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Mar
13

Where’s the Note and Who’s the Holder

By | Bankruptcy, Foreclosure Defense Research

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This post is taken from an article written by the Hon. Samuel Bufford (CA Bankruptcy Judge) and R. Glen Ayers in coordination with the American Bankruptcy Institute.

You can view the FULL REPORT HERE.

 WHERE’S THE NOTE, WHO’S THE HOLDER: ENFORCEMENT OF PROMISSORY NOTE SECURED BY REAL ESTATE

HON. SAMUEL L. BUFFORD
UNITED STATES BANKRUPTCY JUDGE
CENTRAL DISTRICT OF CALIFORNIA
LOS ANGELES, CALIFORNIA

(FORMERLY HON.) R. GLEN AYERS
LANGLEY & BANACK
SAN ANTONIO, TEXAS

AMERICAN BANKRUPTCY INSTITUTE
APRIL 3, 2009
WASHINGTON, D.C.

WHERE’S THE NOTE, WHO’S THE HOLDER

INTRODUCTION

In an era where a very large portion of mortgage obligations have been securitized, by assignment to a trust indenture trustee, with the resulting pool of assets being then sold as mortgage backed securities, foreclosure becomes an interesting exercise, particularly where judicial process is involved. We are all familiar with the securitization process. The steps, if not the process, is simple. A borrower goes to a mortgage lender. The lender finances the purchase of real estate. The borrower signs a note and mortgage or deed of trust. The original lender sells the note and assigns the mortgage to an entity that securitizes the note by combining the note with hundreds or thousands of similar obligation to create a package of mortgage backed securities, which are then sold to investors.

Unfortunately, unless you represent borrowers, the vast flow of notes into the maw of the securitization industry meant that a lot of mistakes were made. When the borrower defaults, the party seeking to enforce the obligation and foreclose on the underlying collateral sometimes cannot find the note. A lawyer sophisticated in this area has speculated to one of the authors that perhaps a third of the notes “securitized” have been lost or destroyed. The cases we are going to look at reflect the stark fact that the unnamed source’s speculation may be well-founded.

UCC SECTION 3-309

If the issue were as simple as a missing note, UCC §3-309 would provide a simple solution. A person entitled to enforce an instrument which has been lost, destroyed or stolen may enforce the instrument. If the court is concerned that some third party may show up and attempt to enforce the instrument against the payee, it may order adequate protection. But, and however, a person seeking to enforce a missing instrument must be a person entitled to enforce the instrument, and that person must prove the instrument’s terms and that person’s right to enforce the instrument. §3-309 (a)(1) & (b).

WHO’S THE HOLDER

Enforcement of a note always requires that the person seeking to collect show that it is the holder. A holder is an entity that has acquired the note either as the original payor or transfer by endorsement of order paper or physical possession of bearer paper. These requirements are set out in Article 3 of the Uniform Commercial Code, which has been adopted in every state, including Louisiana, and in the District of Columbia. Even in bankruptcy proceedings, State substantive law controls the rights of note and lien holders, as the Supreme Court pointed out almost forty (40) years ago in United States v. Butner, 440 U.S. 48, 54-55 (1979).

However, as Judge Bufford has recently illustrated, in one of the cases discussed below, in the bankruptcy and other federal courts, procedure is governed by the Federal Rules of Bankruptcy and Civil Procedure. And, procedure may just have an impact on the issue of “who,” because, if the holder is unknown, pleading and standing issues arise.

BRIEF REVIEW OF UCC PROVISIONS

Article 3 governs negotiable instruments – it defines what a negotiable instrument is and defines how ownership of those pieces of paper is transferred. For the precise definition, see § 3-104(a) (“an unconditional promise or order to pay a fixed amount of money, with or without interest . . . .”) The instrument may be either payable to order or bearer and payable on demand or at a definite time, with or without interest.

Ordinary negotiable instruments include notes and drafts (a check is a draft drawn on a bank). See § 3-104(e).

Negotiable paper is transferred from the original payor by negotiation. §3-301. “Order paper” must be endorsed; bearer paper need only be delivered. §3-305. However, in either case, for the note to be enforced, the person who asserts the status of the holder must be in possession of the instrument. See UCC § 1-201 (20) and comments.

