, and still today, most forensic loan reviews are done by institutions on nonconforming assets. Starting in about 2008, the concept morphed into a kind of consumer protection program. Forensic loan auditing companies have since sprouted up like weeds, and many advisors are now advocating the program as a best practice and the first step before bringing a lawsuit against the lender to get a “bad” mortgage rescinded or force a loan modification.

“Every constituent along the way is looking for their own get-out-of-jail-free card,” observes Frank Pallotta, a principal with Loan Value Group LLC of Rumson, N.J. “I’ve been seeing this for the last two years. It started with banks that bought loans from small correspondents, and when those loans were going down, they would look for anything in the loan documentss to put it back to the person they bought the loan from. Fannie and Freddie are doing it, too. Now you have borrowers going to the banks to see if they have all their documents in place; they want their own get-out-of-jail-free card.”

Litigation-a-go-go

In some regards, lenders should be worried, as a swarm of potential lawsuits could fly in their direction. These might not always be hefty lawsuits, considering they mostly represent individual loan amounts, but they are annoying and the fees to defend the institution from these efforts can mount up very quickly. In addition, if homeowners are successful in the bids to rescind a loan, the lender has to pay back all closing costs and finance charges.
The industry should also be concerned because experts in mortgage loan rescissions say it is very hard for a bank to mount an effective defense against people who can prove that their loan contained violations.

“It is extremely difficult for lenders to defend against a lawsuit when they face a bona fide rescission claim,” says Seth Leventhal, an attorney with Fafinski Mark & Johnson PA in Eden Prairie, Minn., who often works with banks.

Additionally, in this age of securitization, many banks don’t own the loans they originated, but, says Leventhal, this is not a defense. “If they don’t own the loan anymore, they are going to have to get in touch with the servicer who does,” he says.

On the other hand, the homeowner’s cost to arrange a loan audit and hire an attorney can be prohibitive, so there is some balance.
Jon Maddux, principal and founder of Carlsbad, Calif.-based You Walk Away LLC, started one of the first companies offering forensic home loan audits for homeowners back in January 2008.

“We found that about 80% of the loans we audited had some type of violation,” he says. “And we thought it was going to be a great new tactic to help the distressed homeowner.”

However, it wasn’t. Homeowners would take the audit findings to their lender or servicer, only to find themselves pretty much as ignored as they were before they made the investment in the audit.

“We found lenders weren’t really reacting to an audit,” says Maddux, adding that lenders and servicers would only react to lawsuits based on audit information.

An audit by itself is not some magical way to make everything go away; it’s just the beginning, adds Dean Mostofi, the founder of National Loan Audits in Rockville, Md.

“Borrowers who contact lenders with an audit don’t get too far,” he says. “It’s in their best interest to go in with an attorney.”

The problem is, Mostofi states, that the first point of contact is the loss mitigation department, and “those people typically have no idea what you are talking about. To get past them sometimes requires lawsuits.”

Paper chase

The forensic loan audit lets the homeowner know if the closing documents contain any violations of the Truth In Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), or if there was any kind of fraud or misrepresentation.

“We go through the important documents – in particular, the applications – TILA disclosure, Department of Housing and Urban Development forms, the note, etc., making sure that everything was disclosed properly to the borrower and that borrowers knew what they were getting into,” says Mostofi. “We also look at the borrower’s income to see if everything was properly disclosed. If the lender didn’t care about the borrower’s income, then we look further for other signs that it might be a predatory loan.”

According to August Blass, CEO and president of Walnut Creek, Calif.-based National Loan Auditors, a forensic loan audit is a thorough risk assessment audit performed by professionals who have industry and legal qualifications to review loan documents and portfolios for potential compliance or underwriting violations, and provide an informative, accurate loan auditing report detailing errors or misrepresentations.

Some elements of a forensic loan audit, says Blass, should include: a compliance analysis report based on data from the actual file; post-closing underwriting review and analysis; and summary of applicable statutes, prevailing case law and action steps that the attorney or loss mitigation group may chose to act upon.

TILA’s statute of limitations extends back three years, so most people who end up on their lender’s doorsteps are people who financed or refinanced during the boom period of 2005 through early 2007. If serious violations are discovered, the borrower can move to have the mortgage rescinded.

Not everyone appreciates the efforts of the forensic loan auditors working the homeowner side of the business.

“It began with a bunch of entrepreneurial, ex-mortgage brokers who learned how to game the system the first time, then started offering services to consumers to teach them the game,” Digital Risk’s Taylor says.

A year ago, most people didn’t know what a forensic audit was, but “now almost everyone knows,” says Mostofi. “The problem that we are having is that the banks are coming back and telling borrowers that everyone who is offering some kind of service to help them is a crook because they are charging a fee.”

Indeed, fees for a forensic audit often fall into the $2,000 to $5,000 range – but a hefty sum for someone facing foreclosure.
This could all be a desperate attempt to get a loan rescinded, but in regard to loan rescissions, there’s bad news and good news.

“Yes, it’s tough for lenders to defend themselves,” says James Thompson, an attorney in the Chicago office of Jenner & Block LLP who represents banks and finance companies. But, he adds, there is an exception: the plaintiff in this kind of lawsuit has to essentially buy back the loan, which means the plaintive (borrower) has to get new financing.

“The borrower has to be able to repay the amount he borrowed,” explains Thompson. “If the property is underwater, as many of these are, the borrower can’t go out and get a replacement mortgage that would give him the entire amount he would need to repay the lender.”

