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twitterRuling by judges rattles mortgage industry
Some foreclosures may at least be slowed
Saturday, Oct. 3, 2009 | 2 a.m.
A bankruptcy judge here, joining judges across the country, is throwing a bit of sand in the gears of the mortgage machine and its ruthless foreclosure blade.
She has raised this issue: In many home foreclosures springing out of bankruptcy proceedings, the foreclosure is being triggered by a representative of the lender — a surrogate that may not have a legal, equity stake in the proceedings.
As a result, it is conceivable — though still something of a legal long shot — that the homeowner who is filing for bankruptcy protection could end up saving his house.
The argument that a lender’s surrogate can’t trigger foreclosure has drawn notice of Nevada homeowners, who are preparing a class action lawsuit. They are seeking a preliminary injunction this month to stop their foreclosures.
First, some background:
Law and custom have long required that property transactions be recorded with a county clerk or “recorder of deeds,” along with information about the person who holds the mortgage, and, if there are multiple mortgages, the place in line of each creditor.
For big lenders, tracking that information in hundreds of jurisdictions across the country was an onerous process, so the biggest, including Fannie Mae and Freddie Mac, set up a company that would do it all electronically. It is called Mortgage Electronic Registration Systems and is recognized by its acronym.
The MERS name wound up on millions of mortgages, including more than 987,000 in Nevada alone, according to the company.
Once people started defaulting on loans, MERS would announce the default on behalf of its bank clients. Consumer activists and attorneys for homeowners began questioning whether MERS, which represents banks but has no direct financial interest in the loans, could legally trigger foreclosure, but judges were generally not sympathetic to the argument.
Christopher Peterson, a law professor at the University of Utah’s S.J. Quinney College of Law and a former consumer rights attorney, called the emergence of MERS a somewhat dubious development and said it called into question the legitimacy of mortgages recorded in its name:
“MERS has no ownership interest, but they put MERS’ name there instead of the lenders’ name. No legislature said they could do that.”
Peterson has been hired by the Reno law firm Hager & Hearne as an expert witness in a class action lawsuit that will seek to invalidate the right of MERS to trigger foreclosure.
Their case will rely heavily on a recent Kansas Supreme Court ruling. In that complicated foreclosure case, the court decided this month that MERS had “no right to the underlying debt repayment secured by the mortgage ...”
Paul Habibi, a real estate expert at UCLA’s Anderson School of Management, said the decision, though not binding on other states, is a potentially important precedent that “renders MERS somewhat ineffective to proceed with foreclosure.”
The New York Times took note of the decision this week, with columnist Gretchen Morgenson saying the ruling called into question MERS’ entire business model.
How the Kansas argument plays out in Nevada remains to be seen.
Nevada is a nonjudicial foreclosure state, meaning foreclosure doesn’t require a judge’s approval. Trustee companies such as Fidelity National Default Solutions hold the title to the loan for the lender, and they are authorized to foreclose, explained Michael Joe, an attorney for the Legal Aid Center of Southern Nevada.
Still, the judicial backlash has hit MERS in Nevada, and could affect people in bankruptcy proceedings especially.
A person facing foreclosure is not necessarily in bankruptcy. But when the homeowner does file for bankruptcy protection, a lender — or, in this case, MERS — that wants to protect its assets must get permission from the federal bankruptcy judge to foreclose.
And in a Las Vegas case this spring, federal Bankruptcy Judge Linda Riegle ruled that MERS had no standing because the company is not the real party in interest — it doesn’t actually own the loan. In other words, in the course of bankruptcy proceedings, MERS had no claim to the house.
Peterson thinks this could be significant.
“When a court says MERS has no standing, that is a decisive step” in saying the mortgage wasn’t properly recorded, Peterson said. If the mortgage wasn’t properly recorded, it wasn’t legitimate.
Although the homeowner would still owe the lender money, if it wasn’t a legitimate mortgage, then it becomes an unsecured loan, like a credit card.
Bankruptcy proceedings, Peterson said, are all about “who has priority?”
In establishing the priority in which debtors get paid, creditors holding the unsecured debt of the bankrupt, like credit card companies, go to the back of the line, and a bankruptcy judge can give significant relief to the debtor, including reducing the principal of the loan. Or in this case, the judge could refuse to give the house to the lender and arrange new loan terms.
Joe, who has represented scores of Nevadans hit with foreclosure, said, “I like the argument, but I’m not sure it wins.” Lenders merely need to transfer the notes from MERS into the name of a trustee that has the authority to foreclose, he said.
Although that effort would be a major headache because of the nearly one million Nevada mortgages on the MERS system that would have to be transferred, it’s doable, Joe said. He added that there’s evidence it’s happening.
