Contributed by Kevin Chern, Total Attorneys, Inc.

Homeowners facing foreclosure are, understandably, looking for hope. News reports of homeowners successfully asserting the “produce the note” defense to stop foreclosure have sparked that hope in many. It seems only logical that a company commencing a foreclosure action should be required to demonstrate that it is the real party in interest before that action can move forward. But simply demanding that a mortgage servicer produce the note or establish itself as the real party in interest isn’t the magic bullet it sometimes appears in the popular press.

We know mortgage documentation is rife with errors, misrepresentations and missing links. Various studies have estimated the percentage of mortgage claims containing substantial errors between 57% and 80%. Katherine Porter’s 2007 study of mortgage proofs of claim in bankruptcy cases revealed that 52.77% of proofs of claim lacked at least one clearly-required document. What those errors mean for the homeowner depends not only on the nature of the error, but also on the state and jurisdiction in which the claims are prosecuted.

Success Stories

Attorneys in some states have had tremendous success with the defense. In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008-Ohio-4603.)

Although Wells Fargo subsequently acquired the mortgage by assignment, the trial court ruled that this later acquisition did not cure the jurisdictional defect and dismissed with prejudice. The trial court also ordered that the law firm filing the case on behalf of Wells Fargo submit proof that its client was the real party in interest in all future foreclosure actions filed by that firm.

Publicity surrounding Wells Fargo and a handful of other similar cases produced a flurry of real party in interest defenses and optimistic news coverage. A year later, the Ohio Supreme Court declined to review a similar case in Wells Fargo Bank, N.A. v. Jordan, leaving stand an Eighth District Court of Appeals ruling that “If plaintiff has offered no evidence that it owned the note and mortgage when the complaint was filed, it would not be entitled to judgment as a matter of law.”

At the same time, Florida legal aid attorney April Charney and a handful of others began challenging claims supported by affidavits of lost notes. It seemed that in the frenzy to slice, dice, flip and securitize the high-risk loans of the 1990s and early 2000s, many lenders and mortgage servicers had dropped the ball when it came to keeping accurate records. In many cases, the paper trail was broken, non-existent, or simply didn’t conform to legal requirements. Some plaintiffs in mortgage foreclosure cases found their claims dismissed outright for lack of documentation, and some homeowners found themselves in a better position than they’d ever imagined: enormous mortgage debt simply disappeared as it became clear that no proof of ownership of the debt could be produced.

It was heartening to see mortgage servicers taken to task and forced to follow the rules, but even in the oft-cited Byrd case, the real victory was scaled back considerably by the appellate court. While the dismissal was affirmed, the appellate court ruled that it should have been without prejudice; the order that the law firm submit additional documentation in subsequent cases was reversed. Those cases in which demanding the note and dissecting the paper trail resulted in a windfall for the homeowner were few and far between.

The State-by-State Difference

To a layperson, common sense dictates that a plaintiff would have to own the note and mortgage in order to file a complaint based on it; the big surprise is probably not the Ohio rulings above but the fact that the question ever arose. However, that question is far from settled in many states. Consumer attorneys in some states report that their courts are simply declining to entertain defenses like the one successfully raised in Byrd. The most likely explanation for this pattern is simple economy: a case dismissed without prejudice may be re-filed as soon as the defect has been cured, so many courts are apparently reluctant to go through the motions of dismissing a claim on procedural grounds only to have it filed as a new case soon after.

But disparate treatment of this issue by the courts isn’t the only—or even the most significant—difference from state to state. More than half of U.S. states allow for some form of non-judicial foreclosure. That means that the foreclosing party doesn’t have to file a court case in order to foreclose on the property. Non-judicial foreclosure doesn’t render true ownership of the mortgage irrelevant, but it does make it more difficult for the homeowner to pursue the issue.

While the defendant in a judicial foreclosure can simply raise the issue as a defense, the homeowner in a non-judicial foreclosure will typically have to file suit himself to get the issue of mortgage ownership and documentation before the court. That means not only filing fees and service of process, but also a host of procedural hoops unfamiliar to most homeowners. Few will be able to successfully prepare and argue such a claim without an attorney. That isn’t to say that the claim won’t succeed or isn’t worth pursuing in a non-judicial foreclosure state, but the process is far more complex, time-consuming and potentially expensive than the victory stories on television and in news reports might seem to suggest.

The Real Value of Demanding the Note / Questioning the Real Party in Interest

While demanding that the claimant produce the note / arguing that the claimant isn’t the real party in interest and doesn’t have standing to pursue a foreclosure action only occasionally results in a decision that effectively forgives the mortgage debt, the challenge can be a valuable tool for homeowners facing foreclosure. If a claim is dismissed and re-filed, that may buy the homeowner valuable time in which to negotiate or assemble funds to cure the default; the added procedural complications and the possibility that the mortgage servicer or alleged note holder may not be able to establish its claim provide an incentive for the claimant to compromise. Likewise, in a non-judicial foreclosure state, initiating a suit against the claimant may only rarely put an end to a foreclosure action altogether, but may still benefit the homeowner by slowing the proceedings and creating an incentive for the mortgage holder to negotiate a workable settlement.

– Kevin Chern
Total Attorneys, Inc.
25 East Washington Street, Suite 400
Chicago, IL 60602

Attention attorneys/auditor and other industry persons – please drop us a line if you think you can contribute to this blog.  Be seen!

As a homeowner begins research into the lending and foreclosure crisis, there will be many unfamiliar terms, names and companies that come to their attention. Chief among these will be MERS.

