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Securitization Chain-of-Title: The US Bank v. Congress Ruling

posted by Adam Levitin

Over on Housing Wire, Paul Jackson is crowing that chain-of-title issues in mortgage securitization are overblown because an Alabama state trial court rejected such arguments in a case ironically captioned U.S. Bank v. Congress.

But let’s actually consider whether the opinion matters, what the court actually did and did not say, and whether it was right.

Jackson and Yves Smith at Naked Capitalism have a running feud over the seriousness of chain-of-title problems, and I think that explains why Jackson is so worked up over this decision. My own take is that it is much ado about nothing. Before anyone gets too excited one way or the other about this case, let’s remember that this is a ruling by one judge in an Alabama state trial court decision. It was unlikely to get much notice anywhere else in the country, but for the securitization industry grasping for a legal victory to parade around. This court ruling doesn’t have precedential value anywhere, including in Alabama, and its persuasive value is very low too, both on account of it being an Alabama state trial court and because of the quality of its analysis. Put differently, this ain’t an Ibanez type ruling, where a leading state supreme court issues a very thoughtful unanimous opinion.

Perhaps the most important thing to note about the opinion is what isn't there. There was no consideration of the chain-of-title issue in the opinion. Let me repeat, the court said nothing about whether there was proper chain-of-title in the securitization. Instead, the court avoided dealing with it. That means that this ruling isn't grounds for sounding the "all clear" on chain-of-title. At best, it is grounds for arguing that homeowners won't be able to raise chain-of-title problems. As we've seen with Ibanez, that's clearly incorrect, and a closer look at the Congress ruling shows that it might be an Alabama special, not applicable elsewhere. 

Alabama is a “non-judicial” foreclosure state. That means foreclosures are done by private sale. In Congress the securitization trustee held a sale and received a quitclaim deed from the mortgagee MERS. The securitization trustee then brought an ejectment action against the homeowner. The decision was in the ejectment action, not the foreclosure.

The court used this procedural posture to wiggle around having to address the chain-of-title issues. The homeowner’s argument was that the note and mortgage had never been properly and timely transferred to the securitization trust per the method required by the pooling and servicing agreement (PSA) and were, therefore, not trust property, so the trust had no interest in the mortgage and therefore lacked standing to bring a foreclosure: “without proof that U.S. bank was the owner of the Note, it has no standing and therefore the trial court has no subject matter jurisdiction over the case.”

The court played on the procedural posture of the case to reject this argument. First, the court explained that because this was an ejectment action, not a foreclosure, the question of ownership of the note was not an issue of standing, but an affirmative defense for which the homeowner had the burden of proof. The trial court here was citing to a recent Alabama appellate court decision (reversing a previous Alabama appellate decision) that concluded that standing is satisfied by virtue of the bank being named party on the foreclosure deed. That’s just crazy given that the foreclosure deed is a nonjudicial sale. [G.S.—maybe this explains why your shop saw your notaries' seal forged on those foreclosure deeds.]

Crazy or not, however, this meant that the homeowner wasn’t actually challenging the trust's standing. From there it was a small step for the court to say that the homeowner couldn’t invoke the terms of the PSA because she wasn’t a party to it.

If the homeowner were able to bring a standing challenge, there’d really be no way to avoid addressing the PSA on its own terms because that is what determines whether the securitization trust has an interest in the mortgage in the first place. This procedural move of saying that the homeowner wasn’t challenging standing was what decided the case. It certainly made it possible for the court to decide everything under Alabama law, rather than address the New York law that governs the PSA: “This is an action for ejection from Alabama real property, brought against an Alabama resident in an Alabama court.” [Translation: boy, don’t you bring down any of that fancy New York lawyering to Alabama.]

It’s worth noting that this is not the only decision to say that the homeowner has no ability to invoke the PSA. There’s an unpublished Sixth Circuit ruling in a case called Livoniainvolving a commercial mortgage.  In that case, the court said that a litigant who is not party to an assignment cannot challenge the assignment, unless there's a concern about double enforcement (i.e., that someone else might claim to be the note holder). If one traces back the caselaw cited as precedent in Livonia, one will see that it is fairly inapposite--my take is that this is a decision where the law clerks cited some 19th century caselaw language without fully understanding the particular context of those cases. But even if the precedent is well-founded, given the prevelance of warehouse fraud, the double enforcement problem is real, and more importantly, there’s another critical borrower interest in ensuring that litigation is against the proper party. Securitization trusts have very different ability and incentives to settle a foreclosure case by modifying a loan than a portfolio lender. That means borrowers do have an interest in the validity of the assignment and thus standing to litigate over it.  