The original and subsequent transferees are referred to as holders. Holders who take with no notice of defect or default are called “holders in due course,” and take free of many defenses. See §§ 3-305(b).

The UCC says that a payment to a party “entitled to enforce the instrument” is sufficient to extinguish the obligation of the person obligated on the instrument. Clearly, then, only a holder – a person in possession of a note endorsed to it or a holder of bearer paper – may seek satisfaction or enforce rights in collateral such as real estate.

NOTE: Those of us who went through the bank and savings and loan collapse of the 1980′s are familiar with these problems. The FDIC/FSLIC/RTC sold millions of notes secured and unsecured, in bulk transactions. Some notes could not be found and enforcement sometimes became a problem. Of course, sometimes we are forced to repeat history. For a recent FDIC case, see Liberty Savings Bank v. Redus, 2009 WL 41857 (Ohio App. 8 Dist.), January 8, 2009.

THE RULES

Judge Bufford addressed the rules issue this past year. See In re Hwang, 396 B.R. 757 (Bankr. C. D. Cal. 2008). First, there are the pleading problems that arise when the holder of the note is unknown. Typically, the issue will arise in a motion for relief from stay in a bankruptcy proceeding.

According F.R.Civ. Pro. 17, “[a]n action must be prosecuted in the name of the real party in interest.” This rule is incorporated into the rules governing bankruptcy procedure in several ways. As Judge Bufford has pointed out, for example, in a motion for relief from stay, filed under F.R.Bankr.Pro. 4001 is a contested matter, governed by F. R. Bankr. P. 9014, which makes F.R. Bankr. Pro. 7017 applicable to such motions. F.R. Bankr. P. 7017 is, of course, a restatement of F. R. Civ. P. 17. In re Hwang, 396 B.R. at 766. The real party in interest in a federal action to enforce a note, whether in bankruptcy court or federal district court, is the owner of a note. (In securitization transactions, this would be the trustee for the “certificate holders.”) When the actual holder of the note is unknown, it is impossible – not difficult but impossible – to plead a cause of action in a federal court (unless the movant simply lies about the ownership of the note). Unless the name of the actual note holder can be stated, the very pleadings are defective.

STANDING

Often, the servicing agent for the loan will appear to enforce the note. Assume that the servicing agent states that it is the authorized agent of the note holder, which is “Trust Number 99.” The servicing agent is certainly a party in interest, since a party in interest in a bankruptcy court is a very broad term or concept. See, e.g., Greer v. O’Dell, 305 F.3d 1297, 1302-03 (11th Cir. 2002). However, the servicing agent may not have standing: “Federal Courts have only the power authorized by Article III of the Constitutions and the statutes enacted by Congress pursuant thereto. … [A] plaintiff must have Constitutional standing in order for a federal court to have jurisdiction.” In re Foreclosure Cases, 521 F.Supp. 3d 650, 653 (S.D. Ohio, 2007) (citations omitted).

But, the servicing agent does not have standing, for only a person who is the holder of the note has standing to enforce the note. See, e.g., In re Hwang, 2008 WL 4899273 at 8.

The servicing agent may have standing if acting as an agent for the holder, assuming that the agent can both show agency status and that the principle is the holder. See, e.g., In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008) at 520.

A BRIEF ASIDE: WHO IS MERS?

For those of you who are not familiar with the entity known as MERS, a frequent participant in these foreclosure proceedings:

MERS is the “Mortgage Electronic Registration System, Inc. “MERS is a mortgage banking ‘utility’ that registers mortgage loans in a book entry system so that … real estate loans can be bought, sold and securitized, just like Wall Street’s book entry utility for stocks and bonds is the Depository Trust and Clearinghouse.” Bastian, “Foreclosure Forms”, State. Bar of Texas 17th Annual Advanced Real Estate Drafting Course, March 9-10, 2007, Dallas, Texas. MERS is enormous. It originates thousands of loans daily and is the mortgagee of record for at least 40 million mortgages and other security documents. Id.

MERS acts as agent for the owner of the note. Its authority to act should be shown by an agency agreement. Of course, if the owner is unknown, MERS cannot show that it is an authorized agent of the owner.