MERS is the acronym for Mortgage Electronic Registration Systems. It is a national electronic registration and tracking system that tracks the beneficial ownership interests and servicing rights in mortgage loans. The MERS website says:

“MERS is an innovative process that simplifies the way mortgage ownership and servicing rights are originated, sold and tracked. Created by the real estate finance industry, MERS eliminates the need to prepare and record assignments when trading residential and commercial mortgage loans. “

In simple language, MERS is an on-line computer software program for tracking ownership.

MERS was conceived in the early 1990’s by numerous lenders and other entities. Chief among the entities were Bank of America, Countrywide, Fannie Mae, Freddie Mac, and a host of other such entities. The stated purpose was that the creation of MERS would lead to “consumers paying less” for mortgage loans. Obviously, that did not happen.

This article will attempt to explain MERS in very general detail. It will cover a few issues related to MERS and foreclosure, in order to introduce the reader to the issues of MERS. It is not meant to be a complete discussion of MERS, nor of the legal complexities regarding the arguments for and against MERS. For a more in depth reading of MERS and findings coming out of courts, it is recommended that the reader look at Hawkins, Case No. BK-S-07-13593-LBR (Bankr. Nev. 3/31/2009) (Bankr. Nev., 2009) . It gives a good reading of the issues related to MERS, at least for that particular case. Though in Nevada, it is relevant for California.

(Please note. I am not an attorney and am not giving legal advice. I am just reporting arguments being made against MERS, and also certain case law and applicable statutes in California.

The MERS Process

Traditionally, when a loan was executed, the beneficiary of the loan on the Deed of Trust was the lender. Once the loan was funded, the Deed of Trust and the Note would be recorded with the local County Recorder’s office. The recording of the Deed and the Note created a Public Record of the transaction. All future Assignments of the Notes and Deed of Trust were expected to be recorded as ownership changes occurred. The recording of the Assignments created a “Perfected Chain of Title” of ownership of the Note and the Deed of Trust. This allowed interested or affected parties to be able to view the lien holders and if necessary, be able to contact the parties. The recording of the document also set the “priority” of the lien. The priority of the lien would be dependent upon the date that the recording took place. For example, a lien recorded on Jan 1, 2007 for $20,000 would be the first mortgage, and a lien recorded on Jan 2, 2007, for $1,500,000 would be a second mortgage, even though it was a higher amount.

Recordings of the document also determined who had the “beneficial interest” in the Note. An interested party simple looked at the Assignments, and knew who held the Note and who was the legal party of beneficial interest.

(For traditional lending prior to Securitization, the original Deed recording was usually the only recorded document in the Chain of Title. That is because banks kept the loans, and did not sell the loan, hence, only the original recording being present in the banks name.

The advent of Securitization, especially through “Private Investors” and not Fannie Mae or Freddie Mac, involved an entirely new process in mortgage lending. With Securitization, the Notes and Deeds were sold once, twice, three times or more. Using the traditional model would involve recording new Assignments of the Deed and Note as each transfer of the Note or Deed of Trust occurred. Obviously, this required time and money for each recording.

(The selling or transferring of the Note is not to be confused with the selling of Servicing Rights, which is simply the right to collect payments on the Note, and keep a small portion of the payment for Servicing Fees. Usually, when a homeowner states that their loan was sold, they are referring to Servicing Rights.)

The creation of MERS changed the process. Instead of the lender being the Beneficiary on the Deed of Trust, MERS was now named as either the “Beneficiary” or the “Nominee for the Beneficiary” on the Deed of Trust. The concept was that with MERS assuming this role, there would be no need for Assignments of the Deed of Trust, since MERS would be given the “power of sale” through the Deed of Trust.

The naming of MERS as the Beneficiary meant that certain other procedures had to change. This was a result of the Note actually being made out to the lender, and not to MERS. Before explaining this change, it would be wise to explain the Securitization process.

Securitizing a Loan

Securitizing a loan is the process of selling a loan to Wall Street and private investors. It is a method with many issues to be considered, especially tax issues, which is beyond the purview of this article. The methodology of securitizing a loan generally followed these steps:

• A Wall Street firm would approach other entities about issuing a “Series of Bonds” for sell to investors and would come to an agreement. In other words, the Wall Street firm “pre-sold” the bonds.
• The Wall Street firm would approach a lender and usually offer them a Warehouse Line of Credit. This credit would be used to fund the loans. The Warehouse Line would include the initial Pooling & Servicing Agreement Guidelines and the Mortgage Loan Purchase Agreement. These documents outlined the procedures for creation of the loans and the administering of the loans prior to, and after, the sale of the loans to Wall Street.
• The Lender, with the guidelines, essentially went out and found “buyers” for the loans, people who fit the general characteristics of the Purchase Agreement,. (Guidelines were very general and most people could qualify.” The Lender would execute the loan and fund it, collecting payments until there were enough loans funded to sell to the Wall Street firm who could then issue the bonds.
• Once the necessary loans were funded, the lender would then sell the loans to the “Sponsor”, usually the Wall Street firm. At this point, the loans are separated into “tranches” of loans, where they are then turned into bonds. Then, they went to the “Depositor”, usually either the Wall Street firm or back to the lender through as separate entity, and then they would be sold to the “Issuing Entity” which would be the created entity for the selling of the bonds. Finally, the bonds would be sold, with a Trustee appointed to ensure that the bondholders received their monthly payments.

As can be seen, each Securitized Loan has had the ownership of the loan transferred two to three times minimum, and without Assignments executed for each transfer.

(Note: This is a VERY simplified version of the process, but it gives the general idea. Depending upon the lender, it could change to some degree, especially if Fannie Mae bought the loans. The purpose of such a convoluted process was so that the entities selling the bonds could become a “bankruptcy remote” vehicle, protecting lenders and Wall Street from harm, and also creating a “Tax Favorable” investment entity known as an REIMC. An explanation of this process would be cumbersome at this time.)

