For the Servicers: Is It Better to Rob Peter or Paul?

The U.S. mortgage servicing industry is in deep doo-doo. To foreclose on a mortgage, you must own the note and the mortgage. That's a lot of paperwork to keep track of, especially when you're trying to package as many mortgage loans into as many securitizations as you can before the market dries up. If we have learned nothing else in the past four years, it is a lot to ask Wall Street to make sure they get things right when there is money to be made. Because of lost, sloppy, and perhaps nonexistent paperwork, banks who purport to have the right to foreclose often cannot prove they own the note and mortgage.

Things are starting to hit the fan -- we can't say exactly what is hitting the fan because this is a family blog (except for here, here, and especially here). In defending itself, the mortgage industry is taking yet another reflexive, knee-jerk position that seems to me to be against their long-term interest.

A typical fact pattern might play out like this. Bank forecloses on Peter. At the foreclosure sale, Paul buys the property. Bank cannot prove it owned the mortgage and note at the time of the foreclosure sale, meaning it had as much right to foreclose as any other stranger to the property. That is to say, it had no right to foreclose.

At this point, Bank either owes Peter or Paul. It owes Peter for fraudulently obtaining a judgment of foreclosure against him and dispossessing him of his home. Or, if we overturn the foreclosure sale, it owes Paul for conveying an invalid title (more accurately, it would owe the sheriff who should have to return Paul's money). If I had to choose between owing a homeowner for dispossessing the person of her home or owing a disappointed investor for conveying an invalid title at a foreclosure sale, I would rather owe the disappointed investor. It is going to be cheaper.

The issues I have outlined are in play in a Massachusetts case called Bevilacqua v. Rodriguez, currently pending before that state's highest court. Previously, in a case called Ibanez, the court rejected claims that Wall Street's nontransfer of mortgages and notes through the securitization process was sufficient to establish standing to conduct a foreclosure sale. Bevilacqua deals with the fallout from Ibanez as the purchaser at a foreclosure sale tries to bring a "try title" action to establish his prior claim to the property despite the fact that the foreclosure sale appears to be invalid under the reasoning of Ibanez. Credit Slips blogger Adam Levitin led an effort by other Credit Slips bloggers (Katie Porter, Chris Peterson, and John Pottow) to file an extraordinarily well-written amicus brief supporting the homeowner's position. The Mortgage Bankers Association (MBA) has filed an amicus brief supporting the purchaser at the foreclosure sale.

The MBA brief cites the usual reasons for supporting the purchaser at the foreclosure sale, namely that the system works best in the long run if the purchaser can be confident the sale will not be undone. That position is not clearly wrong. Many states have very strong protections for foreclosure sales for exactly this reason, as I have previously discussed. In the current context of widespread problems with the validity of foreclosure sales, are strong protections really the rule that the banking industry wants? As I write above, protecting the purchaser at the foreclosure sale would seem only to increase the bank's liability exposure.

Perhaps the industry is counting on the fact that dispossessed homeowners will not be as aware of their rights than jilted foreclosure sale purchasers? Perhaps the industry is counting on hiding behind finality rules or other ancient doctrines to prevent any recovery for wrongfully dispossessed homeowners? In these cases, the industry's current legal position would be rational, but let us hope that the exit plan for the mortgage servicing mess is not to leave wrongfully dispossessed homeowners without any compensation.

Comments

[Adam Levitin]

Bob, your description of our brief is WAY too kind.

[Bob Lawless]

No, it's not. The brief is clear, concise, direct, and devoid of legal-ese.

[Allan]

I would agree with Bob.

However, I would add that the brief is entertaining. The chaos theory of trying titles ...

[IAN]

So let's get this straight: an entity with no legal standing to foreclose, goes right ahead and does so anyway, evicting the homeowner, who can't find out who owns his mortgage, which never made it into the trust so it can't be located, who is then dunned by another 'creditor' who also believes that they owned the note in their non-mortgage backed securitization, and then the original foreclosing entity makes a 'credit bid' at the foreclosure sale even though they aren't the creditor, but the last (fabricated)assignment of mortgage in the land records was in favor of MERS who then transfers ownership of the mortgage and note to Fannie Mae for $0.00, as in Ibanez,even though MERS never holds any interest in the promissory note, just the mortgage or deed of trust. Geez,this is so straightforward and easy to follow- I don't see why everyone keeps writing about it.

[Ebenezer Scrooge]

I'm not a dirt lawyer, but wouldn't judicial foreclosure states be different from non-judicial foreclosure states?