More generally, I find the argument that there's no standing to argue over chain of title misplaced. Perhaps the most fundamental defense to a foreclosure is to argue that the party bringing the action isn’t the creditor. That’s a standing question, and there’s simply no way to examine it without getting into the PSA.

There’s also a secondary issue in Congress that is also worthy of comment (I could go on and on about the rubberbanded allonge issue as well, but gosh that'd be dry and technical): The court wrote that “U.S. bank was the ‘holder’ of the Congress note and therefore had the legal right to foreclose on the Congress property.” The concept of “holder” is a UCC Article 3 concept. It goes to the ability to enforce the note.  UCC 3-301. A holder is simply a party in possession of a note made out to that party or to bearer.  UCC 1-201(b)(20).  Thus, a thief of a bearer note is a “holder” of the note for UCC purposes, and therefore entitled to enforce the note.

But recall that the note is separate from the security instrument, and the securitization trustee isn’t trying to enforce just the note. It is trying to enforce the security instrument that accompanies the mortgage, and the enforceability of security interests in real property isn’t governed by UCC Article 3 and with good reason—mortgages aren’t negotiable, even if the notes themselves are. The commercial benefits from enhanced liquidity of debt do not trump concerns about protecting homeowners’ rights to occupancy.

Unlike an action on a note, which is an action at law, mortgage foreclosure is an equitable action—it is the cutting off the borrower’s equity of redemption. Most states have abandoned the formal law/equity division, but the principles still stand, even if the court structure does not. While a thief can enforce bearer paper, the idea that a thief could enforce a mortgage is laughable. If you don’t have clean hands, don’t expect relief in equity.

The Alabama court just seemed to assume that if a party is a UCC Article 3 holder of a note, it can enforce an associated mortgage. My own take is that enforcement of the mortgage—that is foreclosure—is a separate issue that requires a separate analysis. The court couldn’t have gone down this path, however, because clean hands leads right back to the chain-of-title question.

So to recap, I don’t think there’s much to get excited about with Congress. If the homeowner had prevailed, the banks would have been saying “it’s just an Alabama state trial court,” and it might well have been overturned on appeal. But that doesn’t mean that the chain-of-title issue isn’t real. It just means that there’s still a search for the proper channel on which to advance the argument.

In the end, I see Paul Jackson as toeing the "nothing to see here folks" line that's coming out of thesell-side banks and American Securitization Forum, but numerous buy-side people (read MBS investors) have told me that they think there’s a serious problem with the securitization documentation. The problem that they have is that they don’t know what to do about it—they are trying to figure out a way that this can be used to put the mortgages back to the banks without it tanking the entire financial system. In other words, the banks are being protected by the too-big-to-fail problem. That’s letting them externalize their violations of their securitization contracts on MBS investors.


"The PSA says The Bank of New York is the owner of the note and mortgage and that in no way shape or form should the servicer claim ownership in the note or mortgage."

Read the opinion. USBank didn't need to be an "owner" as long as it had enforcement rights. Ms. Congress's own witness stated that the "holder" could foreclose, and that the rules were controlled by Alabama law. Judge Vowell found that USBank was a "holder" entitled to enforcement, regardless of who the "owner" was.

What is the error here?

There was no lost note here. Not all cases are the same.

Ownership of the note was irrelevant. Enforcement rights were found in USBank, and Ms. Congress's own expert witness agreed that a holder of the note could foreclose. The judge found that USBank was a holder.

Where is the error?

Not to be a naysayer , but I have seen HUD-1 settlement statements with the original DoT recording charged to the borrower.

I'm with Spencer though. How bout people get proactive. There are remedies. Quiet title, Scire Facia comes to mind ( I know it's "abolished" but the remedy is still there is not called something else.)Get the record Anulled because the Trust was granted based upon the false suggestion of the trustee and/or beneficiary.

"Unlike an action on a note, which is an action at law, mortgage foreclosure is an equitable action—it is the cutting off the borrower’s equity of redemption."