New Procedures

As mentioned previously, Securitization and MERS required many changes in established practices. These practices were not and have not been codified, so they are major points of contention today. I will only cover a few important issues which are being fought out in the courts today.

One of the first issues to be addressed was how MERS might foreclose on a property. This was “solved” through an “unusual” practice.

• MERS has only 44 employees. They are all “overhead”, administrative or legal personnel. How could they handle the load of foreclosures, Assignments, etc to be expected of a company with their duties and obligations?When a lender, title company, foreclosure company or other firm signed up to become a member of MERS, one or more of their people were designated as “Corporate Officers” of MERS and given the title of either Assistant Secretary or Vice President. These personnel were not employed by MERS, nor received income from MERS. They werebeen named “Officers” solely for the purpose of signing foreclosure and other legal documents in the name of MERS. (Apparently, there are some agreements which “authorize” these people to act in an Agency manner for MERS.)

This “solved” the issue of not having enough personnel to conduct necessary actions. It would be the Servicers, Trustees and Title Companies conducting the day-to-day operations needed for MERS to function.

As well, it was thought that this would provide MERS and their “Corporate Officers” with the “legal standing” to foreclose.

However, this brought up another issue that now needed addressing:

• When a Note is transferred, it must be endorsed and signed, in the manner of a person signing his paycheck over to another party. Customary procedure was to endorse it as “Pay to the Order of” and the name of the party taking the Note and then signed by the endorsing party. With a new party holding the Note, there would now need to be an Assignment of the Debt. This could not work if MERS was to be the foreclosing party.

Once a name is placed into the endorsement of the Note, then that person has the beneficial interest in the Note. Any attempt by MERS to foreclose in the MERS name would result in a challenge to the foreclosure since the Note was owned by “ABC” and MERS was the “Beneficiary”. MERS would not have the legal standing to foreclose, since only the “person of interest” would have such authority. So, it was decided that the Note would be endorsed “in blank”, which effectively made the Note a “Bearer Bond”, and anyone holding the Note would have the “legal standing” to enforce the Note under Uniform Commercial Code. This would also suggest that Assignments would not be necessary.

MERS has recognized the Note Endorsement problem and on their website, stated that they could be the foreclosing party only if the Note was endorsed in blank. If it was endorsed to another party, then that party would be the foreclosing party.

As a result, most Notes are endorsed in blank, which purportedly allows MERS to be the foreclosing party. However, CA Civil Code 2932.5 has a completely different say in the matter. It requires that the Assignment of the Debt be executed.

• CA Civil Code 2932.5 – Assignment“Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.”

As is readily apparent, the above statute would suggest that Assignment is a requirement for enforcing foreclosure.

The question now becomes as to whether a Note Endorsed in Blank and transferred to different entities as indicated previously does allow for foreclosure. If MERS is the foreclosing authority but has no entitlement to payment of the money, how could they foreclose? This is especially true if the true beneficiary is not known. Why do I raise the question of who the true beneficiary is? Again, from the MERS website……..

• “On MERS loans, MERS will show as the beneficiary of record. Foreclosures should be commenced in the name of MERS. To effectuate this process, MERS has allowed each servicer to choose a select number of its own employees to act as officers for MERS. Through this process, appropriate documents may be executed at the servicer’s site on behalf of MERS by the same servicing employee that signs foreclosure documents for non-MERS loans.Until the time of sale, the foreclosure is handled in same manner as non-MERS foreclosures. At the time of sale, if the property reverts, the Trustee’s Deed Upon Sale will follow a different procedure. Since MERS acts as nominee for the true beneficiary, it is important that the Trustee’s Deed Upon Sale be made in the name of the true beneficiary and not MERS. Your title company or MERS officer can easily determine the true beneficiary. Title companies have indicated that they will insure subsequent title when these procedures are followed.”

There, you have it. Direct from the MERS website. They admit that they name people to sign documents in the name of MERS. Often, these are Title Company employees or others that have no knowledge of the actual loan and whether it is in default or not.

There, you have it. Direct from the MERS website. They admit that they name people to sign documents in the name of MERS. Often, these are Title Company employees or others that have no knowledge of the actual loan and whether it is in default or not.

Even worse, MERS admits that they are not the true beneficiary of the loan. In fact, it is likely that MERS has no knowledge of the true beneficiary of the loan for whom they are representing in an “Agency” relationship. They admit to this when they say “Your title company or MERS officer can easily determine the true beneficiary.

To further reinforce that MERS is not the true beneficiary of the loan, one need only look at the following Nevada Bankruptcy case, Hawkins, Case No. BK-S-07-13593-LBR (Bankr.Nev. 3/31/2009) (Bankr.Nev., 2009) – “A “beneficiary” is defined as “one designated to benefit from an appointment, disposition, or assignment . . . or to receive something as a result of a legal arrangement or instrument.” BLACK’S LAW DICTIONARY 165 (8th ed. 2004). But it is obvious from the MERS’ “Terms and Conditions” that MERS is not a beneficiary as it has no rights whatsoever to any payments, to any servicing rights, or to any of the properties secured by the loans. To reverse an old adage, if it doesn’t walk like a duck, talk like a duck, and quack like a duck, then it’s not a duck.”

If one accepts the above ruling, which MERS does not agree with, MERS would not have the ability to foreclose on a property for lack of being a true Beneficiary. This leads us back to the MERS as “Nominee for the Beneficiary” and foreclosing as Agent for the Beneficiary. There may be pitfalls with this argument.

