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Mortgage Documentation Issues Close to (My) Home

posted by Jean Braucher

The Arizona Supreme Court currently has under review a mortgage documentation case, Vasquez v. Saxon Mortgage, Inc. Just by chance, the Court was on its annual visit to the University of Arizona law college, where I teach, for the oral argument on Sept. 22. So of course I was in the audience at the argument, along with my students from our new Mortgage Clinic and a related course, called the Mortgage Crisis. We’ve been analyzing and debating the opposing arguments since.

Although Arizona law is at issue, the questions presented may have resonance elsewhere. It is always hazardous to guess what any group of justices is thinking from the questions they ask, but of course, that’s what court watchers do. So here is my take: it was palpable that the bubble over the justices’ heads during the argument read: “Fixing this mess isn’t our job. Talk to the legislature.” And the burden of argument seemed to be on the homeowner side, to show where explicitly it says in the state’s statutes that any documentation is needed to conduct a non-judicial foreclosure sale. The most vocal members of the court seemed to join the lender side of the argument. As the lawyer for the Arizona Attorney General, arguing as an amicus on the borrower side, astutely noted in response to one loaded question, “That’s the bankers’ argument.” Alas, no member of the court raised the concerns of homeowners in general.

All Arizona homeowners (and I’m one) should care about having a transparent system of real estate ownership, including liens. Lax documentation affects property rights and real estate values. Foreclosure sales are a significant portion of all sales in Arizona these days, in some areas exceeding non-distressed sales. When purported owners of security interests in real estate pursue forced sales without having good evidence of a right to do so, prices are likely to be further depressed. Buyers may hesitate to show up at a foreclosure sale to buy from someone without an interest of record, and in cases where the property may be worth more than the debt outstanding, the absence of such buyers matters. The creditor will only bid in the loan amount. Also, even a very small number of mistaken foreclosures should concern us. Since most foreclosure sales in Arizona are non-judicial, after only 90-days’notice, they can easily go forward even if mistaken. Under the statutory scheme, later recourse is difficult at best.

The particular case is complex. It came to the Arizona Supreme Court on certified questions and a statement of facts from the Bankruptcy Court for the District of Arizona. When Deutsche Bank sought to foreclose on Julia Vasquez’s property non-judicially, she filed in bankruptcy to assert a predatory lending claim, but was barred by the statute of limitations, and then she sought to modify her loan in chapter 13. Halfway through the briefing period in the Arizona Supreme Court case, the lenders fired their lawyer and brought in new ones along with an army of heavy-hitting amici, from the Mortgage Bankers Association on down. Also during this period, the National Consumer Law Center, an amicus for the borrower/homeowner, discovered that the stipulated “facts” about how Deutsche Bank, the trustee for a securitized pool of loans, got the note were contrary to provisions of the sales and servicing agreement filed with the Securities and Exchange Commission (SEC). It seems that if Deutsche Bank got the note directly from the originator (Saxon Mortgage), as it said it did, it didn’t follow the securitization agreement designed to protect the investors in the pool for which the bank was trustee.

But let’s cut to the chase of the questions before the Arizona Supreme Court, awaiting decision. The questions boil down to: What does Arizona law require in the way of documentation to foreclose under a deed of trust (DOT), a type of real estate security interest, in a non-judicial sale? And why should anyone care? The Bankruptcy Court’s statement of facts includes that Deutsche Bank was assigned the note, but nothing is said about whether the note is a negotiable instrument. Indeed, use of the word “assigned” rather than “negotiated” suggests a non-negotiable instrument. The note, a copy of which is attached to the certified questions, provides for late fees, which may mean the note is not negotiable under Section 3-104(a) of the Uniform Commercial Code, which requires an “unconditional” promise, not a promise dependent in part on an event that may or may not occur. If the note isn’t negotiable, mere possession of it doesn’t by itself give a right to payment. Proof of the chain of assignments would be relevant to the question who currently owns the contract right to payment. This may be why the sale and servicing agreement (SSA) for this securitization, filed with the SEC, requires delivery to the investment pool’s trustee, Deutsche Bank, of “the original Mortgage note . . . with all intervening endorsements showing a complete chain of endorsement from the originator” as well as delivery of “each interim recorded assignment of such Mortgage, or a copy of each such interim recorded assignment of Mortgage. . . .” (Pp. 37-38)

As noted above, the loan was originated by Saxon Mortgage, and that happened back in 2005. There is no chain of endorsements on the note, and a written assignment of the deed of trust was executed and recorded only after an initiation of a foreclosure sale in 2008, with a purported retroactive effective date, to a few months earlier in 2008 (but long after a copy of a recorded assignment was supposed to be in the possession of the securitized trust, that is in 2005, as provided in the SSA, which contemplated transfers from Saxon Mortgage through at least one other Saxon entity, Saxon Asset Securities Company, to the trust, with Deutsche Bank as trustee, in order to make the trust bankruptcy-remote and the investments under it eligible for pass-through tax treatment).