In some court cases, as part of the initial lawsuit, the plaintiff needs to prove that he or she is capable of getting a refinancing. What happens if the court grants a rescission but the consumer can’t find financing? Oddly, no one knows, because court cases haven’t gotten that far.

“Every one of these cases gets resolved,” says Thompson. “The borrowers are struggling to get the attention of the overworked loan servicers, who are scrambling with as many loan modifications and workouts they can come up with. You can get to the head of the line sometimes if you show up with an attorney and forensic loan examination, saying, ‘Here is a TILA violation; we want to rescind.'”

“I don’t see very many of these litigating,” National Loan Auditors’ Blass concurs. “It brings the settlement offer to the table a little faster. It’s not as if the lender would not have brought an offer to the table without the audit. It just seems to fast-track the process a little bit more.”

Forensic loan audits expose mistakes and unscrupulous lending practices that will assist the borrower in negotiation efforts, Blass adds. “Federal-, state- or county-specific lending violations and the legal guidelines for remedy, can pave the way to successful and expedient modification.”

Perhaps, the bigger nightmare of all is not the lawsuits brought by individual homeowners, but the big law firms finding all these individuals and bringing them together for a class action suit.

“The plaintiff bar is as active as ever. They have these big dragnets, trying to capture all the misdeeds of mortgage bankers, going after them with class-action lawsuits,” says David Lykken, president of Mortgage Banking Solutions in Austin, Texas.

This just aggravates the situation, adds Lykken. “I have not seen one class-action lawsuit bring about any positive change. Punitive damages just drain the cash-out of already cash-strapped companies.”

Steve Bergsman is a freelance writer based in Mesa, Ariz., and author of “After The Fall: Opportunities & Strategies for Real Estate Investing in the Coming Decade,” published by John Wiley & Sons.

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MERS v. LISA MARIE CHONG

Posted on December 9, 2009. Filed under: bankruptcy, Case Law, Foreclosure Defense, Mortgage Law | Tags: , , , , , , |

UNITED STATES DISTRICT COURT

DISTRICT OF NEVADA

Dist. Ct. Case No. 2:09-CV-00661-KJD-LRL
Bankr. Ct. Case No. BK-S-07-16645-LBR

Presently before the Court is Appellant’s Appeal under 28 U.S.C. § 158(a) from the Bankruptcy Court’s Order Denying Motion to Lift Stay entered in the Adversary Proceeding No. BKS- 07-16645-LBR, docket no. 49, March 31, 2009.

Having considered the briefs and the record on appeal, including the arguments of parties at the consolidated hearing on November 10, 2009, the Court affirms the Order of the Bankruptcy Court

Procedural History and Facts

On April 14, 2009, Appellant Mortgage Electronic Registration Systems, Inc. (“MERS”) filed Notice of Appeal (#1) appealing the Bankruptcy Court’s order denying Appellant’s motion for relief from stay. This appeal is one of approximately eighteen (18) similar cases in which the Bankruptcy Court ruled that Appellant lacked standing to bring the motion.

In the underlying bankruptcy action, MERS filed its Motion for Relief from Stay (“the Motion”) pursuant to Federal Rule of Bankruptcy Practice (“Rule”) 4001 on January 14, 2008 seeking to have the automatic stay lifted so that MERS could conduct a non-judicial foreclosure saleon debtor’s real property because the debtor lacked the ability to make payments and could not provide adequate security. Trustee Lenard E. Schwartzer (“Trustee”) filed objections to the Motion claiming that MERS did not have standing as a real party in interest under the Rules to file the motion. (Appellant’s Appendix (“Appx.”) Doc. No. 12, p. 34).

In response, Appellant filed the Declaration of Faatima Straggans, an employee of Homecomings Financial, LLC the authorized servicing agent for MERS, attempting to authenticate a copy of the original Deed of Trust (“Deed”) and Note. (Appx. 36–38). The Deed described MERS as beneficiary and identified MERS as the nominee of the original lender, FMC Capital LLC. Id. However, the Declaration identified neither the current owner of the beneficial interest in the Note, nor any of the successors or assignees of the Deed of Trust. The Declaration also failed to assert that MERS, FMC Capital LLC or Homecomings Financial, LLC held the Note.

Due to the similar issues raised regarding motions for relief from stay in approximately twenty-seven (27) cases involving MERS, the Bankruptcy Court set a joint hearing for all twenty seven cases. (Appx. 113–18). The Bankruptcy Court also ordered consolidated briefing for all cases to be filed in Case No. 07-16226-LBR, In re Mitchell, the “lead case”. Id. In a majority of the cases, including the present case, Appellant attempted to withdraw the Motion but was procedurally unable to do so, because the Trustee would not consent. (Appx. 1383, 1902-1904, 1907-1909). MERS informed the Bankruptcy Court that it had attempted to withdraw the Motion, because it had been filed contrary to its own corporate procedures. (Appx. 432). Particularly in this case, MERS was unable to show that a MERS Certifying Officer was in physical possession of the Note at the time the Motion was filed. (Appx. 624).

A final hearing was held on August 19, 2008. (Appx. 650-729). On March 31, 2009, the Bankruptcy Court issued Memorandum Opinions and Orders denying MERS’ motions for relief from stay in Mitchell and two other cases. (Appx. 740-54, 1581-95, 1959-72). In the remaining cases, including the present case, the Bankruptcy Court denied the motions for relief from stay by incorporating the reasoning from the Mitchell Memorandum Opinion. (Appx.46). The Bankruptcy Court held that MERS lacked standing because it was not a real party in interest as required by the Rules. (Appx. 740-54). Specifically, the court found that “[w]hile MERS may have standing to prosecute the motion in the name of its Member as nominee, there is no evidence that the named nominee is entitled to enforce the note or that MERS is the agent of the note’s holder.” (Appx. 753).