• When the initial Deed of Trust is made out in the name of MERS as Nominee for the Beneficiary and the Note is made to AB Lender, there should be no issues with MERS acting as an Agent for AB Lender. Hawkins even recognizes this as fact.
• The issue does arise when the Note transfers possession. Though the Deed of Trust states “beneficiary and/or successors”, the question can arise as to who the successor is, and whether Agency is any longer in effect. MERS makes the argument that the successor Trustee is a MERS member and therefore Agency is still effective, and there does appear to be merit to the argument on the face of it.The original Note Holder, AB Lender, no longer holds the note, nor is entitled to payment. Therefore, that Agency relationship is terminated. However, the Note is endorsed in blank, and no Assignment has been made to any other entity, so who is the true beneficiary? And without the Assignment of the Note, is the Agency relationship intact?

Uniform Commercial Code may address this issue, however, it can be argued in the negative:

Uniform Commercial Code§ 3-301. PERSON ENTITLED TO ENFORCE INSTRUMENT.

“Person entitled to enforce” an instrument means (i) the holder of the instrument, (ii) a non-holder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to Section 3-309 or 3-418(d). A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.

Are you confused yet? I am. Most attorneys are. And most courts are…….

Separation of the Note and the Deed

There is one more issue that I will now address. That is the separation of the Note and the Deed of Trust. Again, case law is confused on this.

In the case of MERS, the Note and the Deed of Trust are held by separate entities. This can pose a unique problem dependent upon the court. There are many court rulings based upon the following:

“The Deed of Trust is a mere incident of the debt it secures and an assignment of the debt carries with it the security instrument. Therefore, a Deed Of Trust is inseparable from the debt and always abides with the debt. It has no market or ascertainable value apart from the obligation it secures.

A Deed of Trust has no assignable quality independent of the debt, it may not be assigned or transferred apart from the debt, and an attempt to assign the Deed Of Trust without a transfer of the debt is without effect. “

This very “simple” statement poses major issues. To easily understand, if the Deed of Trust and the Note are not together with the same entity, then there can be no enforcement of the Note. The Deed of Trust enforces the Note. It provides the capability for the lender to foreclose on a property. If the Deed is separate from the Note, then enforcement, i.e. foreclosure cannot occur. The following ruling summarizes this nicely.

In Saxon vs Hillery, CA, Dec 2008, Contra Costa County Superior Court, an action by Saxon to foreclose on a property by lawsuit was dismissed due to lack of legal standing. This was because the Note and the Deed of Trust were “owned” by separate entities. The Court ruled that when the Note and Deed of Trust were separated, the enforceability of the Note was negated until rejoined. ( Note: LFI did the audit for this loan.)

All Saxon could do on this loan would be to rescind the foreclosure, reunite the Deed and the Note by Assignment and then foreclose again.

Other examples of this is that in the past month, LFI has done audits whereby it was determined that Notary Fraud was present with regard to the signing of the Deed of Trust. This immediately made the Deed of Trust void, and as a result, the Note was then “Unsecured Debt”, and the property was unable to be foreclosed upon. There is even question as to if the Note is void as well.

As I have attempted to show, the whole concept of MERS is fraught with controversy and questions. Certainly, at the very least, MERS actions pose legal issues that are still being addressed each and every day. As to where these actions will ultimate lead, it is anybody’s guess. With some courts, the court sides with the lender, and others side with the homeowner. However, there does appear to be a trend developing that suggests, at least in Bankruptcy Courts, MERS is losing support.

I would like to again make note of the fact that this is simply a basic primer on MERS and the issues surrounding it. To fully cover MERS, I could easily write 100 pages, quoting statutes, case law and legal theories regarding how to defend against MERS.. However, I will save that for the attorneys, and someday, when I have time to write a book on the battles occurring daily in the courts.

Update:

As I wrote this article, a case pending on appeal in Kansas was finally decided. This case, Landmark vs Kesler, Milliennia, MERS, Sovereign Bank and others was finally decided. It offered some interesting conclusions, and reinforces what I had written about in the above article.

I must stress that this case is a guide only. It was in Kansas, and draws from case law in many different states. What is important is that with any Court, case law within the jurisdiction of the Court must be considered first in arguments. If such case law for arguments does not exist, then case law from other jurisdictions can be used to support the arguments.

What this case does do is provide guidelines for arguing in other venues. I do find the case very interesting in that it does highlight the general issues that I addressed above. It supports Haskins very nicely.

It should be noted that various articles have already been written, some of which promote the idea that it will mean free homes for millions of people. This is not likely for various reasons. However, it does offer interesting possibilities regarding certain lawsuits that I am currently assisting with. Of course, LFI has anticipated this occurring and is currently assisting attorneys in refining the argument.

This case is about a foreclosure that had occurred. The lender is trying to overturn a default judgement in favor of another lender. MERS has sided with that lender. As such, the differences in this case could weigh heavy in future rulings. I will just cite relevant portions without going into great detail, which would take a day to write. My comments follow each quote from the ruling.

“While this is a matter of first impression in Kansas, other jurisdictions have issued opinions on similar and related issues, and, while we do not consider those opinions binding in the current litigation, we find them to be useful guideposts in our analysis of the issues before us.”

This supports my contention that this is only useful in other jurisdictions to argue, but jurisdictional case law takes precedence in each area. Therefore, arguments must be made that can overturn such case law.

“Black’s Law Dictionary defines a nominee as “[a] person designated to act in place of another, usu. in a very limited way” and as “[a] party who holds bare legal title for the benefit of others or who receives and distributes funds for the benefit of others.” Black’s Law Dictionary 1076 (8th ed. 2004). This definition suggests that a nominee possesses few or no legally enforceable rights beyond those of a principal whom the nominee serves……..The legal status of a nominee, then, depends on the context of the relationship of the nominee to its principal. Various courts have interpreted the relationship of MERS and the lender as an agency relationship.”

