Foreclosure Halt Overblown - Part I
The Cleveland foreclosure cases recently dismissed by Judge Boyko and Judge O'Malley have been incorrectly heralded by some as a severe blow to lenders wishing to foreclose on delinquent loans. At most, the decisions are merely a warning to a certain class of lenders involved in "securitization" transactions that they will need to pay more attention to certain details in those transactions, particularly if they wish to avail themselves of the federal courts in Northern Ohio.
It may have started with this post from I am Facing Foreclosure.com, but it was the New York Times story by Gretchen Morgensen which increased the level of interest in the dismissals of more than thirty foreclosure cases by two federal judges in Cleveland, Ohio. This then produced a bevy of activity in the blogosphere as others rushed in to express how exciting this was for borrowers. Click here and here for a sample of the reaction.
Now that Judge Rose, another federal judge in Dayton, Ohio has dismissed fourteen other similar cases and this has now also been reported by Gretchen Morgensen in the New York Times, some pundits will undoubtedly become even more effusive about this "victory" for homeowners facing foreclosure. For a copy of Judge Rose's Order, click JudgeRoseOrder.
However, those believing that these federal trial court dismissals without prejudice have somehow signaled disaster for lenders everywhere and a debt holiday for borrowers are sadly mistaken. To be sure, there have been some responsible bloggers who have tried to stem the tide against premature celebration. For example Calculated Risk has made at least two reasoned and exceptionally well explained posts about what this is all really about. Click here and here to read these - and if you read nothing else about these cases, read this! In addition, John Waller of the Indiana Commercial Foreclosure Blog has rather succinctly summed up what these cases mean in reality for lenders:
The moral of the story is that the institution filing the foreclosure suit, if pressed by the Court or the defendant borrower, must have proof that it owned the note and held the mortgage on the date of the filing of the foreclosure complaint. As demonstrated by the Ohio ruling, with respect to mortgage security pools this seemingly simple requirement may be burdensome or perhaps even impossible under certain structuring.
Corrective action probably can be taken during the proceedings in most cases to ensure that the named plaintiff actually holds the mortgage and owns the note. For example, depending upon the circumstances, the pleadings can be amended to name the proper party or, on the other hand, assignments can be executed to place the note/mortgage into the hands of the plaintiff. Lenders/investors and their counsel should be advised of the Ohio ruling and prepare themselves accordingly.
At the outset, it is important to understand how limited the dismissal ruling really is. All of the cases were dismissed "without prejudice" which means that once the deficiencies noted by the Judges are corrected (which they probably can be), the lenders can, and almost certainly will, refile the foreclosure successfully. In addition, unlike most foreclosures that are typically filed in state court, these dismissals occurred in cases filed in federal courts and there is no way to know whether state courts would require the same proof of the ownership of notes and mortgages. Finally, these were decisions made by trial courts which leaves other trial courts free to make other decisions.
So why were the cases dismissed? Simply put, the lenders failed to take sufficient care in establishing the chain of ownership through the various assignments of the mortgage and promissory note from one financial institution to another. The nature of the "securitization" process as applied to the mortgages in question certainly contributed to this shortcoming by making it more cumbersome to obtain all of the proper assignments throught the chain of title.
However, as explained in the Calculated Risk postings, with some expenditure of time and money, the problem can be remedied in these cases and relatively minor changes in procedures can totally eliminate the issue. Moreover, in those cases where the promissory note and mortgage have only been assigned once or twice and are not part of a mortgage-backed securitization, the problem of demostrating ownership is unlikely to arise anyway.
Thus, while these developments certainly underscore the importance of attention to detail, they in no way indicate any collapse of the securitization market or an insurmouintable problem for lenders. For another bank attorney's similar conclusion focusing on the practical realities of the situation, read Kevin Funnell's "Tale of Two Judges" posting on his Bank Lawyer's Blog.
Even if foreclosures against securitized properties are not "impossible", it is extremely significant that the costs of carrying them through look set to go up.
You and Waller point out that, in extremis, the cases can simply be re-filed with new assignments. I think this is technically (and importantly) incorrect: the assignments must exist prior to the filing of the foreclosures.
If "all" that needs to be done then is re-file the foreclosures, that, once again, does not seem like "nothing".
What is nothing, however, is any additional information in this post, or those of Tanta or Waller, that we were not already aware of.
Securitization has dramatically increased the complexity of the market, and it appears set to significantly increase the expense of foreclosure and the process of monetizing the underlying delinquent properties for lenders/investors.