The court further held that MERS’ asserted interest as beneficiary under the contract terms did not confer standing because MERS had no actual beneficial interest in the note and, therefore, was not a beneficiary. (Appx. 745-48). MERS now appeals that order asserting that the Bankruptcy Court erred as a matter of law when it determined that MERS may not be a beneficiary under the deeds of trust at issue in the eighteen consolidated cases where the express language of the deeds of trust provide that MERS is the beneficiary. The Trustee continues to assert that MERS lacks standing because it is not a real party in interest. II. Standard of Review

This Court has jurisdiction pursuant to 28 U.S.C. § 158(a) and reviews the Bankruptcy Court’s findings under the same standard that the court of appeals would review a district court’s findings in a civil matter. 28 U.S.C. § 158(c)(2). Therefore, the Court reviews the Bankruptcy Court’s factual findings under a clearly erroneous standard, and conclusions of law de novo. See In re Healthcentral.com, 504 F.3d 775, 783 (9th Cir. 2007); In re First Magnus Fin. Corp., 403 B.R. 659, 663 (D. Ariz. 2009). III. Analysis This appeal arises from eighteen cases in which MERS filed motions for relief from stay in the Bankruptcy Court. In each case, either a party or the Bankruptcy Court raised the issue of whether MERS had standing to bring the motion.

In holding that MERS did not have standing as the real party in interest to bring the motion for relief from stay, the Bankruptcy Court determined that MERS was not a beneficiary in spite of language that designated MERS as such in the Deed of Trust at issue. MERS seeks to overturn the Bankruptcy Court’s determination that it is not a beneficiary. However, the Court must affirm the Bankruptcy Court’s order under the facts presented because MERS failed to present sufficient evidence demonstrating that it is a real party in interest.

A motion for relief from stay is a contested matter under the Bankruptcy Code. See Fed. R. Bankr. P. 4001(a); 9014(c). Bankruptcy Rule 7017 applies in contested matters. Rule 7017 incorporates Federal Rule of Civil Procedure 17(a)(1) which requires that “[a]n action must be prosecuted in the name of the real party in interest.” See also, In re Jacobson, 402 B.R. 359, 365-66 (Bankr. W.D. Wash. 2009); In re Hwang, 396 B.R. 757, 766-67 (Bankr. C.D. Cal. 2008). Thus, while MERS argues the bankruptcy court erred when it determined that MERS was not a beneficiary under the deeds of trust, MERS only has standing in the context of the motion to lift stay under the Rules if it is the real party in interest. See Fed. R. Bankr. P. 7017. Since MERS admits that it does not actually receive or forfeit money when borrowers fail to make their payments, MERS must at least provide evidence of its alleged agency relationship with the real party in interest in order to have standing to seek relief from stay. See Jacobson, 402 B.R. at 366, n.7 (quoting Hwang, 396 B.R. at 767 (“the right to enforce a note on behalf of a noteholder does not convert the noteholder’s agent into a real party in interest”)).

An agent for the purpose of bringing suit is “viewed as a nominal rather than a real party in interest and will be required to litigate in the name of his principal rather than his own name.” Hwang, 396 B.R. at 767. This is particularly important in the District of Nevada where the Local Rules of Bankruptcy Practice require parties to communicate in good faith regarding resolution of a motion for relief from stay before it is In other cases movant did not seek to withdraw the Motion, but similarly produced no evidence that it held the note or acted as the agent of the noteholder. filed. LR 4001(a)(3). The parties cannot come to a resolution if those with a beneficial interest in the note have not been identified and engaged in the communication.

In the context of a motion for relief from stay, the movant, MERS in this case, bears the burden of proving it is a real party in interest. In re Wilhelm, 407 B.R. 392, 400 (Bankr. D. Idaho 2009)(citing In re Hayes, 393 B.R. 259, 267 (Bankr. D.Mass. 2008)(“To have standing to seek relief from the automatic stay, [movant] was required to establish that it is a party in interest and that its rights are not those of another entity”)).

Initially, a movant seeking relief from stay may rely upon its motion. Id. However, if a trustee or debtor objects based upon standing, the movant must come forward with evidence of standing. Id.; Jacobson, 402 B.R. at 367 (requiring movant at least demonstrate who presently holds the note at issue or the source of movant’s authority). Instead of presenting the evidence to the Bankruptcy Court, MERS attempted to withdraw the Motion from the Bankruptcy Court’s consideration, citing the failure of a MERS Certifying Officer to demonstrate that a member was in physical possession of the promissory note at the time the motion was filed.1 The only evidence provided by MERS was a declaration that MERS had been identified as a beneficiary in the deed of trust and that it had been named nominee for the original lender.

Since MERS provided no evidence that it was the agent or nominee for the current owner of the beneficial interest in the note, it has failed to meet its burden of establishing that it is a real party in interest with standing. Accordingly, the order of the Bankruptcy Court must be affirmed. This holding is limited to the specific facts and procedural posture of the instant case. Since the Bankruptcy Court denied the Motion without prejudice nothing prevents Appellant from refilling the Motion in Bankruptcy Court providing the evidence it admits should be readily available in its system. The Court makes no finding that MERS would not be able to establish itself as a real party in interest had it identified the holder of the note or provided sufficient evidence of the source of its authority. IV.