This is the essence of the Agency Relationship that I presented above.

“LaSalle Bank Nat. Ass’n v. Lamy, 2006 WL 2251721, at *2 (N.Y. Sup. 2006) (unpublished opinion) (”A nominee of the owner of a note and mortgage may not effectively assign the note and mortgage to another for want of an ownership interest in said note and mortgage by the nominee.”)”

This case, if used and upheld in California, could portend great consequences for all homeowners.

The law generally understands that a mortgagee is not distinct from a lender: a mortgagee is “[o]ne to whom property is mortgaged: the mortgage creditor, or lender.” Black’s Law Dictionary 1034 (8th ed. 2004). By statute, assignment of the mortgage carries with it the assignment of the debt. K.S.A. 58-2323. Although MERS asserts that, under some situations, the mortgage document purports to give it the same rights as the lender, the document consistently refers only to rights of the lender, including rights to receive notice of litigation, to collect payments, and to enforce the debt obligation. The document consistently limits MERS to acting “solely” as the nominee of the lender.

Indeed, in the event that a mortgage loan somehow separates interests of the note and the deed of trust, with the deed of trust lying with some independent entity, the mortgage may become unenforceable.

“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. [Citation omitted.] 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. [Citation omitted.] 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).

“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 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.”).

This identifies the real issue, as I mentioned previously. The Note and the Deed were separated, so without Assignments uniting them, there can be no foreclosure.

What stake in the outcome of an independent action for foreclosure could MERS have? It did not lend the money to Kesler or to anyone else involved in this case. Neither Kesler nor anyone else involved in the case was required by statute or contract to pay money to MERS on the mortgage. See Sheridan, ___ B.R. at ___ (”MERS is not an economic ‘beneficiary’ under the Deed of Trust. It is owed and will collect no money from Debtors under the Note, nor will it realize the value of the Property through foreclosure of the Deed of Trust in the event the Note is not paid.”). If MERS is only the mortgagee, without ownership of the mortgage instrument, it does not have an enforceable right. See Vargas, 396 B.R. 517 (”[w]hile the note is ‘essential,’ the mortgage is only ‘an incident’ to the note” [quoting Carpenter v. Longan, 16 Wall. 271, 83 U.S. 271, 275, 21 L. Ed 313 (1872)]).

This reinforces the Hawkins argument that without a “Beneficial Interest”, there is no ability to enforce the note.

This ruling in Kansas comes down to several basic issues. These are that:

• MERS had no Beneficial Interest in the Note, therefore, they could not be a Party of Interest and had no authority in the case.
• MERS and the Agency Relationship did not exist with the Assignment of the Note without a new Agency Agreement.
• The Note and the Deed of Trust were separated, therefore, the Note could not be enforced by the Deed of Trust.
• MERS did not have a power to assign the Note.

This ruling, along with Hawkins, can offer the attorney a practical roadmap on how to attack MERS. It should not be taken for granted that this will apply in all states immediately, nor that this will be easy. Jurisdictional Case Law will certainly have to be fought out and overcome. Additionally, I do expect further appeals of this case, especially with other parties joining in to side with MERS because of the practical implications of this ruling.

Disclaimer: Pulatie and LFI are not attorneys and do not dispense legal advice. The purpose of LFI is to assist attorneys and homeowners in their fight.

The following post was contributed by Ken Andrews of the Doan Law Firm in California. Ken also runs a blog called “San Diego Predatory Lending”, where the original of this article is posted. The article discusses a bankruptcy defense based on existing law to dispense with second mortgages.

A lot has been written by me and others about How To Walk Away From Your Home. My blog has become more of a self-help guide to walking away in California. I get at least 25 calls and emails a week from people who want to get out from their underwater homes, but are scared they will be liable for the unpaid mortgage debt. As I previously explained, California homeowners who used 80/20 loans to purchase their homes and have not refinanced the second mortgage

But I also get many folks who have refinanced that second mortgage, or who want to keep their homes, but can’t pay for the adjusted payment on their mortgage, or don’t want to pay on a house that worth substantially less than they owe on it. They have tried to get the bank to work with them, but are frustrated because the bank won’t talk unless they are two payments behind and the only thing the bank will do is freeze their payments or add their arrears to their loan balance. Banks will not reduce the principal amount on loans to fair market value to save a borrower from foreclosure. They just won’t do it.

Once again it’s the 80/20 loan to the rescue. This beautiful piece of financial engineering genius (you really need to click on that link, it’s hilarious!) has found yet another way to help distressed home owners. And not just in California, this trick works all over the United States.

The trick is called a “Chapter 13 Lien Strip” but I like to call it the “Back Door Cram Down.” You may have read about the proposed mortgage “Cram Down” legislation that would allow Chapter 13 judges to reduce or “Cram Down” mortgages balances to fair market value in a Chapter 13 case. This legislation has zero chance of passing until a new election and Congress are seated next January.

Instead, we are “Cramming Down” second mortgages using the old Bankruptcy code section 1322 which states:

“Contents of plan

(b) The plan may–

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.”

What’s not obvious about this code section is a loan is not “secured” by your personal residence if there is no value or equity in your home that would go to the lender if the home was sold. That means the loan can be converted to unsecured or the lien “stripped” from the house by “modifying the rights of holders of secured claims.” This turns it into unsecured debt, like credit card debt, which can be discharged!!!! This is why I call it a “Back Door” cram down because we are cramming down the second mortgage to unsecured status.

Here is an example. You bought your home in 2006 for $500k with 100% financing using an 80/20 loan. So your first mortgage is 80% or $400k and your second mortgage is 20% or $100k. The market is down more than 20% from its peak and your house is now only worth $375k. This means if the house was sold, the first mortgage would take all $375k and the second mortgage would get nothing. In this case the second mortgage is “wholly unsecured” and the second clause of section 1322(b) does not apply, so we can modify the rights of the second mortgage holder and turn it into unsecured debt.