There should be no need for the purchaser in a judicial foreclosure state to file a quiet title claim. The purchaser's title flows from the judicial acts in the foreclosure. Any frauds on the court are the problem of the fraudsters, not the purchaser. The fraud victim would have an in personam cause of action against the fraudster, but no in rem action against the purchaser.

The problems, I think would emerge in a non-judicial state, like Massachusetts.

[Ebenezer Scrooge]

I just read the briefs. wtf? If the MBA's position is adopted by the court, the entire title insurance industry becomes unnecessary.

It is worth noting that the law--especially the UCC--has long been tilting in the direction of protecting bona fide purchasers over original owners. Jim Rogers wrote a nice article a number of years ago on this (and other issues) in the Cardozo Law Review: "Negotiability, Property, and Identity." But real estate and art have strongly resisted this trend.

[Jim O'Connor]

From the MBA brief at page 24: "Assuming that U.S. Bank was the Holder of the
Rodriguez Note at the time of foreclosure in 2006, as can be inferred from the J u l y 1, 2005 date of the securitization trust and the knowledge that MERS did not hold the Note,” U.S. Rank held an equitable rightto assignment of the Mortgage."

Seems like quite the leap of faith.

[David Acosta]

In Florida a foreclosing plaintiff lacking in standing doesn't have to pay either Peter or Paul.

Mortgage companies filing foreclosure actions on shaky ground generally do not worry about their judgments or sales being set aside because they know a secret. They have a get-out-of-jail-card granted to them by our Florida Supreme Court.

The secret, and legal issue, may explain one reason why foreclosing plaintiffs and their attorneys have not been more diligent in bringing their claims against property owners with complete or even truthful pleadings and documentation. The secret and its history begins with precedent established during the great depression in Quinn Plumbing Co., Inc., v. New Miami Shores Corp., 100 Fla. 413, 129 So. 690, 692, 73 A.L.R. 600 and later affirmed by Bridier v. Burns, 148 Fla. 587, 4 So.2d 853 (Fla. 1941). In these two Supreme Court cases it was held that when real property, subject of a mortgage foreclosure judgment, is sold and that sale is later set aside, the mortgage company does not have to return the money paid by the purchaser. Instead, the court established that in vacating the sale the defendant property owner is restored to his position as title holder, effectively wiping out any deed created with the completion of the public sale, the rights of the mortgagee are then subrogated to the purchaser. In other words, the purchaser steps into the shoes of the mortgage company and now has all the rights the mortgagee had. The Bridier court stated “[S]uch purchaser becomes virtually an equitable assignee of the mortgage and of the debt it secured, with all rights of the original mortgagee, and becomes entitled to an action de novo for the foreclosure of such mortgage against all parties”. Accordingly, to recover money paid for the purchase of the property the purchaser now has to enforce the mortgage and note.

In the case leading to Bridier, Bridier v. Burns, 145 Fla. 642, 200 So. 355, a foreclosure judgment led to the sale of real property in Volusia County. The sale was timely challenged by the filing of objections backed by a proper supersedeas bond. The Clerk of the Court rejected the bond and relief was sought by petition seeking certiorari. In granting certiorari the court declared the deed resulting from the sale as null and void. On remand, however, the lower court denied the original property owner to be restored as title holder and that issue was brought before the appellate court as a petition for modification. In reversing the lower court, the opinion stated “[W]hen a foreclosure sale is set aside by an order of court for any fatal irregularity, the title acquired by the purchaser is thereby vacated. The law subrogates the purchaser at the void foreclosure sale to all the rights of the mortgagee in the indebtedness and the mortgage securing the payment of the same. The mortgage and final decree are not affected by the void sale.”

The Bridier court cited Quinn, where the court held “It is well established in this jurisdiction that the purchaser of mortgaged property at a foreclosure sale, when for any reason the foreclosure proceedings are imperfect or irregular, becomes subrogated to all the rights of the mortgagee in such mortgage and to the indebtedness that it secured. Such purchaser becomes virtually an equitable assignee of the mortgage and of the debt it secured, with all rights of the original mortgagee, and becomes entitled to an action de novo for the foreclosure of such mortgage against all parties holding junior encumbrances who were omitted as parties to the foreclosure proceedings under which the purchaser bought.” The holding in Bridier remains law in Florida as it was also cited in American Bankers Life Assur. Co. of Fla. v. Williams, Salomon, Kanner & Damian, 399 So.2d 365 (Fla. 3rd DCA 1981).