In addition to whether the note is negotiable, other issues in the case are whether the security interest under the deed of trust was timely assigned or recorded. The Arizona deed of trust (DOT) statute, in Arizona Revised Statutes (A.R.S.) section 33-817, includes a provision that the security follows the contract obligation. However, the lack of clear proof of who owns the obligation (that is, through what chain of transfers), if not a negotiable instrument, and the belated effort in 2008 to assign the DOT directly from the originator to Deutsche Bank and to record Deutsche Bank’s DOT nterest at that time, both contrary to the SSA, raise questions about whether the note and security were separated and thus about who, if anyone, had rights to foreclose under the DOT. If no one did, Deutsche Bank might have to use a judicial foreclosure and go into court and prove its interest before trying to sell a home.

Because Deutsche Bank did not record an assignment of the DOT before it started the process of non-judicial foreclosure, there is an issue about compliance with the Arizona recording statute. The first sentence of A.R.S. section 33-411.01 requires that any document evidencing the transfer of “any legal or equitable interest” in real estate “shall be recorded by the transferor. . . within sixty days of transfer.” If Deutsche Bank got the interest in the DOT by virtue of assignment of a note in 2005, the assignment should have been recorded in the county records by 60 days later, not in 2008. A second sentence provides that in lieu of recording, “the transferor shall indemnify the transferee in any action in which the transferee’s interest in such property is at issue . . .,” a provision that is inapplicable as between a transferor and someone holding a prior interest in the property (that is the trustor/borrower, with its equitable ownership interest).

The recording statute goes on to deal with the effectiveness of unrecorded instruments of conveyance, explicitly mentioning deeds of trust and providing that unrecorded conveyances “shall be void” as to creditors and subsequent purchasers for value and without notice. A.R.S. 33-412.A. (And A.R.S. 33-818 repeats the importance of recording “assignment of a beneficial interest under a trust deed” as against subsequent purchasers for value.) So non-recording of assignment of an interest under a DOT, as in this case, certainly could dampen enthusiasm for purchasing at foreclosure, driving down prices. Buyers should be suspicious of a DOT sale initiated by someone not of record, because there might be an intervening claimant with priority.

In addition, A.R.S. 33-412.B provides that unrecorded instruments of conveyance “as between the parties and their heirs” shall be “valid and binding.” Notably missing from that provision is any reference to assigns. At the oral argument, one of the Arizona justices read this provision to the bankers’ attorney as though it supported that side of the argument, but of course Deutsche Bank and the borrower, Vasquez, were not both parties to an instrument. Deutsche Bank did not appear on the DOT (only Saxon Mortgage did). The formulation “parties, their assigns and heirs” or the like is common in the law; the pointed omission of assigns in the recording statute provision on the validity of unrecorded interests implies a lack of validity as between an assignee and the trustor. (The borrower, Vasquez, was the trustor who signed the DOT making Saxon Mortgage beneficiary; and the DOT was recorded in that form, with no further recording of any transfers prior to initiation of the foreclosure.)

At a minimum, the statute is ambiguous, saying that an unrecorded DOT conveyance is “void” against a good faith purchaser for value and “valid and binding” between immediate parties and their heirs. So where does the statute come down as between a trustor/borrower and an assignee from the beneficiary? The statute does not say either that the unrecorded remote assignee has a valid interest or an invalid interest, although it implies invalidity in the absence of recording. In these circumstances, it is open to the Court to interpret the statute according to the implication of invalidity. The recording statutes pre-date securitization, and the SSA here strongly suggests that the lender complex involved in this loan thought it necessary to document transfers of the note with a chain of endorsements and transfers of the DOT interest by recorded assignments. Securitizers could have complied with the law (as apparently intended under the SSA), or, if they wanted to be free not to provide documentation, they should have gotten statutory changes clearly saying so before proceeding with their new model. Instead, Deutsche Bank acted as though it knew the documentation was messed up, filing a recorded assignment with a purported retroactive effective date in 2008, only after initiating a foreclosure.