Conclusion

Accordingly, IT IS HEREBY ORDERED that the Order of the Bankruptcy Court entered March 31, 2009 is AFFIRMED. DATED this 4th day of December 2009.

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Fannie Mae to rent out homes instead foreclosing

Posted on November 5, 2009. Filed under: Foreclosure Defense, Housing, Mortgage Law | Tags: , , , , , , |

Fannie Mae to rent out homes instead foreclosing

By ALAN ZIBEL (AP) – 4 hours ago

WASHINGTON — Thousands of borrowers on the verge of foreclosure will soon have the option of renting their homes from Fannie Mae, under a policy announced Thursday.

The government-controlled company, through its new “Deed for Lease” program, will allow borrowers to transfer ownership to Fannie Mae and sign a one-year lease, with month-to-month extensions after that.

The program will “eliminate some of the uncertainty of foreclosure, keeps families and tenants in their homes during a transitional period, and helps to stabilize neighborhoods and communities,” Jay Ryan, a Fannie Mae vice president, said in a statement.

But the effort is likely to affect a relatively small number of homeowners. In the first half of the year, Fannie Mae took back about 1,200 properties through this process, known as a deed-in-lieu of foreclosure. That pales in comparison to the 57,000 foreclosed properties the company repossessed in the period.

While neither option is particularly attractive for the homeowner, a deed-in-lieu does less harm to the borrower’s credit record.

The rental program is designed to help homeowners who don’t qualify for a loan modification under the Obama administration’s plan, but still want to remain in their homes. Fannie Mae is not planning to market the homes for sale during the one-year rental period.

Fannie Mae has hired an outside company, which officials declined to identify, to manage the properties.

To qualify, homeowners have to live in the home as their primary residence and prove that they can afford the market rent, which would be determined by the management company. The rent can’t be more than 31 percent of their pretax income.

Fannie Mae’s sibling company, Freddie Mac, launched a similar effort in March. That policy, however, requires the foreclosure to be complete and only allows month-to-month leases. A Freddie Mac spokesman declined to say how many borrowers have participated.

via The Associated Press: Fannie Mae to rent out homes instead foreclosing.

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Mortgage Assignment & Affidavit Fraud

Posted on October 27, 2009. Filed under: Banking, Finance, Foreclosure Defense, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , , , |

In bankruptcy and government takeovers of financial institutions, missing collateral is a major obstacle for trustees and regulators to overcome. The missing assignment problem is an extension of not carelessness or sloppiness as many have claimed, but of overt acts of fraud.

Skilled attorneys and forensic accounting experts could expose this fraud and as such, the effects and implications are more far reaching than a borrower, simply having their debt extinguished. Debt extinguishment or dismissal of foreclosure actions could be obtained if it can be shown that the entity filing the foreclosure:

• Does not own the note;
• Made false representations to the court in pleadings;
• Does not have proper authority to foreclose;
• Does not have possession of the note; and/or
• All indispensable parties (the actual owners) are not before the
court or represented in the pending foreclosure action.

To circumvent these issues, mortgage servicers and the secondary market have created and maintained a number of practices and procedures. MERS was briefly discussed and will be the sole subject of a major fraud report in the future.

Another common trade practice is to create pre-dated, backdated, and fraudulent assignments of mortgages and endorsements before or after the fact to support the allegations being made by the foreclosing party. Foreclosing parties are most often the servicer or MERS acting on the servicer’s behalf, not the owners of the actual promissory note. Often, they assist in concealing known frauds and abuses by originators, prior servicers, and mortgage brokers from both the borrowers and investors by the utilization of concealing the true chain of ownership of a borrower’s loan.
Ocwen-Anderson-Report-Sue-First-Ask-Questions-Later

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Deutsche Bank v. Debra Abbate Etal.

Posted on October 23, 2009. Filed under: Case Law, Foreclosure Defense, Mortgage Audit, Mortgage Law | Tags: , , , , , , , , , , , , |

Deutsche Bank National Trust Company, AS TRUSTEE FOR THE CERTIFICATE HOLDERS OF CARRINGTON MORTGAGE LOAN TRUST 2005-OPT2, ASSET-BACKED CERTIFICATES, SERIES 2005-OPT2, Plaintiff

against

Debra Abbate, CARMELA ABBATE, KIM FIORENTINO, BOCCE COURT HOMEOWNERS ASSOCIATION, INC., NEW YORK CITY ENVIRONMENTAL CONTROL BOARD, NEW YORK CITY TRANSIT ADJUDICATION BUREAU, NEW YORK CITY PARKING VIOLATIONS BUREAU, and “JOHN DOE No. 1″ through “JOHN DOE #10,” the last ten names being fictitious and unknown to the plaintiff, the person or parties intended being the person or parties, if any, having or claiming an interest in or lien upon the Mortgaged premises described in the Complaint, Defendants.

100893/07

Plaintiff was represented by the law firm of Frenkel Lambert Weiss & Weisman.

Defendant was represented by Robert E. Brown, Esq.

Joseph J. Maltese, J.

The defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted in its entirety.