RULES OF EVIDENCE – A PRACTICAL PROBLEM

This structure also possesses practical evidentiary problems where the party asserting a right to foreclose must be able to show a default. Once again, Judge Bufford has addressed this issue. At In re Vargas, 396 B.R. at 517-19. Judge Bufford made a finding that the witness called to testify as to debt and default was incompetent. All the witness could testify was that he had looked at the MERS computerized records. The witness was unable to satisfy the requirements of the Federal Rules of Evidence, particularly Rule 803, as applied to computerized records in the Ninth Circuit. See id. at 517-20. The low level employee could really only testify that the MERS screen shot he reviewed reflected a default. That really is not much in the way of evidence, and not nearly enough to get around the hearsay rule.

FORECLOSURE OR RELIEF FROM STAY

In a foreclosure proceeding in a judicial foreclosure state, or a request for injunctive relief in a non-judicial foreclosure state, or in a motion for relief proceeding in a bankruptcy court, the courts are dealing with and writing about the problems very frequently.

In many if not almost all cases, the party seeking to exercise the rights of the creditor will be a servicing company. Servicing companies will be asserting the rights of their alleged principal, the note holder, which is, again, often going to be a trustee for a securitization package. The mortgage holder or beneficiary under the deed of trust will, again, very often be MERS.

Even before reaching the practical problem of debt and default, mentioned above, the moving party must show that it holds the note or (1) that it is an agent of the holder and that (2) the holder remains the holder. In addition, the owner of the note, if different from the holder, must join in the motion.

Some states, like Texas, have passed statutes that allow servicing companies to act in foreclosure proceedings as a statutorily recognized agent of the noteholder. See, e.g., Tex. Prop. Code §51.0001. However, that statute refers to the servicer as the last entity to whom the debtor has been instructed to make payments. This status is certainly open to challenge. The statute certainly provides nothing more than prima facie evidence of the ability of the servicer to act. If challenged, the servicing agent must show that the last entity to communicate instructions to the debtor is still the holder of the note. See, e.g., HSBC Bank, N.A. v. Valentin, 2l N.Y. Misc. 3d 1123(A), 2008 WL 4764816 (Table) (N.Y. Sup.), Nov. 3, 2008. In addition, such a statute does not control in federal court where Fed. R. Civ. P. 17 and 19 (and Fed. R. Bankr. P. 7017 and 7019) apply.

SOME RECENT CASE LAW

These cases are arranged by state, for no particular reason.

Massachusetts

In re Schwartz, 366 B.R.265 (Bankr. D. Mass. 2007)

Schwartz concerns a Motion for Relief to pursue an eviction. Movant asserted that the property had been foreclosed upon prior to the date of the bankruptcy petition. The pro se debtor asserted that the Movant was required to show that it had authority to conduct the sale. Movant, and “the party which appears to be the current mortgagee…” provided documents for the court to review, but did not ask for an evidentiary hearing. Judge Rosenthal sifted through the documents and found that the Movant and the current mortgagee had failed to prove that the foreclosure was properly conducted.

Specifically, Judge Rosenthal found that there was no evidence of a proper assignment of the mortgage prior to foreclosure. However, at footnote 5, Id. at 268, the Court also finds that there is no evidence that the note itself was assigned and no evidence as to who the current holder might be.

Nosek v. Ameriquest Mortgage Company (In re Nosek), 286 Br. 374 (Bankr D Mass. 2008).

Almost a year to the day after Schwartz was signed, Judge Rosenthal issued a second opinion. This is an opinion on an order to show cause. Judge Rosenthal specifically found that, although the note and mortgage involved in the case had been transferred from the originator to another party within five days of closing, during the five years in which the chapter 13 proceeding was pending, the note and mortgage and associated claims had been prosecuted by Ameriquest which has represented itself to be the holder of the note and the mortgage. Not until September of 2007 did Ameriquest notify the Court that it was merely the servicer. In fact, only after the chapter 13 bankruptcy had been pending for about three years was there even an assignment of the servicing rights. Id. at 378.