Now to perhaps the key question: does proper documentation matter? As I have already suggested, all homeowners in Arizona should care that real estate values not be dragged down by lenders’ failure to document who owns a loan, holds a security interest in a home, and thus who has a right to foreclose upon default. Deutsche Bank did not follow its own roadmap, laid out in the SSA filed with the SEC, for the documentation of the transaction. It was supposed to get delivery of both the note, with the chain of ownership established by endorsements, and a copy of a recorded assignment of the DOT. When purported owners of loans cannot crisply show that they are entitled to enforce, this will discourage potential buyers at DOT sales, with ripple effects for all homeowners. This is particularly true with the volume of distressed sales occurring during the current mortgage crisis, brought on by a spree of extreme risk-taking and now compounded by sloppy documentation (and failure to make modification deals that would be win-win, compared to foreclosure). With no competitors at a DOT sale, purported owners of a loan can buy with a credit bid at the loan amount; there is no reason to bid more even when the home might be worth more.

We should also care about mistaken foreclosures, which are a risk with a quick non-judicial process, and it would be unfortunate if the Arizona Supreme Court blesses sloppy procedures that can lead to them. The dimensions of that problem have not been studied, and we cannot assume it away.

Finally, borrowers have an interest in being able to find out who owns their loans. Servicers all too frequently refuse to say but also say they lack authority and refuse to approve modifications that would improve returns to investors while providing relief to borrowers. Having a placeholder in the real estate records makes it hard or even impossible to find out whom to approach about a modification. In 2010, Arizona’s legislature added a provision to the DOT statute (A.R.S. 33-808.01.A) requiring “the lender” (undefined) on a residential loan to contact the borrower at least 30 days before notice of sale to explore options to avoid foreclosure, showing a legislative interest in more workouts. Interpreting the recording statute to make assignees have to be of record, as implied by the Arizona recording statute, would make the entire system more coherent.


Would the AZSC be so reluctant to require proof if it was the homeowner who filed his/her own Deed of Reconveyance? Because I don't see much difference between that and what the banks are doing. Aren't both subject to the same rules of evidence when challenged? Yes, I understand burdens may be on different parties, but once a homeowner makes a threshold showing that the foreclosing entity doesn't actually possesses the interest it's attempting to enforce, isn't that entity bound by the same rules that bind the rest of us? Am I nuts?

Disclosure: I have not read the briefs nor have I listened to oral argument, so I may be improperly framing the issues that are actually before the AZSC in this case.

Well... Unfortunately, Pima county doesn't give access to the actual docs. But, since this is a 2005 Trust with a closing date of 9/29/05 the window of substitution most likely closed 9/29/07. If any AoMs miraculously appear after that showing xfer into the Saxon Asset Securities Trust 2005-3 trust they are most likely fraudulent.

You're also assuming the foreclosing seller credit-bids at the sale in the amount of the debt. Here in Michigan, for about the last three to five years, I've seen many foreclosure sales by advertisement (contractual power of sale), where the lender is the only bidder, and bids in an amount substantially below the debt owed, then sues for the deficiency. The next step is bankruptcy.

For anyone who wants to read the sales and servicing agreement (SSA) for this securitization, showing the multiple parties involved and the provisions both for chain of endorsements on the note and recorded assignments of the DOT (see pp. 37-38), it is on the SEC site at: http://www.sec.gov/Archives/edgar/data/1340329/000116231805000859/exhibit991.htm

As to Greg's point, Arizona has an anti-deficiency provision in the DOT statute, but it only applies to "property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling," so some properties are subject to the risk he mentions.

All of the arguments being bandied about are nothing but STALL tactics. Making these types of arguments will never get the homeowner any money or their house free & clear.

Homeowners need to understand a promissory note and the deed of trust are nothing more, nothing less a contract, which needs to be examined for contract breaches and/or tortuous conduct. For an example we find appraisal fraud in nine out of every ten mortgages we've examined in AZ.

Mortgage Fraud Examiners recently exposed these useless arguments in our latest press release: "Beware of the Latest Foreclosure Rescue Scam--"Pretender Defenders" http://www.mmdnewswire.com/foreclosure-rescue-scam

I forgot to ask when we spoke awhile back, Mr. Bradford, but proving an entity lacks standing to foreclose or has any title or interest in a promissory note and, therefore, should not be considered real parties to the contract is considered a "stall" tactic in your book?