What happens to the now unsecured stripped off second mortgage? It gets paid in your Chapter 13 plan but only after your other secured debts are paid. Secured debts are the first mortgage, your property taxes, and your car payments. And because a Chapter 13 plan lasts only 3-5 years (usually 5) a whole lot of that unsecured debt does not get paid. At the end of 5 years, most unsecured debts (not student loans, back income taxes, or family support payments) are discharged so you don’t have to repay them.

So at the end of 5 years, you are left with just your just mortgage payment on your house. Your cars and your back property taxes are paid off, your student loans and back income taxes are paid down, but your second mortgage and your credit card debt is gone! Beautiful isn’t it? God bless the 80/20! It just keeps on giving.

You can read more about Chapter 13 plans here so I’m not go into great detail on them other than to say they are like debt consolidation inside of a bankruptcy, they last 3 to 5 years (usually 5) and you also can included student loans and back income taxes.

So what is the downside? First off, you will have gone “Bankrupt.” Your creditors will report that for 7 years and it will appear as a public record for 10 years on your credit report. Creditors do not really distinguish between a Chapter 7 or a Chapter 13 bankruptcy so your credit will take a beating. But I like to point out to people that if they do nothing, their credit will likely take a beating anyway, so it’s not really any worse.

The other major downside is you must make every plan payment for 3 to 5 years. If you fail, everything goes back to the way it was. You owe all that debt, and the second lien is no longer stripped off. So I always tell my clients to make a budget that will work for 5 years, not just one that looks good to the Bankruptcy Court.

The Bush Administration proposed a new foreclosure relief plan today in response to the mortgage crisis. The plan encourages lenders to write down loans and shift risk to the government-backed FHA program.

Hoping to assist more than 100,000 homeowners, the administration announced their intention to expand the FHASecure program. The expansion will allow the FHA to insure new mortgages for struggling borrowers, including those with ARMs and those who owe more than their homes are worth.

Not everyone will qualify though. High risk borrowers and borrowers who missed more than just a couple of mortgage payments will be turned away. Approval will also depend on a lender’s willingness to write down the mortgage principal owed. The maximum amount that could be borrowed under the expanded program would be either 90 or 97 percent of the home’s value, depending on the borrower’s risk profile.

Democrats are expected to oppose the effort. They are in the midst of writing more aggressive legislation to deal with the foreclosure problem. Although their legislation also calls for expansion of the FHA program, there are a lot of other provisions in the bill.

The FHA’s Financial Woes

Although both Democrats and Republicans are looking to the FHA to rescue homeowners in trouble, there is some question as to whether or not the agency is equipped to deal with the foreclosure crisis.

By its own estimates, the FHA will be operating in the red this year. Congressional officials are projecting a $1.4 billion shortfall in fiscal 2009 for the agency. If this happens, American taxpayers will be forced to subsidize the FHA for the first time in its 74-year history.

Some housing officials are now blaming the bad ink on an FHA program that allows seller-financed down payment loans. Under the program, sellers arrange to cover buyers’ down payments. The seller concessions are generally added to the total cost of the loan.

Only 2 percent of FHA insured loans were seller-financed down payment loans in 2000, but they grew in popularity during the boom and the FHA did nothing to keep the program in check. By 2007, seller-financed down payment loans accounted for a whopping 35 percent of all FHA loans.

The problem with this is that the foreclosure rate on seller-financed down payment loans is two to three times that of other loans, putting the FHA’s portfolio in a very precarious position.

Already, the FHA backs 3.8 million loans worth approximately $365 billion. If Congress and the Bush Administration have their way, the agency will be greatly expanded. Since the FHA has a government insurance fund of only $20 billion, and statistics show that 25 percent of FHA insured borrowers go into default again after a workout, there is almost no doubt the agency will have problems handling all the loans that do end up in foreclosure.

Under pressure from consumer groups and troubled homeowners to prevent further collapse in the housing market, Senate Democrats and Republicans are working together to create a foreclosure relief bill.

Approximately $1.5 million worth of subprime mortgages will reset to higher rates before then end of 2008. And subprime is just the tip of the iceberg. Before the credit bubble has deflated completely, an estimated $1 trillion in defaults and writedowns are expected as bonds, commercial mortgages, leverage loans and other mortgage loans go sour.

Lawmakers are under extreme pressure from some groups to do something to bail out Main Street. Since the bailout of Wall Street firm, Bear Stearns, the pressure has increased considerably.

Although the Democrats have been pushing for broader government intervention for some time now, the Republicans have held firm on their belief that such action might cause more problems than it fixes.  

This week a notable change occurred. The Senate agreed to set partisan differences aside to create legislation that is meant to prevent foreclosures and bolster the ailing housing market. The new consensus is that immediate action must be taken.

On Tuesday, the Senate voted overwhelmingly to move forward with new housing legislation. Late Wednesday, they unveiled the Foreclosure Prevention Act.

Democrats and Republicans have reached a tentative agreement on the core details and will be debating amendments in the coming days. The core of the plan provides:

• A $4 billion fund for local governments to clean up neighborhoods riddled with foreclosed homes.
• $100 billion for mortgage counseling programs.
• $10 billion for federal tax-exempt bonds to help finance and refinance home purchases.
• A $7,000 tax credit to people who purchase newly built homes, foreclosure properties or properties owned by sellers in default.
• A new loan limit for the Federal Housing Administration that will allow borrowers to finance 110 percent of an area’s median home price versus 95 percent.