This is a new world and a new kind of mess for borrowers and lenders. To argue otherwise -- that there is "nothing to see here" -- now that might truly be categorized as "irresponsible".
The idea that these dismissals are simply par for the course in the legal arena is simply not true.
Let's examine this issue. The foreclosing plaintiffs almost always claim they are the holder and owner of the promissory note. Then, they also claim that the note has been lost or destroyed and ask the court to simply reestablish the allegedly lost or destroyed note. Foreclosing plaintiffs also represent that the note was not transferred to another party or seized by legal process. These allegations are found in most foreclosure complaints. The problem is that 99% of the time, these specific allegations are untrue and fraudulent representations to the court.
The truth is that when challenged as to the authenticity of the copy of promissory note, or where the plaintiff's standing comes into question, suddenly the note appears. The note was never lost or destroyed. It had been negotiated to a party different than the foreclosing plaintiff. Just take a look at the back of the original and see the endorsements that reflect the negotiation of the note to another. Sometimes these endorsements are in blank, which makes the note a bearer instrument. In that case, whoever holds the instrument is the real party in interest entitled to enforce the note.
Every time I have seen the note or the plaintiff's standing challenged, the note magically appears. Then, the note bears witness against the foreclosing plaintiff showing that he had no standing to bring the action on the day the foreclosure was filed. This is an easy dismissal.
The main point I'm making is that the district court's dismissals signal much more than a procedural anomaly foreclosing plaintiffs are not used to. It signals the court coming back into control regarding defendant rights. Our system of justice does not allow the use of the court to fraudulently gain a judgment and then use that judgment to get property or money. Yet this is exactly what happens when a plaintiff who did not have standing is awarded a judgment, takes the home, sells it and pockets the money - including all the added fees that made the deal sweet to pursue in the first place. It amounts to an abuse of process and a civil theft.
This is avoided when the proper plaintiff prosecutes an action of foreclosure. The court, however, must guard its subject matter jurisdiction and uphold the constitutional responsibility to ensure it has proper parties and the pleadings sufficient to invoke the power of the court. The recent rulings show that the court is cognizant that if one of the parties does not have standing to bring the action, and it fails to ascertain its jurisdictional authority, that it operates in a ministerial capacity and loses all immunity. This is not a light subject. Judges can be held personally liable if they act outside their constitutionally-granted authority. Therefore, making sure a foreclosing plaintiff has demonstrated standing and properly alleged the requisite elements to invoke the court's jurisdiction is in the judge's best interest.
There should be no ambiguity about the recent rulings. Foreclosing attorneys making false representations to the court should and will be held accountable for these pleadings. Foreclosure defendants have a number of remedies available to them to pursue plaintiff's debt collector attorneys who misrepresent the amount, character, or legal status of a debt or who use unfair and deceptive practices.
Securitization has been good for mortgage bankers and large lenders. However, now that these institutions have woven a complex path to determining who actually owns the note and mortgage, the fast track to mortgage foreclosure is going away. These institutions simply cannot eat their cake and still have it. Sorry. I say the recent rulings should be a significant wake up call for judges, foreclosing plaintiffs, and debt collector attorneys. And, most importantly it should sound an alarm to the unfortunate
homeonwer who is facing foreclosure. How does a homeowner know that the plaintiff trying to take the house is the one with the right to do so? Ok, so they owe someone and there has been a defaulted on the loan. However, if the court lets the wrong company take the house, what is the difference between that result and an outright swindle? One difference, to be sure, is that the court participated in the swindle becuase some judge simply overlooked the very safeguards that make our judicial system the best in the world.
The Ohio district court judges have set an example that should be followed by judges across all jurisdictions. Surely more people will be watching from now on.
David, I do not believe, and I do not believe the courts believe, that there is anything underhanded going on here. In my experience, this is not a matter of some lender deciding to foreclose on a loan they have no interest in. I don't think the courts doubt that the lenders are the holders and owners of the notes and mortgages - they are simply being explicit that the financial institutions must now "show their worK' as it were rather than simply announcing the result of that work and expecting everyone else to accept that at face value.
What is true is that these rulings should force lenders to be more careful about dotting their "i"s and crossing their "t"s when it comes to making and documenting the assignments. Will that be a headache for lenders, particularly with respect to mortgages in securitization pools? Yes it will be, but only until the industry upgrades its transaction procedures. Does this mean that some borrowers will get a break? Possibly, but again it's merely buying some time, without changing the ultimate outcome.
Teri