So what’s the big deal? For starters, there appears to be very little incentive for the foreclosing plaintiff to make its foreclosure complaint to be accurate or even truthful at the time of filing the action. Foreclosing plaintiffs realize that judges are always inclined to grant a foreclosure judgment. Why work any harder? There is also little risk associated with presenting shoddy or even fraudulent foreclosure pleadings because after the property is sold, and the plaintiff gets paid, the law established by Quinn and Bridier shield the mortgage company from having to forfeit the proceeds – assuming someone else has purchased and paid for the property. If the foreclosing plaintiff has acquired the property by bidding any portion of their judgment there is also little risk because the setting aside of the sale merely leads to restoring the property owner to his position as title holder prior to the completion of the vacated sale. No sanctions, attorneys’ fees or other form of risk – ever.

Additionally, if the foreclosing plaintiff has also taken possession of the property beyond the sale, even if set aside, Florida law even shields the mortgage company from having to relinquish possession to the mortgagor according to the holding in 601 West 26 Corp. v. Equity Capital Company, 178 So.2d 894 (Fla. 3rd DCA 1965)(holding it would not be proper under the law to require the mortgagee in possession to surrender the premises to the mortgagor (or to a receiver unless need for the later should appear) pending accounting and necessary resale. This is so because it is established that a mortgagee who acquires possession of property in good faith on a foreclosure sale which later is set aside holds as a ‘mortgagee in possession,’ entitled to retain the property until the mortgage debt is paid or redeemed, or the property foreclosed).

This might explain the mortgage industry’s mad dash to get foreclosure complaints through the courts as quickly as possible. The strategy has been effective and even aided by the concept of a “rocket-docket”. And, the foreclosure mills are all too eager to be paid to prop up the scheme. It’s easy money. For about $1,200 a case all we have to do is get the judgment – using a production line workflow. File the complaint, even if it is not accurate, complete or truthful; push it through and get the judgment; sell the property and collect the money. The buyer at auction is S-O-L if the sale is set aside – minor detail. Mortgage company client gets to keep the proceeds and the buyer has to work it out. Next case. One has to wonder how many times this precedent has been the subject of discussions, negotiations or letters exchanged between foreclosure property buyers and the foreclosing plaintiff’s attorney. It would be throwing good money after bad for the investor to try getting their purchase money back especially with precedent dating back to 1930. Investors would simply have to take it on the chin.

The foregoing suggests that any litigation flowing from vacated judgments or sales set aside, the fight over the property, the rights of the mortgagee and anything related to the proceedings leading up to the public auction and sale will be between the former property owner and the purchaser at the sale conducted by the Clerk of the Court. Such a deal. Can anyone say “caveat emptor”. In the end, this well-kept secret will continue to fuel the mortgage industry’s rush to displace homeowners even when there is no right to foreclose in the first place. After all, what’s the risk?

[Randy Hilst]

The Massachusetts Association of Bank Counsel made the same points Mr. Acosta makes in an amicus brief in Bevliacqua v. Rodriguez filed after Mr. Levitin's astoundingly well-written brief in that same case.

[Francis M.A. White]

Loved the line "to kosher otherwise illegitimate foreclosures" in Prof. Levitan et al.'s amicus brief. Wasn't aware that "kosher" was a verb or a legal term.

[M C G]

I am currently a first year law student in Mass. (for the next three weeks, anyway) and have been closely following the foreclosure chaos since the Ibanez Land Court decision.

Maybe this is cynical, but it seems like the Banks are taking this position in support of the title insurance companies. If they can successfully try title they will avoid having to indemnify these third-party purchasers (and then won't go after the foreclosing banks to recover their losses).

I am very impressed with Prof. Levitan et al.'s brief amicus brief and relieved that he will be there tomorrow for oral arguments.

[Marcy Koltun-Crilley]

Hawaii may be putting an end to this issue if this bill passes Tuesday.

SB 651

On the Hawaii State website SB651 SD2 HD2 CD1

In non-judicial foreclosures,
besides requiring a foreclosure Dispute Resolution process, it also requires the servicer, at least 14 days prior to foreclosure, to present among other things, “a copy of the promissory note… including any endorsements, allonges, amendments, or riders to the note evidencing the mortgage debt.”

It should be signed tomorrow but in Hawaii we are making sure it does not get changed in the wee hours of the night.

[TriumphinTX]

How about an educated consumer with equity and standing who has legally disputed the debt and the collection efforts and threats.

Waiting for a very large servicer with no standing to come on and take a try at it.