The Foreclosure Prevention Act also includes special provisions for soldiers. If the bill is signed into law, lenders will not be able to foreclose on a soldier’s home for at least nine months after the soldier returns from active duty. Lenders will also be forced to put a one year rate freeze on mortgages that are held by active-duty soldiers who face a rate reset.

Amendments that are up for debate include a plan that will give bankruptcy judges the power to write down mortgage principal and a plan that will offer tax breaks to homebuilders who have experienced credit losses over the last two years.

If the legislation is approved, it will go before the House of Representatives and eventually President Bush. There is already some doubt as to whether or not it will make it all the way. A White House spokesperson released a statement Wednesday afternoon saying there were “serious concerns about some of the elements.”
 

Presidential candidate Hillary Clinton unveiled a new four-part mortgage relief plan at a speech before 150 elected officials and students at the University of Pennsylvania yesterday. The plan calls for immediate action and direct government intervention.

Senator Hillary Clinton has been proposing ideas to provide foreclosure relief for more than a year now. On Monday, she added to those proposals, calling for $30 billion and government intervention.

Her new four-part plan, which includes some of her previous proposals, is the most aggressive plan floated by a presidential candidate so far. In addition to interest rate freezes and a foreclosure moratorium, Clinton wants to see a $30 billion fund that will allow cities and states to improve neighborhoods by buying foreclosed properties.

To encourage loan restructuring, she suggested mortgage servicers be given more protection against lawsuits from investors. According to her, evidence suggests servicers are less willing to modify mortgages because they fear litigation.

Clinton also stated that she would support controversial legislation recently introduced by Representative Barney Frank (D) and Senator Christopher Dodd (D) that calls for $20 billion in public funds to establish a federally backed mortgage auction. 

Other ideas she mentioned included a huge expansion of the Federal Housing Administration (FHA) and an emergency, non-partisan “working group” that could brainstorm new ways to prevent more foreclosures. She recommended tapping economists, as well as former Federal Reserve chairmen Alan Greenspan and Paul Volcker and former Treasury Secretary Robert Rubin to lead the group.

Her speech comes as the mortgage crisis threatens to overwhelm the economy. The latest statistics show that nearly one million people are facing foreclosure, and more trouble is expected as rates reset and home prices continue to fall.

Senator Barrack Obama’s campaign issued a statement after Clinton’s speech to say that Obama is also working to ease the credit crisis. He too has suggested a “homeownership preservation summit,” expansion of the FHA and a larger mortgage bond program.

Other ideas Obama has come out with previously include stiffer penalties for predatory lenders and a simplified tax code that will allow more people to benefit from the mortgage income tax credit.

Republican presidential candidate John McCain is traveling down a different road. Today, he warned against government intervention, saying it is not the “duty of the government” to bailout irresponsible borrowers or lenders.

Breakdown of Hillary’s Proposals

• 90-day foreclosure moratorium
• Freeze the interest rates on subprime ARMs for at least five years
• Allow the FHA to guarantee up to $400 billion in refinanced mortgages
• Put underwater mortgages on the government’s balance sheet on a temporary basis
• Introduce legislation to protect mortgage servicers from investor lawsuits
• Create a $30 billion stimulus package to allow cities and states to purchase foreclosed properties
• Set aside $10 billion to expand the mortgage revenue bond program
• Create a “high-level emergency working group” to brainstorm more ideas to help ease the foreclosure crisis

Government regulators eased capital requirements for Freddie Mac and Fannie Mae on Wednesday. The move is meant to ease the housing crisis, but critics say it will cause the two overleveraged firms to hang themselves at the expense of taxpayers.

The Office of Federal Housing Enterprise Oversight, which oversees Freddie Mac and Fannie Mae, agreed to allow the two government-sponsored entities to reduce their mandatory cash cushion by a third. The plan is expected to free up $200 billion that will go to buying up more mortgages and mortgage securities.

This is the third consecutive step the government has taken to ensure the two firms will be able to take on more of the country’s bad mortgage debt. The first came when Congress raised the limits for the loans that Fannie and Freddie can buy or insure from $417,000 to $729,750. The second occurred March 1 when Fannie and Freddie were released from the combined $1.5 trillion cap on their mortgage investment holdings.

The initiatives taken recently by the government are controversial because it raises the risks the two companies will be allowed to take on. This in turn raises risks for taxpayers. Although Fannie and Freddie are publicly-traded companies, they enjoy the benefit of an implicit government guarantee. In other words, taxpayers will be expected to flip the bill if Fannie and Freddie ever fail. 

And the risk of failure is very real. In the fourth quarter of last year, the two GSEs were responsible for nearly 75 percent of the mortgage backed securities on the market. They are also losing money fast and expect to see more red ink in the future.

Fannie Mae posted a record $3.55 billion fourth quarter loss. Analysts believe the company’s credit losses will continue to rise this year and in 2009. Freddie Mac is in a similar position. The company reported a record $2.45 billion net loss during the same period.

James Lockhart, director of the Office of Federal Housing Enterprise Oversight, assured everyone at a news conference today that Freddie and Fannie are “safe and sound” and would remain that way.

Until recently, Lockhart has been firmly against loosening regulations for Fannie Mae and Freddie Mac. There has been some speculation that his rapid change of heart stems from political and lobbyist pressure.

With foreclosures on the rise in nearly every area of the country, the White House is under pressure from consumer advocates to do something to address the crisis. One of the latest solutions involves letting states issue tax-exempt bonds to help troubled homeowners refinance.
 
The Bush Administration is pushing for Congress to temporarily give state and local governments the authority to issue tax-exempt bonds to homeowners who need help refinancing out of unaffordable loans.

The idea is that state and local governments can sell the bonds and create enough revenue to help subsidize the cost of refinancing. Treasury Secretary Henry Paulson has said that he would like to see the cap on such bonds raised by at least $15 billion over the next three years.