What authority do you have for that? Foreclosure by advertisement, as far as I know, is ALWAYS a statutory "procedure." That's a main reason why it passes Due Process analysis. While repo (after eviction) is an like an equitable remedy, it's also a statutory remedy in this context.

It's an interesting point, but I'd still like to see authority.

"The idea that a thief could enforce a mortgage is laughable."

The thief would also have to have a prior assignment in its favor in a typical non-judicial state (whether recorded - like in MN - or merely effective, like MA).

That said, a forged assignment would be void. Or would it? That gets into differences in forgeries. I really don't know under Ibanez, for example, if the court found that Jane signed for her subordinate Fred, but ABC Mortgage still intended to assign to Vampire Squid Trust, and the document was otherwise fine for proving that intent, and was somehow ratified, that Ibanez wouldn't have come out in favor of USBank.

This is one danger of over-reading Ibanez.

Foreclosure timelines in different states have different markers. Here, equity of redemption is called either cure of default or right to reinstate. The right of redemption is generally six months (12 months for ag, and 12 if the amount owing is less than 2/3 the original principle).

In any case, if the redemption period is post-sale and statutory, then can it be called equity of redemption? I don't think it can.

This gets to one main reason counsel should be retained early. Way too many people lack basic information about what to expect and what the time lines are. Worse, they think foreclosure is uniform state -to-state and they read blogs that talk about rules in Florida that are not accurate for their state. Then, they show up at the attorney's office when the property has been posted for eviction.

Wow. This is generating a lot more discussion than I anticipated.


(1) As far as the Brooklyn Bridge, I used that example because of the proverbial expression, but if you're going to insist that there be a resident, let's change it to the White House or your house.

(2) Why would you think that the "holder" of a note is automatically entitled to enforce a mortgage? They are two separate contracts, governed by different law, albeit with the mortgage referencing the note. The note just goes to the enforceability of the debt, not the ability to grab to the collateral.

Foreclosure by advertisement is a statutory procedure, but the nature of foreclosure as an action in general stems from equity practice. I don't think this is a point for which there is particular caselaw authority to cite, although I imagine one can find various 19th century references to this.

(3) Once you conclude US Bank was the holder, then yes, the rest of the decision follows pretty naturally. But that's the issue that was being argued and there's no sign of that in the opinion. If you read the briefing, you'll see that the argument was that US Bank was not the "holder". The note was not endorsed to US Bank and US Bank, as trustee, cannot hold bearer paper--or so it was argued. No discussion of this whatsoever.

(4) This case might have been better litigated as a quiet title action. There wouldn't have been a question of US Bank's standing per se, but it would have been harder to avoid looking at the PSA.

Thanks for this post. I couldn’t make it and this post has been useful.

My point on the Brooklyn Bridge is that it's not an abstraction. As a concrete matter, when you start trying use real facts, it falls apart.

"The note just goes to the enforceability of the debt, not the ability to grab to the collateral."

I don't like the word "just." The note also allows enforcement of the security, and is the central premise of the "mortgage follows the note" doctrine.

Are the briefs available on-line, other than WL or Lexis?

My interest in this case was high, but now that I've been told the price tag, it's a little higher.

Do ejectment judgments have special appeal rules?

Why is all effort focused only on servicers and lenders? When a house purchased in 1998 or 2000 is refinanced on a "stated-income" loan (cash out refinance) why should I care if the cashed-out party is kicked to the curb? In many instances, they not only refinanced the first and took $100k or more, but blazed ahead with a second for $60k or more. (And those numbers are low) Explain to me why I should care that US Bank or BofA is racing to purge their systems?

P.S. You cannot use a "clean hands" equity argument for a breaching party! Come on! You don't have to graduate first in your class to know that a breaching home owner (even if caused by loss of job), especially a cash out refinance homeowner, cannot use an equity argument, they DO NOT HAVE CLEAN HANDS!

Note: Don't need your highbrow bull responses either. The good thing about a mirror, we can see when our ties don't match. Yet, even then some don't have style. Too bad our mouths don't have a similar apparatus. Most of ya'all sounds likes hicks tryin' to smarter than the rest o' us hillybillies. (Insert hickup.) Yet even if such a device existed, as with our ties, some simply just don't have any style!

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