This is an action to foreclose a mortgage dated February 24, 2005, upon the property located at 25 Bocce Court, Staten Island, New York. The mortgage was originated by Suntrust Mortgage Inc. (”Suntrust”) and was recorded in the Office of the Clerk of Richmond County on April 26, 2005. The plaintiff filed the Summons, Complaint, and Notice of Pendency on March [*2]1, 2007.[FN1] However, Suntrust assigned the first mortgage on this property to Option One Mortgage Corporation, which was executed on July 6, 2007. Another assignment to plaintiff Deutsche Bank National Trust Company (”Deutsche Bank”) was executed on March 7, 2007. Both assignments, which were recorded on July 23, 2007, contained a clause expressing their intention to be retroactively effective: the first one to date back to February 24, 2005, and the second one to February 28, 2007.[FN2] On November 19, 2007, this court issued an order of foreclosure and sale on the subject property. This court also granted two orders to show cause to stay the foreclosure on January 9, 2008 and April 8, 2008.[FN3]

Discussion

The Appellate Division, Second Department ruled and reiterated in Kluge v. Kugazy the well established law that “foreclosure of a mortgage may not be brought by one who has no title to it . . . .”[FN4] The Appellate Division, Third Department has similarly ruled that an assignee of a mortgage does not have a right or standing to foreclose a mortgage unless the assignment is complete at the time of commencing the action.[FN5] An assignment takes the form of a writing or occurs through the physical delivery of the mortgage.[FN6] Absent such transfer, the assignment of the mortgage is a nullity.[FN7]

Retroactive Assignments of a Mortgage are Invalid
The first issue this court must resolve is whether the clauses in the July 6, 2007 and March 7, 2007 assignments setting the effective date of the assignment to February 24, 2005 and February 28, 2007 respectively are permissible. This court rules that, absent a physical or written transfer before the filing of a complaint, retroactive assignments are invalid.

Recently, trial courts have been faced with the situation where the plaintiff commenced a [*3]foreclosure action before the assignment of the mortgage.[FN8] In those cases the trial courts have held,

. . . where there is no evidence that plaintiff, prior to commencing the foreclosure action, was the holder of the mortgage and note, took physical delivery of the mortgage and note, or was conveyed the mortgage and note by written assignment, an assignment’s language purporting to give it retroactive effect prior to the date of the commencement of the action is insufficient to establish the plaintiff’s requisite standing. . .[FN9]

In this case, the plaintiff failed to offer any admissible evidence demonstrating that they became assignees to the mortgage on or before March 1, 2007; as such, this court agrees with its sister courts and finds that the retroactive language contained in the July 26, 2007 and March 7, 2007 assignments are ineffective. This court therefore rules that it lacks jurisdiction over the subject matter when the plaintiff has no title to the mortgage at the time that it commenced the action.

The next issue this court must resolve is whether the defendants waived subject matter jurisdiction because they did not raise that issue in their prior applications to this court.

Affirmative Defense of Standing

At the outset of any litigation, the court must ascertain that the proper party requests an adjudication of a dispute.[FN10] As the first step of justiciability, “standing to sue is critical to the proper functioning of the judicial system.”[FN11] Standing is a threshold issue; if it is denied, “the pathway to the courthouse is blocked.” [FN12]

The doctrine of standing is designed to “ensure that a party seeking relief has a sufficiently cognizable stake in the outcome so as to present a court with a dispute that is capable [*4]of judicial resolution.”[FN13] “Standing to sue requires an interest in the claim at issue in the lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request.”[FN14] Where the plaintiff has no legal or equitable interest in a mortgage, the plaintiff has no foundation in law or in fact.[FN15]

A plaintiff who has no standing in an action is subject to a jurisdictional dismissal since (1) courts have jurisdiction only over controversies that involve the plaintiff, (2) a plaintiff found to lack “standing is not involved in a controversy, and (3) the courts therefore have no jurisdiction of the case when such plaintiff purports to bring it.”[FN16]

On November 7, 2005, in the case of Wells Fargo Bank Minn. N.A. v. Mastropaolo [“Mastropaolo”], this court found that “Insofar as the plaintiff was not the legal titleholder to the mortgage at the time the action was commenced, [the Bank] had no standing to bring the action and it must be dismissed.”[FN17] Erroneously, this court “[o]rdered, that the plaintiff’s summary judgment motion is denied in its entirety and that this action is dismissed with prejudice.”[FN18]

This Court should have ordered that this matter was dismissed without prejudice, which would have given the plaintiff the right to start the action again after it had acquired title to the note and mortgage. Unfortunately, the plaintiff, did not seek a motion to reargue that error, which would have been corrected promptly. Instead, the plaintiff appealed the decision to the Appellate Division, Second Department, which rightfully reversed the decision 18 months later on May 29, 2007 based upon the dismissal with prejudice as opposed to a dismissal without prejudice to refile the action. However, in what appears to be dicta, the court went on to discuss whether lack of standing is tantamount to lack of subject matter jurisdiction. The court further stated that the failure of the initial pro se defendant to make a pre-answer motion or a motion to dismiss, the defense of lack of standing would be waived. But the Appellate Division did not address the issue of subject matter jurisdiction, which may not be waived. [*5]

In the instant case, this court is again faced with similar facts, which raise the issue that the Bank must have title to the mortgage before it can sue the defendant. Clearly, having title to the subject matter (the mortgage) is a condition precedent to the right to sue on that mortgage. This has always been the case, but since the Appellate Division, Second Department’s comments in Mastropaolo, that issue has been clouded.