Because these misrepresentations were not simple mistakes: as the Court has noted on more than one occasion, those parties who do not hold the note of mortgage do not service the mortgage do not have standing to pursue motions for leave or other actions arising form the mortgage obligation. Id at 380.

As a result, the Court sanctioned the local law firm that had been prosecuting the claim $25,000. It sanctioned a partner at that firm an additional $25,000. Then the Court sanctioned the national law firm involved $100,000 and ultimately sanctioned Wells Fargo $250,000. Id. at 382-386.

In re Hayes, 393 B.R. 259 (Bankr. D. Mass. 2008).

Like Judge Rosenthal, Judge Feeney has attacked the problem of standing and authority head on. She has also held that standing must be established before either a claim can be allowed or a motion for relief be granted.

Ohio

In re Foreclosure Cases, 521 F.Supp. 2d (S.D. Ohio 2007).

Perhaps the District Court’s orders in the foreclosure cases in Ohio have received the most press of any of these opinions. Relying almost exclusively on standing, the Judge Rose has determined that a foreclosing party must show standing. “[I]n a foreclosure action, the plaintiff must show that it is the holder of the note and the mortgage at the time that the complaint was filed.” Id. at 653.

Judge Rose instructed the parties involved that the willful failure of the movants to comply with the general orders of the Court would in the future result in immediate dismissal of foreclosure actions.

Deutsche Bank Nat’l Trust Co. v. Steele, 2008 WL 111227 (S.D. Ohio) January 8, 2008.

In Steele, Judge Abel followed the lead of Judge Rose and found that Deutsche Bank had filed evidence in support of its motion for default judgment indicating that MERS was the mortgage holder. There was not sufficient evidence to support the claim that Deutsche Bank was the owner and holder of the note as of that date. Following In re Foreclosure Cases, 2007 WL 456586, the Court held that summary judgment would be denied “until such time as Deutsche Bank was able to offer evidence showing, by a preponderance of evidence, that it owned the note and mortgage when the complaint was filed.” 2008 WL 111227 at 2. Deutsche Bank was given twenty-one days to comply. Id.

Illinois

U.S. Bank, N.A. v. Cook, 2009 WL 35286 (N.D. Ill. January 6, 2009).

Not all federal district judges are as concerned with the issues surrounding the transfer of notes and mortgages. Cook is a very pro lender case and, in an order granting a motion for summary judgment, the Court found that Cook had shown no “countervailing evidence to create a genuine issue of facts.” Id. at 3. In fact, a review of the evidence submitted by U.S. Bank showed only that it was the alleged trustee of the securitization pool. U.S. Bank relied exclusively on the “pooling and serving agreement” to show that it was the holder of the note. Id.

Under UCC Article 3, the evidence presented in Cook was clearly insufficient.

New York

HSBC Bank USA, N.A. v. Valentin, 21 Misc. 3D 1124(A), 2008 WL 4764816 (Table) (N.Y. Sup.) November 3, 2008. In Valentin, the New York court found that, even though given an opportunity to, HSBC did not show the ownership of debt and mortgage. The complaint was dismissed with prejudice and the “notice of pendency” against the property was canceled.

Note that the Valentin case does not involve some sort of ambush. The Court gave every HSBC every opportunity to cure the defects the Court perceived in the pleadings.

California

In re Vargas, 396 B.R. 511 (Bankr. C.D. Cal. 2008)

and

In re Hwang, 396 B.R. 757 (Bankr. C.D. Cal. 2008)

These two opinions by Judge Bufford have been discussed above. Judge Bufford carefully explores the related issues of standing and ownership under both federal and California law.

Texas

In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008)

and

In re Gilbreath, 395 B.R. 356 (Bankr. S.D. Tex. 2008)

These two recent opinions by Judge Jeff Bohm are not really on point, but illustrate another thread of cases running through the issues of motions for relief from stay in bankruptcy court and the sloppiness of loan servicing agencies. Both of these cases involve motions for relief that were not based upon fact but upon mistakes by servicing agencies. Both opinions deal with the issue of sanctions and, put simply, both cases illustrate that Judge Bohm (and perhaps other members of the bankruptcy bench in the Southern District of Texas) are going to be very strict about motions for relief in consumer cases.