Under current laws, state and local governments have the authority to issue bonds to first time homebuyers and buyers in distressed areas. The change would extend that authority and allow state and local housing agencies to help borrowers refinance with private lenders regardless of “buyer status” or location.

Critics say the plan is dangerous because bond-backed refinances will serve as a prop for artificial house prices and punish future homeowners while rewarding risk-taking borrowers and lenders.

Some say that there is also a chance that the increased use of mortgage bonds could affect other subsidy programs, such as student loan programs and career development programs.  

So far there is no estimate as to how many borrowers could be helped with tax-exempt municipal bonds or what type of borrowers would be eligible, but it is assumed that homeowners who are well into the foreclosure process would not be eligible. Borrowers who have loans that exceed the value of their home are likely to be left out as well.

Examples of ineligibility can already be seen in states like Ohio where enacted refinancing programs have managed to attract only a small percentage of troubled borrowers.

In a recent interview with Reuters, Bob Connell of the Ohio Housing Finance Agency said that most homeowners are simply “too far gone” by the time they contact a housing agency to be helped.

Connell added that he did believe the Bush administration’s proposal would be beneficial nevertheless and hopes that discussion of the proposal prompts homeowners to contact housing agencies for help.

By Aaron Krowne & Moe Bedard

In a decision piggy-backing on Judge Boyko’s recent Deutsche Bank ruling (announced on this site Tuesday), Judge Rose has thrown out another batch of foreclosures, making the following summary remarks:

“This court is well aware that entities who hold valid notes are entitled to receive timely payments in accordance with the notes. And, if they do not receive timely payments, the entities have the right to seek foreclosure on the accompanying mortgages.

However, with regard the enforcement of standing and other jurisdictional requirements pertaining to foreclosure actions, this court is in full agreement with Judge Christopher A Boyko for the Northern District of Ohio who recently stressed, ‘That the judicial integrity of the United States District Court is ‘Priceless.’”

The ruling is another HUGE victory for consumer advocate attorneys and homeowners in general.

A pdf file of the full ruling is available here.

Jacksonville Legal Aid attorney April Charney remarked to us regarding the two Ohio decisions:

As to the real ramification of the Ohio decision, aside from slowing the foreclosure trains, is that the fact that there were no “original” assignments rendering the sales of the mortgages to the trusts, in violation of the true sale obligations imposed by securities law. ”

For more comments by April and us on this foundational issue of these rulings, see our next post. There we also address some criticisms and critiques we’ve received since our original coverage.

by Moe Bedard and Aaron Krowne

Judge Christopher A. Boyko of the Eastern Ohio United States District Court, on October 31, 2007 dismissed 14 Deutsche Bank-filed foreclosures in a ruling based on lack of standing for not owning/holding the mortgage loan at the time the lawsuits were filed.

Judge Boyko issued an order requiring the Plaintiffs in a number of pending foreclosure cases to file a copy of the executed Assignment demonstrating Plaintiff (Deutsche Bank) was the holder and owner of the Note and Mortgage as of the date the Complaint was filed, or the court would enter a dismissal.

The Court’s amended General Order No. 2006-16 requires Plaintiff (Deutsche Bank) to submit an affidavit along with the complaint, which identifies Plaintiff as the original mortgage holder, or as an assignee, trustee or successor-interest.

Apparently Deutsche bank submitted several affidavits that claim that Deutsche was in fact the owner of the mortgage note, but none of these affidavits mention assignment or trust or successor interest.

Thus, the Judge ruled that in every instance, these submissions create a “conflict” and they “do not satisfy” the burden of demonstrating at the time of filing the complaint, that Deutsche Bank was in fact the “legal” note holder.

While the decision is great for homeowners in distress (due to providing a new escape hatch out of foreclosure), it is a big blow to the cause of sorting out the high-finance side of the mortgage mess.

Jacksonville Area Legal Aid Attorney, April Charney, broke this news to us via email and made these comments in regards to the Ohio Federal Court ruling (emphasis ours):

This court order is what I have been saying in my cases. This is rampant fraud on every court in America or nonjudicial foreclosure fraud where the securitized trusts are filing foreclosures when they never own/hold the mortgage loan at the commencement of the foreclosure.

That means that the loans are clearly in default at the time of any eventual transfer of the ownership of the mortgage loans to the trusts. This means that the loans are being held by the originating lenders after the alleged “sale” to the trust despite what it says per the pooling and servicing agreements and despite what the securities laws require.

This also means that many securitized trusts don’t really, legally own these bad loans.

In my cases, many of the trusts try to argue equitable assignment that predates the filing of the foreclosure, but a securitized trust cannot take an equitable assignment of a mortgage loan. It also means that the securitized trusts own nothing.

So with this decision, it appears confirmed that investors in the mortgage debacle may in fact own nothing—not even the bad loans they funded! It seems their right to the cash flow from the underlying properties does not extend to ownership of the properties themselves; thus clouding the recovery picture considerably.

Charney further remarked to us:

This opinion, once circulated and adopted by state and Federal courts across the country, will stop the progress of foreclosures, at first in judicial foreclosure states, across America, dead in their tracks.

We agree with additional remarks Charney made pointing out that this decision has major adverse implications for the prospects of an amicable financial workout for the various investor contingents in mortgage-backed securities (MBSes). Doubt is cast on where the full write-downs will eventually land, and this uncertainty can only be expected to further harm the market value of MBS and MBS-based synthetic securities, already in shambles purely due to rising underlying delinquencies. Investors in these securities might have assumed—wrongly, it turns out—that they actually owned some “real estate” in these deals.

To paraphrase Jim Cramer, “They own nothing!”