At the time that the plaintiff improperly commenced the action, the pathway to the Courthouse should have been blocked. Deutsche Bank had no legal foundation to foreclose a mortgage in which it had no interest at the time of filing the summons and complaint. Lack of a plaintiff’s interest at the beginning of the action strips the court’s power to adjudicate over the action.[FN19] Lack of interest and controversy is protected by the umbrella of subject matter jurisdiction. Whenever a court lacks jurisdiction, a defense can be raised at any time and is not waivable.[FN20] In other words, for there to be a cause of action, there needs to be an injury. At the time that the action was commenced, the instant plaintiff suffered no injury and had no interest in the controversy. Since the plaintiff filed this action to foreclose the mortgage before it had title to it, there was no controversy between the existing parties when the action commenced. Therefore, the court lacked subject matter jurisdiction to adjudicate the present case. The defendants are consequently entitled to a dismissal without prejudice because the court lacked jurisdiction over a non-existent controversy.

Accordingly, it is hereby:

ORDERED, that the defendants Kim Fiorentino, Debra Abbate, and Carmella Abbate’s motion to dismiss the plaintiff’s complaint is granted, without prejudice to the plaintiff having the right to refile within the time provided by the Statute of Limitations; and it is further

ORDERED, that the parties and counsel shall appear before this court to further conference this matter on November 20, 2009 at 11:00AM.

ENTER,

DATED: October 6, 2009

Joseph J. Maltese

Justice of the Supreme Court

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The next financial tsunami unleashed by toxic mortgages

Posted on October 23, 2009. Filed under: Banking, Foreclosure Defense, Fraud, Housing, Mortgage Audit, Mortgage Fraud, Mortgage Law, Predatory Lending | Tags: , , , , , , , , , , , |

By PAM MARTENS

The financial tsunami unleashed by Wall Street’s esurient alchemy of spinning toxic home mortgages into triple-A bonds, a process known as securitization, has set off its second round of financial tremors.

After leaving mortgage investors, bank shareholders, and pension fiduciaries awash in losses and a large chunk of Wall Street feeding at the public trough, the full threat of this vast securitization machine and its unseen masters who push the levers behind a tightly drawn curtain is playing out in courtrooms across America.

Three plain talking judges, in state courts in Massachusetts and Kansas, and a Federal Court in Ohio, have drilled down to the “straw man” aspect of securitization. The judges’ decisions have raised serious questions as to the legality of hundreds of thousands of foreclosures that have transpired as well as the legal standing of the subsequent purchasers of those homes, who are more and more frequently the Wall Street banks themselves.

Adding to the chaos, the Financial Accounting Standards Board (FASB) has made rule changes that will force hundreds of billions of dollars of these securitizations back onto the Wall Street banks balance sheets, necessitating the need to raise capital just as the unseemly courtroom dramas are playing out.

The problems grew out of the steps required to structure a mortgage securitization. In order to meet the test of an arm’s length transaction, pass muster with regulators, conform to accounting rules and to qualify as an actual sale of the securities in order to be removed from the bank’s balance sheet, the mortgages get transferred a number of times before being sold to investors. Typically, the original lender (or a sponsor who has purchased the mortgages in the secondary market) will transfer the mortgages to a limited purpose entity called a depositor. The depositor will then transfer the mortgages to a trust which sells certificates to investors based on the various risk-rated tranches of the mortgage pool. (Theoretically, the lower rated tranches were to absorb the losses of defaults first with the top triple-A tiers being safe. In reality, many of the triple-A tiers have received ratings downgrades along with all the other tranches.)

Because of the expense, time and paperwork it would take to record each of the assignments of the thousands of mortgages in each securitization, Wall Street firms decided to just issue blank mortgage assignments all along the channel of transfers, skipping the actual physical recording of the mortgage at the county registry of deeds.

Astonishingly, representatives for the trusts have been foreclosing on homes across the country, evicting the families, then auctioning the homes, without a proper paper trail on the mortgage assignments or proof that they had legal standing. In some cases, the courts have allowed the representatives to foreclose and evict despite their admission that the original mortgage note is lost. (This raises the question as to whether these mortgage notes are really lost or might have been fraudulently used in multiple securitizations, a concern raised by some Wall Street veterans.)

But, at last, some astute judges have done more than take a cursory look and render a shrug. In a decision handed down on October 14, 2009, Judge Keith Long of the Massachusetts Land Court wrote:

“The blank mortgage assignments they possessed transferred nothing…in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed. The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form…The issues in this case are not merely problems with paperwork or a matter of dotting i’s and crossing t’s. Instead, they lie at the heart of the protections given to homeowners and borrowers by the Massachusetts legislature. 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 and the further assumption that potential bidders will be undeterred by the lack of a demonstrable legal foundation for the sale and will nonetheless bid full value in the expectation that that foundation will ultimately be produced, even if it takes a year or more. The law recognizes the troubling nature of these assumptions, the harm caused if those assumptions prove erroneous, and commands otherwise.” [Italic emphasis in original.] (U.S. Bank National Association v. Ibanez/Wells Fargo v. Larace)

A month and a half before, on August 28, 2009, Judge Eric S. Rosen of the Kansas Supreme Court took an intensive look at a “straw man” some Wall Street firms had set up to handle the dirty work of foreclosure and serve as the “nominee” as the mortgages flipped between the various entities. Called MERS (Mortgage Electronic Registration Systems, Inc.) it’s a bankruptcy-remote subsidiary of MERSCORP, which in turn is owned by units of Citigroup, JPMorgan Chase, Bank of America, the Mortgage Bankers Association and assorted mortgage and title companies. According to the MERSCORP web site, these “shareholders played a critical role in the development of MERS. Through their capital support, MERS was able to fund expenses related to development and initial start-up.”

In recent years, MERS has become less of an electronic registration system and more of a serial defendant in courts across the land. In a May 2009 document titled “The Building Blocks of MERS,” the company concedes that “Recently there has been a wave of lawsuits filed by homeowners facing foreclosure which challenge MERS standing…” and then proceeds over the next 30 pages to describe the lawsuits state by state, putting a decidedly optimistic spin on the situation.