SUMMARY

The cases cited illustrate enormous problems in the loan servicing industry. These problems arise in the context of securitization and illustrate the difficulty of determining the name of the holder, the assignee of the mortgage, and the parties with both the legal right under Article 3 and the standing under the Constitution to enforce notes, whether in state court or federal court.

Interestingly, with the exception of Judge Bufford and a few other judges, there has been less than adequate focus upon the UCC title issues. The next round of cases may and should focus upon the title to debt instrument. The person seeking to enforce the note must show that:

(1) It is the holder of this note original by transfer, with all necessary rounds;
(2) It had possession of the note before it was lost;
(3) If it can show that title to the note runs to it, but the original is lost or destroyed, the holder must be prepared to post a bond;
(4) If the person seeking to enforce is an agent, it must show its agency status and that its principal is the holder of the note (and meets the above requirements).

Then, and only then, do the issues of evidence of debt and default and assignment of mortgage rights become relevant.

Jan
10

Banks, Bailout and Billions – The ins & outs of "Securitization"

By | Bank/Lender Failures, Corporate Greed & Corruption, Foreclosure Defense Research, Government, Homeowner Resources

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Ok, so let’s break this down a bit because the pundits and the politicians are each spinning this in their own direction and one has to have some serious fog lights to eat through the “haze” that these guys spin in. Throw in the fact that no one is really exposing the REAL issues here to see if the actual bailout plan will truly deal with the real issues.

First, we need something to be done. Let’s get past this. It is true our entire financial sector is going through the dry heaves here as there’s not much more it can throw up. The entire financial system is starting to seize up and the constant coverage on these issues is pumping fear into the system and the heart of every American and even the foreign markets. So, if we can all agree that all of us losing our pensions, retirement funds, stocks, money market funds, and more home value is not a good thing then we can move on to what the solution should look like fundamentally because we do need a big solution to right the ship.

To start, one must have a basic understanding of the root of the problem. Yep, you guessed it, the mortgage meltdown which has led to the foreclosure crisis. Financial institutions, mainly the largest banks and investment banks on Wall Street are essentially holding large pools of residential and commercial loans (notes and corresponding mortgages) that are, for all intents and purposes, worthless – right now. Worthless because they cannot find a buyer for these notes (loans) with the current state of affairs. We all know that these “assets” are worth something and probably a lot more than just “something” BUT, if you can’t find a buyer then it’s really hard to place any real value on them currently. The assets are literally “backed” by mortgages and, ultimately, the real estate they’re tied to. We know the homes are worth something. That’s obvious.

Without getting into a lot of complicated explanations, this is the root of the problem. Now, you need to understand the process of the mortgage market because this is EXTREMELY important in the entire crisis. Almost 100% of all residential and commercial loans made since the late ’90′s were made by a “bank” or “lender.” Almost immediately after closing (and often before closing), these lenders sold these loans in “pools” to an “aggregator” of loans. Ok, a little glossary break down here. A pool of loans is two or more loans combined into a package. Smaller lenders might sell a package or pool of 50-100 loans to larger lender. The larger lender might buy 30 pools of 100 loans from 30 different smaller lenders. Now they have 3000 loans that they pool together into one big pool. You with me so far???

Ok, next here’s what happens… a larger bank (Chase, Countrywide, Wachovia, GMAC, Homecomings Financial, Fremont, Option One, etc) then sells these 3000 loans to another entity. This “other” entity is often a subsidiary but sometimes not and this other entity is a “Sponsor” and usually a “Master Servicer” entity. This means that this company is going to be the servicer of these loans. A servicer is the company that is going to collect the monthly payments, manage the escrow accounts, etc. Now, most people think that this is who they owe the money to for the loan they have because they received that notice about 60 days after closing notifying them that the “Servicing” of their loans was being transferred to XYZ Company. Because they make the payments to this servicer they automatically assume that this is now their “lender.” Remember when I just said that these large pools are usually sold to subsidiaries of the large banks? Well, it’s no wonder that these Master Servicing companies have highly similar names. What’s the difference between “America’s Wholesale Lender” and “Countrywide Home Loans, Inc.?” Well, a lot and very little. Both do business as “Countrywide.” One is a lender and one is a Master Servicer. Confusing? Yes. Purposefully? Yes. If there is confusion in Wall Street, it’s on purpose because these guys aren’t “stupid.” Stay with me here…