If the contract and/or the intervening assignments are proven invalid, would not appraisal fraud simply be that much more icing?

Yes Mr. Dillon, it is a stall tactic, it is also a valid defense, the two are not mutually exclusive. The fundamental issue is whether the borrower has made the payments on the property required by the note supported by the mortgage/deed of trust. If they have not been making the payments, there is someone out there with the right to enforce the note on which the borrowers have not been paying. Claiming the party in court to foreclose is not the appropriate party to enforce the note is a valid and important defense, and it may save your house in this case. But unless the borrow is alleging that they have been paying and they are current on their note, at some point the "real party in interest" will show up to take the house.

Bryan, I submit that, before you can address whether a borrower has made payments on a note, you need to determine the owner of the note i.e. to whom the payments should be/have been made and that THAT is even MORE fundamental. If/when the real party in interest shows up and can prove such, only then can you determine whether a borrower is current in their payments.

If a trust can produce a valid, intact, unbroken chain of title of a note from originator to trust and properly document all of the non-recourse sales that took place to get it from A to D then, barring any additional issues, they have successfully proven that they are the proper note holder and have standing, title and interest.

However, as far as I know, you can't sell a note from originator (or MERS) directly into a trust, it can't be done beyond the window of substitution, and it certainly can't be effectively back-dated. So if the AoM/DoT wasn't properly created at the time that the promissory note in question was securitized, then you may very well have a fraudulent AoM/DoT on your hands at which point, I believe that any entity attempting to prove ownership of a note has sufficiently hung themselves.

Bryan's point about the "real party in interest" seems reasonable, but if there is a securitization fail as in this case, wouldn't the "real party in interest" be the original lender (who failed to properly convey the mortgage to the trust)?

A good number of these original lenders were banks or mortgage companies that have since disappeared.

In such cases, who should have the right to foreclose for the homeowners lapse in payment? Why should draconian foreclosure be the privileged solution for such problems?

The other issue is state law on who can enforce a note. In Oklahoma, all foreclosures are judicial and notes are negotiable instruments. As a general rule the person who holds the “blue-ink” original of the note is entitled to enforce it and any associated security agreement/mortgage, even if the mortgage is still in the name of the original lender. In essence, the mortgage follows the note, even to a wrongful holder (if the wrongful holder enforces, the rightful holder then has a legal remedy against the interloper.)

In my experience, (which has been on both sides, and as a neutral party) this type of law leads to the following question by the court, (state or bankruptcy) "Has the Debtor actually made his/her payments on the house, TO ANYBODY?" if the answer is no, judges seem to reason (either explicitly or implicitly) that the Debtor is in default to somebody, and the issue of who actually owns the note and is thus entitled to the proceeds of the foreclosure is an issue to be litigated between the parties in the chain of title if there is some problem there.

Just my personal opinion, this is a result of a deep-seated puritan abhorrence of allowing anyone a "free ride" if they haven't been paying for their house. I’m not saying that’s right, just that it is a common sentiment in all of the courts I have been in.

As to Patrick's question, I think every state has something in their corporate wind-up statutes/regulations that would indicate who the rightful party to "found" assets is. Regardless, it should be possible to identify the successor parties to the original makers if that were necessary. Though given the state of mortgage originators, some of the successor parties are likely to be receivers, bankruptcy trustees, and federal regulators like the FDIC.

"Just my personal opinion, this is a result of a deep-seated puritan abhorrence of allowing anyone a "free ride" if they haven't been paying for their house. I’m not saying that’s right, just that it is a common sentiment in all of the courts I have been in."

I don't necessarily disagree, Bryan. A fair number of foreclosures ARE legitimate in the sense that borrowers could not afford payments and defaulted. The issue is that, in large part, the *law* simply is not being followed because that *sentiment* is overruling. It simply is not good enough that "you owe SOMEbody the money" because you mortgaged the property. Until/unless SOMEbody can prove that they are owed the debt, no one has standing to collect on it.

I'm reminded of the story of the reporter that was curious about a note the Wells Fargo supposedly could not find for a foreclosure case. Note holder was losing in court and had admitted they could not produce the original, if memory serves. Reporter went looking in the warehouse and, lo and behold, found the original note. Had it not been for that reporter, the borrower most likely would have won the case.

With regard to "the mortgage following the note" that, in essence, is the entire argument against MERS and bifurcation of note & mortgage.

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