MERS doesn’t have a big roster of employees or lawyers running around the country foreclosing and defending itself in lawsuits. It simply deputizes employees of the banks and mortgage companies that use it as a nominee. It calls these deputies a “certifying officer.” Here’s how they explain this on their web site: “A certifying officer is an officer of the Member [mortgage company or bank] who is appointed a MERS officer by the Corporate Secretary of MERS by the issuance of a MERS Corporate Resolution. The Resolution authorizes the certifying officer to execute documents as a MERS officer.”

Kansas Supreme Court Judge Rosen wasn’t buying MERS’ story. In fact, Wall Street was probably not too happy to land before Judge Rosen. In January 2002, Judge Rosen had received the Martin Luther King “Living the Dream” Humanitarian Award; he previously served as Associate General Counsel for the Kansas Securities Commissioner, and as Assistant District Attorney in Shawnee County, Kansas. Judge Rosen wrote:

“The relationship that MERS has to Sovereign [Bank] is more akin to that of a straw man than to a party possessing all the rights given a buyer… What meaning is this court to attach to MERS’s designation as nominee for Millennia [Mortgage Corp.]? The parties appear to have defined the word in much the same way that the blind men of Indian legend described an elephant — their description depended on which part they were touching at any given time. Counsel for Sovereign stated to the trial court that MERS holds the mortgage ‘in street name, if you will, and our client the bank and other banks transfer these mortgages and rely on MERS to provide them with notice of foreclosures and what not.’ ” (Landmark National Bank v. Boyd A. Kesler)

Lawyers for homeowners see a darker agenda to MERS. Timothy McCandless, a California lawyer, wrote on his blog as follows:

“…all across the country, MERS now brings foreclosure proceedings in its own name — even though it is not the financial party in interest. This is problematic because MERS is not prepared for or equipped to provide responses to consumers’ discovery requests with respect to predatory lending claims and defenses. In effect, the securitization conduit attempts to use a faceless and seemingly innocent proxy with no knowledge of predatory origination or servicing behavior to do the dirty work of seizing the consumer’s home. While up against the wall of foreclosure, consumers that try to assert predatory lending defenses are often forced to join the party — usually an investment trust — that actually will benefit from the foreclosure. As a simple matter of logistics this can be difficult, since the investment trust is even more faceless and seemingly innocent than MERS itself. The investment trust has no customer service personnel and has probably not even retained counsel. Inquiries to the trustee — if it can be identified — are typically referred to the servicer, who will then direct counsel back to MERS. This pattern of non-response gives the securitization conduit significant leverage in forcing consumers out of their homes. The prospect of waging a protracted discovery battle with all of these well funded parties in hopes of uncovering evidence of predatory lending can be too daunting even for those victims who know such evidence exists. So imposing is this opaque corporate wall, that in a ‘vast’ number of foreclosures, MERS actually succeeds in foreclosing without producing the original note — the legal sine qua non of foreclosure — much less documentation that could support predatory lending defenses.”

One of the first judges to hand Wall Street a serious slap down was Christopher A. Boyko of U.S. District Court in the Northern District of Ohio. In an opinion dated October 31, 2007, Judge Boyko dismissed 14 foreclosures that had been brought on behalf of investors in securitizations. Judge Boyko delivered the following harsh rebuke in a footnote:

“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…There is no doubt every decision made by a financial institution in the foreclosure is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing improper or wrong with financial institutions or law firms making a profit – to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns. Unlike the focus of financial institutions, the federal courts must act as gatekeepers…” (In Re Foreclosure Cases)

While the illegal foreclosure filings, investor lawsuits over securitization improprieties, and predatory lending challenges play out in courts across the country, a few sentences buried deep in Citigroup’s 10Q filing for the quarter ended June 30, 2009 signals that we’ve seen merely a few warts on the head of the securitization monster thus far and the massive torso remains well hidden in murky water.

Citigroup tells us that the Financial Accounting Standards Board (FASB) has issued a new rule, SFAS No. 166, and this is going to have a significant impact on Citigroup’s Consolidated Financial Statements “as the Company will lose sales treatment for certain assets previously sold to QSPEs [Qualifying Special Purpose Entities], as well as for certain future sales, and for certain transfers of portions of assets that do not meet the definition of participating interests. Just when might we expect this new land mine to go off? “SFAS 166 is effective for fiscal years that begin after November 15, 2009.” There’s more bad news. The FASB has also issued SFAS 167 and, long story short, more of those off balance sheet assets are going to move back onto Citi’s books.

Bottom line says Citi:

“… the cumulative effect of adopting these new accounting standards as of January 1, 2010, based on financial information as of June 30, 2009, would result in an estimated aggregate after-tax charge to Retained earnings of approximately $8.3 billion, reflecting the net effect of an overall pretax charge to Retained earnings (primarily relating to the establishment of loan loss reserves and the reversal of residual interests held) of approximately $13.3 billion and the recognition of related deferred tax assets amounting to approximately $5.0 billion….” [Emphasis in original.]

I’m trying to imagine how the American taxpayer is going to be asked to put more money into Citigroup as it continues to bleed into infinity.

Citigroup is far from alone in financial hits that will be coming from the Qualifying Special Purpose Entities. Regulators are receiving letters from Citigroup and other Wall Street firms pressing hard to rethink when this change will take effect.