So here’s what happens to this pool of 3000 loans. The Master Servicer then sells these same 3000 loans to a “Depositor.” What really and actually happens is a bona fide sale of all of these loans. Now, here’s an EXTREMELY important point, pay attention right here. When a “loan” is sold, what is really sold is the “Note.” The Note is sometimes called the “Promissory Note.” The Note is the only and real evidence of the debt. The ORIGINAL Note that is. That’s why you’ll sometimes here this called “selling the paper.” The paper debt, the NOTE, is the debt and has an actual value because you, the homeowner and borrower, have signed that note with your signature and pledged (promised) to pay that debt back. The MORTGAGE is what you give to the original lender (and any subsequent purchase of the Note) as “security” in case you don’t pay the debt back. The mortgage gives the owner of that Note the security (the home or property) and thus the right to foreclose if you don’t pay it back.

Now, this is important… the Mortgage doesn’t give just <i>anyone</i> the right to foreclose, It gives the actual OWNER of the Note the right to foreclose. The owner of the actual and original Note. Not a copy of the Note but the ORIGINAL note. This is a very important point that must be understood and grasped, by everyone, including the US Government. I think that it’s highly possible that this bailout package might be relieving financial institutions of defaulted debt even thought that same institution may not even have the actual Notes to evidence the defaulted debt. And, is it really defaulted? How do we know that these entities weren’t already paid for these Notes? It depends on exactly WHO they are bailing out but if it’s any entity other than the Trust, those entities have already been paid for the Notes!

Back to this pool of 3000 loans… so the Master Servicer has sold the 3000 loans to a Depositor for about 102.5% of the face value of these Notes. When a sale of these 3000 loans is made, the Depositor literally pays the seller of the loans a lump sum of money and the Master Servicer in turn hands over the Notes for that payment of money. And then this same Depositor sells the 3000 loans to a Trust and “deposits” (hence the name “Depositor”) these Notes into the Trust. The Trust pays the Depositor a lump sum of money and in return receives the Notes. The Master Servicer or “Servicer” gives the Notes, receives a lump sum payment and then promises to “pay” the trust a monthly payment on the money that the Trust paid it. This large monthly payment to the Trust is usually guaranteed by the Servicer and is an aggregate or sum of all of the individual 3000 borrowers who paid their monthly payment to that Servicer. The servicer collects all of those monthly payments, takes off their fees, disburses some of it to escrow accounts, etc. and then makes the payments to the Trust. The Servicers also have multiple layers of insurance that insure them against borrower defaults because the Servicers do in fact make representations and warranties on the monthly payments to the Trust that really owns these Notes.

This whole process is called “Securitization.” This is a simplified explanation of what happens. Through this Securitization process, these Notes are packaged into what’s called “Asset Backed Securities” or “Mortgage Backed Securities” in what’s called a CDO (Collaterlized Debt Obligation) and are sometimes called ABS or MBS Pools. The Depositor creates something called a “Special Purpose Vehicle” (SPV) to deposit these Notes into the SPV and then these Notes are sold and deposited into the Trust. The Trust is owned by all sorts of investors, individual and companies, pension funds, foreign investors. etc. They collectively own these Trusts. A “Trustee” acts as an Agent for the Trust and on behalf of the Trust in a fiduciary relationship.

So, now that you’re a securitization guru, let’s get the rubber to meet the road in all of this.

Here’s the real rub. I told you that, legally speaking, the only evidence of this debt (the loan) is the actual and original Note; and this makes sense! If not, anyone could create a Note, get a copy of your signature (which they can get in public records on the mortgage you signed and was subsequently recorded in public records), paste it on that created Note and allege that you owe them this money. Also, because this Note is changing hands some 3-6 times in the securitization process, everyone touching it can create a copy and allege you owe them the money even though they’ve already sold the original Note and have been paid for it by the new buyer! Just like a personal check, the Note has to be “Endorsed” to the new buyer of the Note by the Seller of that Note. They literally need to stamp on the last page of the Note, “Pay to the Order of Without Recourse” and then stamp or write in the name of the new buyer. On a bona fide Note, this is EXACTLY what you will see and find. Everytime this Note changes hands, it needs an actual endorsement.