MERS would respond only to written questions submitted by the Sun.
The company will appeal the Kansas case, company spokeswoman Karmela Lejarde wrote.
“The ruling is confusing and goes against long-standing precedent,” she said.
She disputed the assertion that MERS has no financial interest in the loans on which it is listed.
The fact that MERS transfers the proceeds of the loan to the lender doesn’t mean it doesn’t have a “protected property interest.” That property interest, the company alleges, was unfairly and illegally taken by the recent court decisions.
Lejarde noted that several Nevada cases went the other way and bestowed ownership rights to MERS.
“As the mortgagee, MERS possesses all of the rights of the lender,” Lejarde concluded, “including the right to foreclose the mortgage.”
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Gosh, I hope not.
Ms. Lejarde's comments are rich. As she knows full well, until and unless either the Bankruptcy Appellate Panel or the 9th Circuit overturn Judge Riegle's decision in In Re Mitchell, in Nevada MERS has no standing to pursue relief from stay motions on notes it does not own. Full stop. It's also notable that other courts have begun to adopt the Mitchell reasoning, even though it was only announced in March.
"Some foreclosures may at least be slowed"?? More like "many if not most foreclosures are blatantly fraudulent."
Everyone with a mortgage needs to pay attention to this article and to what LasVegasLawyerGal posted! Get your copy of In re Mitchell online @ http://www.nvb.uscourts.gov/Opinions/Rie...
One curious omission here -- MERS is only on the deed of trust, but the actual obligation to pay is to the Note Holder on the other vital piece to this puzzle, the actual note. Coolican, when are you going to cover what Morgenstern has been saying about that for over two years?
Then there's that odd bit from attorney Joe -- "Lenders merely need to transfer the notes from MERS into the name of a trustee that has the authority to foreclose..." He wishes it were only that simple. Since a chain is only as strong as its weakest link, if the recordings haven't been performed showing new trustee appointments and note transfers/assignments, the resulting chaos is an indicator to massive institutional frauds. Yet Nevada's AG seems to be only interested in small time loan mod scammers instead of the biggest scam of all -- MERS and its accomplices. What's she doing for Nevada on this??
Then there's that big ol' crap sandwich just waiting for the entire mortgage industry to line up and take a bite -- securitizing the notes and the legal question of whether or not that securitization voids the notes, meaning the end of mortgage debt and foreclosures. And an end to how much mortgage obligors can be milked. A closer look at Ohio's federal Judge Boyko's November '07 foreclosure cases shows one of the mortgage obligors, Moore, found Deutschebank had traded her note 660 times in LESS than one year.
Two links on that securitization mess --
http://www.lasvegassun.com/photos/2009/j...
http://docs.google.com/present/view?skip...
People, this is a looooong way from being over. Good to see the Sun and the courts finally waking up to it.
Let's up the ante on all this.
From the Conclusion of the amicus brief filed August 20th for the 27 debtor parties to In re Mitchell, writtent by local attorney Christopher Burke:
"In creating MERS, the industry decided that settled mortgage law did not matter, and it could create its own private system of mortgage law. The mortgage industry's unilateral actions in creating MERS do not entitle them to have the judiciary alter the settled doctrines of standing and real-party-in-interest status to accommodate its machinations. But that is exactly what MERS is asking here in claiming that it can file motions to lift the bankruptcy stay without naming any party who will actually receive foreclosure proceeds. Moreover, by filing these motions in its name, MERS deprives homeowners facing foreclosure of essential, otherwise unavailable information concerning who owns their loan. This Court should refuse to authorize MERS's subterfuge and affirm the decision of the bankruptcy court."
What this shows is the arrogance of this entire industry. And the beginning of its fall, thanks to champions like judges Boyko, Riegle and Bufford, who actually deserve the title "the Honorable."
The question now is who's going to make MERS, et al., unravel and compensate all those foreclosures? This is what AG Masto is supposed to be doing instead of bragging about taking down a few small time "scammers"!
If there is merit to the arguement that MERS has no legal standing to foreclose (I'm not taking a position either way) then banks and other note holders would do well to put more resources into substantive and genuine modifications as well as short sales. If they don't let the debtors get to the point of foreclosure, they would cut their potential losses considerably, wouldn't they?
burnemandturnem - why?
MERS is just a symptom of the larger problem as laid out above. It's very likely once this mess is sorted out -- the states' AGs should do this as they did the tobacco settlements -- the "lenders" could very well be outed as having voided or discharged the notes yet continued to collect payments and homes they had no legal right to. That means a lot of mortgage fraud, and a lot of people were driven from their homes when they very well may have de facto owned free and clear. The damages for intentional infliction of emotional distress alone could put all those banks directly in the people's debt forever. What a turnaround!