Putting aside for the moment the massive predatory lending frauds bundled into mortgage securitizations, inadequate debate has occurred on whether securitization of home mortgages (other than those of government sponsored enterprises) should be resuscitated or allowed to die a welcome death. If we understand the true function of Wall Street, to efficiently allocate capital, the answer must be a resounding no to this racket.

Trillions of dollars of bundled home mortgage loans and derivative side bets tied to those loans were being manufactured by Wall Street without any one asking the basic question: why is all this capital being invested in a dormant structure? Houses don’t think and innovate. Houses don’t spawn new technologies, patents, new industries. Houses don’t create the jobs of tomorrow.

Also, by acting as wholesale lenders to the unscrupulous mortgage firms (some in house at Wall Street firms), Wall Street was not responding to legitimate consumer demand, it was creating an artificial demand simply to create mortgage product to feed its securitization machine and generate big fees for itself. Now we see the aftermath of that inefficient allocation of capital: a massive glut of condos and homes pulling down asset prices in neighborhoods as well as in those ill-conceived securitizations whose triple-A ratings have been downgraded to junk.

There’s no doubt that one of the contributing factors to the depression of the 30s and the intractable unemployment today stem from a massive misallocation of capital to both bad ideas and fraud. Today’s Wall Street, it turns out, is just another straw man for a rigged wealth transfer system.

Pam Martens worked on Wall Street for 21 years; she has no security position, long or short, in any company mentioned in this article other than that which the U.S. Treasury has thrust upon her and fellow Americans involuntarily through TARP. She writes on public interest issues from New Hampshire. She can be reached at pamk741@aol.com

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New law denies homeowners access to legal representation

Posted on October 23, 2009. Filed under: Banking, Case Law, Foreclosure Defense, Housing, Legislation, Loan Modification, Mortgage Law, Politics | Tags: , , , , , , , , , , , , , , , , |

California has a new law on the books that bans collection of advance fees from firms that provide loan modification services to people struggling to avoid foreclosure.

Other real estate related bills signed into law this month by Gov. Arnold Schwarzenegger aim to crack down on abusive lending practices by mortgage brokers; provide more safeguards for seniors taking out reverse mortgages; and require lenders to provide a summary translation of loan papers to non-English speakers.

Effective Oct. 11, Senate Bill 94 made it illegal for anyone to collect advance fees from consumers seeking a loan modification. The legislation closed a loophole that previously allowed state- licensed real estate brokers and attorneys to collect advance payments for loan modification services provided a client signed off on forms approved by the state Department of Real Estate.

SB 94 was written by state Sen. Ron Calderon, D-Montebello.

“Over the past two years, unscrupulous attorneys and real estate brokers have abused their trusted roles and exploited desperate homeowners seeking to avoid foreclosure. The loophole that allowed this abusive practice has now been closed, and homeowners should avoid any person charging upfront fees for foreclosure relief services,” state Attorney General Jerry Brown said in a statement.

Advance payments previously collected before Oct. 11 are not impacted by the law but no additional fees can be collected going forward,


said Tom Pool, a Department spokesman.

About 1,000 real estate brokers had previously submitted the required paperwork to collect advance payments before the law became effective, he said. More than 1,300 consumers have contacted the department with complaints about foreclosure rescue firms, most of which involved paying advance fees and not getting the loan modification assistance that was promised, he said. In many cases, the fees were collected by people who were not even licensed to offer loan modifications.

SB 94 only allows fees to be collected after the promised services are provided. Consumers must also be told that similar services are available from nonprofit housing counseling agencies approved by the federal Department of Housing and Urban Development. Consumers must also be told they have the option of calling their lender directly to request a change in loan terms.

Effective Jan. 1, three other laws will kick in to provide more protections to consumer who take out home loans:

  • Assembly Bill 260, written by state Assemblyman Ted Lieu, D-Torrance, extends federal mortgage lending laws to state-regulated mortgage brokers. Among other things, mortgage brokers would be prohibited from steering borrowers into higher-priced, subprime loans in cases where they could qualify for a lower-interest, fixed-rate loan.AB 260 restricts the type of home loans that consumers have access to, said John Holmgren, an Oakland-based mortgage broker and spokesman for the California Association of Mortgage Brokers, which opposed the legislation.

    For now, subprime loans have pretty much gone away in response to tougher lending standards but Holmgren expects that demand for such products will eventually return when the economy improves.

    “It would be wonderful if every consumer had perfect credit” but that is not the case, Holmgren said. “It’s bad for those consumers (with poor credit scores) because it restricts their choice and that’s what this does … In this troubled economy, there is a number of people whose credit has suffered.”

    Mortgage brokers would also be banned from offering negative amortization loans, which results in a growing loan balance the longer the borrower holds the loan. Strict caps would also be placed on prepayment penalties.

  • Assembly Bill 329 adds existing consumer protections for reverse mortgages, which allow seniors to convert equity held in a home into tax-free income or a lump-sum payment while continuing to live in the home. Among other things, the law extends counseling requirements that apply to Federal Housing Administration-backed reverse mortgages to all lenders who offer reverse mortgages. The bill was written by state Assemblyman Mike Feuer, D-Los Angeles.n”‚Assembly Bill 1160 requires mortgage lenders to provide a translated summary document in the language in which it was originally verbally negotiated with a borrower whose primary language is not English. The translation requirement applies to Spanish, Chinese, Tagalog, Vietnamese and Korean languages. The law, written by state Assemblyman Paul Fong, D-Cupertino, extends translation requirements that already apply to mortgage brokers.

    Contra Costa Times

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