Also just found out early this year the Arkansas Supreme Court also shut down MERS for lack of standing. _ http://livinglies.wordpress.com/2009/09/...
the global financial reform could internationalize the mortgage backed securities regs.
there could be big changes, look at how the student loan industry was revamped.
You might as well just have the govenment fund mortgages, and have banks, credit unions, brokers originate them.
Just delaying the hammer.
mred - exactly what hammer would that be?
It's not just MERS and residential mortgages at issue. In the U.S. District Court for Central District of California, Judge Erithe Smith ruled that since the assignee of mortgage loan notes on approximately 10 commercial mortgages, Fenway Capital, LLC, had not given Lehman Commercial Paper, Inc. express written authority to file claims for Fenway in the 10 Chapter 11 cases, the claims made by Lehman loosely on behalf of Fenway were not valid, because the precise wording of the Bankruptcy Code on "who can file claims" was not followed. Since Fenway Capital never filed its own claims, missing the Claims Bar Deadline in the Chapter 11 cases, there is no monetary obligation secured by these 10 deeds of trust. That case will be interesting to watch because Weil Gotschal & Manges, which claims to be the largest and most prestigious bankruptcy law firm in the U.S.A., was the one which screwed up the wording of the claims. The case is: Palmdale Hills Property, LLC - Case 8:08-bk-17206-ES (Lead Case for Motion Filing Purposes).
In the case of mortgage lender Lehman Commercial Paper, which itself is a Chapter 11 debtor, there may be 2 reasons why the filing of the claims by/for Fenway Capital got screwed up: (1) Lehman's debtor in possession operations are so chaotic the dimwits who run it don't know who Lehman sold what loans to or (2) Lehman's debtor in possession employees are trying to hide securities frauds (i.e. overstating the gross dollar amount of the real estate loan portfolio Lehman Brothers Holdings actually owned) during the weeks or months prior to their own bankruptcy.
This "who can sign the notice of foreclosure" question may also affect the foreclosure on the now-closed hotel owned by A/P Hotel LLC which filed suit against Lehman on Tuesday 9/29/09 in Clark County District Court.
At issue is the closed Atrium Suites Las Vegas hotel, 4255 S. Paradise Road, i.e. the Crown Plaza next to the Hard Rock and across the street from Terrible's. On 10/1/09, Steve Green wrote about a lawsuit arising out of that attempted trustee sale foreclosure. What Steve didn't report is the Lehman debtor-in-possession's absolutely incredible presumptuousness in thinking they can foreclose on projects where they breached their own contracts to lend, by stiffing borrowers and their contractors when Lehman went bankrupt and simply decided not to fund the undisbursed loan proceeds under mortgage loans they had made. There is evidence concerning A/P Hotel in the Lehman BK file that Lehman has lawyers actively looking at every commercial loan file to see if can call the loans into default and foreclose rather than continue funding. Talk about predatory lending!
Its only because of the bravery of judges like those listed in the story above that this epidemic of fraud, bad faith and under handed dealings by the mortgage lending industry will be stopped.
Judge Linda Riegle rocks!
Too little too late. No Vegas judge will permantly stop a foreclosure because the owner of the note is at issue. MERS will have no choice but to eventually clear the ownership with a boilerplate Certified Chain of Assignment of Ownership Motion to the Court; than it will move forward with foreclosure business as usuall. Roughly 1,000 of those predatory lawsuits have been filed in Nevada State and Federal Court over the past 18 months. 90% of those lawsuits assert the "Produce the Note, MERS isn't the real owner" allegation... the judges literally role their eyes and at this allegation. 99% of those lawsuits have been dismissed. To change Nevada's judges' rulings in favor of the homeowner, a searing multi million dollar verdict from California, New York or possibly a serious warning shot from Washington DC is required. That hasn't happened and these suits have been around for 18 months now. Its not going to happen.
HookorCrook
Most Nevada judges are not that hip to Real Estate law, and most are light weights when it comes to all these assignees and who zoomed who. Rest assured they will be paying attention now, and I doubt very seriously that most of these judges will be dismissing these cases as frivolous nonsense anymore, like you imply.
CynicalO -- excellent post!
HookrCrook -- all that, maybe. Or the AG takes notice, then actually does her job and takes all the credit.
This whole thing smacks of a securities fraud / mortgage fraud combo. And along with this In re Mitchell continues up the appellate chain, with little hope of success.
Just so people get to keep their houses.
correction -- "with little hope of success for MERS."
I will be asking my wife's bankruptcy lawyer on her case.
Here is one for you legal scholars.
Scenario:
Merrill Lynch buys 100,000 notes originally written by Countrywide. Both these companies are in bankruptcy proceedings and have sold the notes for 40% of their original value.
The new owner of the note forecloses for the original loan amount when the purchase price they paid through bankruptcy proceedings is valued at 40% of the original loan amount.
With the above being said, the money from TARP is financing the purchase of notes thus the taxpayer is paying a reduced amount for bulk mortgage purchases. The monies revived from TARP are being paid back to the FEDS at interest rates regulated by them.
The banks and/or new note holders are now claiming a loss on notes based on the original note, the the amended purchase price they paid. When not paid the original note amount they're claiming a loss when in fact they're not losing monies. They're "VOODOO" accounting.
Would the consumer have any remedies to force the new note holder to reduce the amount down to the price they paid?
What remedies would the IRS have for taking deductions on notes based on the original value not the actual value they paid?
It seems to me that the consumer has legal rights that haven't been thought about.
Go to the District Court website and search "Countrywide" or "Wells Fargo" of "Bank of America" and you will see that 100s of these have already been filed and subsequently dismissed. Last week one judge said they get "10 of these a week and not one has made it even close to trial." The benefit the homeowner gets is a postponement of the Trustee Sale which means more months of mortgage free living. A
personal injury style verdict is not forthcoming.
HookorCrook -- depends on the pleadings and the kind of cases being filed, and in what court, federal or state?
Sounds like they're filing personal injury suits, and that's a waste -- a totally different statutory and evidentiary standard than the proper filing, which should be declaratory with injunctive relief IF they can't file Chapter 13 banko. As shown here it's the banko cases making the progress in this area.
The solution still comes down to where's the note and, if it even exists, who's the holder? Without them the plaintiff has not standing.
re: Collection Lawyers' Sham Foreclosures, Abuses, and Evictions; Lender Improprieties; Impediments to Justice
The Brennan Center for Justice October 2009 report entitled, "Foreclosures: A Crisis in Legal Representation" points out things some people never consider: When a person lacks knowledge, particularly of Consumer Law, he or she is not likely to recognize an actionable claim concerning a mortgage debt or any other type of debt which requires a judicial ruling. Owing a debt does not justify denial of Due Process, nor erroneous or fraudulent pleadings filed in courtrooms, nor any other Unconstitutional violation of people. Lack of financial means to pay for a lawyer obstructs access to justice; and too often judges are biased against the financially unfortunate, and tend to rule favorably for the rich and powerful. Or, a person can run out of money to pay his / her lawyer before the controversy becomes resolved. Moreover, incredibly, some people actually think that because a person does not have a lawyer, that person's claims have no merit. And sadly, some people fail to regard the reality that Statute of Limitation is the reason why a person who has yet to obtain a lawyer is forced to commence his / her litigation in 'proper person'.
In a few States such as where I reside, Louisiana, there is such a thing as "Cognovit Clause" which most States have banned because it precludes people from timely raising objections to improper foreclosures. Sometimes foreclosure lawyers here intentionally file falsified Civil and Bankruptcy foreclosure pleadings in courts; and in some instances, through use of a false mortgage holder's name, the collection lawyer actually is the disguised foreclosure plaintiff who wounds up with ownership of the. . .*SEE ENTIRE ARTICLE @ http://www.pr-inside.com/parallels-to-th...
**Here are a few LINKS about lenders / borrowers:
"IRS Tax Advocate Renews Criticism of Private Collectors"
http://money.cnn.com/news/newsfeeds/arti... ..
"Piling On: Borrowers Buried by Fees" by Gretchen Morgenson
http://www.nytimes.com/2008/04/20/busine...
"DEBTOR'S HELL" a 4-part investigation by the Boston Globe
http://www.boston.com/news/specials/debt...
"Dubious Fees Hit Borrowers in Foreclosures"
http://www.nytimes.com/2007/11/06/busine... ..
"Complaints Against Debt Collector Skyrocket, Lack of Oversight to Blame"
www.mediasyndicate.com/index.php?name=Ne...
Public Citizen's Consumer Law & Policy Blog,
http://pubcit.typepad.com/clpblog/debt_c...
"OPEN LETTER TO PRESIDENT OBAMA on Foreclosure Crisis"
http://www.pr-inside.com/open-letter-to-... ..
"Lack of Legal Help: One More Way the Deck Is Stacked Against Homeowners"
(http://www.huffingtonpost.com/arianna-hu... ..)