So here’s what literally happening with ALL of these foreclosures… the Trusts are the actual owners of the majority of all of these Notes. Yes, the Trusts. A trust has a funky name such as Harborview Mortgage Loan Trust 2006-5 or Meritage Loan Trust 2007-2. There’s no such Trust named Countrywide Home Loans or Chevy Chase Bank or Citimortgage or GMAC Mortgage Co. or Residential Funding Corporation or Amtrust Bank or Fremont Investment and Loan or Option One Mortgage Co. – you get the point. All of these entities are either lenders or servicers. Period. They are NOT the Trusts that your loan and everyone’s loans were sold to. Don’t let anyone fool you. Over 98% of all loans made since 2000 were securitized in just the fashion I described above.

Now, I can only speak to the 100 or so foreclosure cases I have personally read the complaints on in Florida and a few in Ohio. In 100% of these foreclosure cases, the suit is being brought NOT by the Trust but by the servicer or the trustee. Both of these entities are agents for the Trust but they are NOT the owners of these Notes unless they show that they re-purchased that Note from the Trust. In about 70% of the foreclosure cases we have seen, the Plaintiff (usually the servicer) is also alleging that they have LOST THE NOTE or that is has been destroyed. No, that was NOT a typo or mistake. Well, if the Note is actually lost, they don’t have any actual evidence of the debt anymore.

So here’s the question to start asking your Congressman or Congresswoman, your State Senators, your Governor and every other politician that has any influence and may want to be re-elected… if the Federal Government is going to buy all of these non-performing or defaulted loans (ie. Notes), who are they actually going to buy them from? The Trusts or the Servicers?

And, if they can actually tell us this in plain language, are they actually going to buy the original Notes? Not a copy and not some affidavit from some $15/hour employee who is swearing that they saw the original note before it was actually lost or destroyed but the original Note?

I’m not kidding here. I’m seeing 70% of the cases allege a Lost Note! When they produce the Note, what this Servicer alleges is the original note is, in fact, only a COPY of the note and is NOT the original. Want to know how I know it’s NOT the original?

This is easy folks. The entire securitization process that any and all Notes are involved is and must be disclosed in filings with the SEC. Yes, every Note is involved a securitization. And this MUST be filed with the SEC. And in these filings with the SEC, these companies MUST disclose all of the parties involved in that process and what that “chain” of securitization actually follows. That chain MUST be evidenced on every single Note on the last page of that Note in the form of an endorsement. “Pay to the order of…” Every Note should have at a minimum of 2 endorsements and more likely, 4-5 endorsements. If a Servicer or an attorney for that Lender or Servicer produces a copy of a Note that they allege is the original Note, all one needs to do is look for those endorsements. If the endorsements don’t follow EXACTLY what they have already filed with the SEC, they got real problems folks. Either they are lying to the court (called fraud) or that Note is faulty in that the proper endorsements aren’t there and most likely, both are real legal issues.

Also, in these foreclosure cases, the Plaintiff (a Servicer or Trustee) is actually alleging that they have the RIGHT to foreclose and that they are the <u>owner and holder of the Note</u> (which gives rise to the right to foreclose). Now, us folks and attorneys who are wise to this charade know that they are NOT the owner of these Notes because they actually disclose these facts right in their SEC filings! But no judge in this country is going to or has the time to go and do fact checking on these issues and hold these Plaintiffs accountable to what they are alleging in their foreclosure lawsuits. 98% of all foreclosure filings go uncontested by the borrower. This means that 98% of the time, the foreclosure process is nothing more than a rubber stamp process with judges defaulting borrowers who don’t show up to defend themselves. The Servicing companies are getting away with highway robbery – rather, home robbery. Yes, this is happening. Entities like large banks and servicing companies are taking the homes of hard-working citizens and they do NOT own the mortgages or notes secured by that home. Yes, these homeowners owe the money to someone but that someone is NOT the actual owner of that Note. And, if I’m the homeowner, I’d like the opportunity to have a meaningful chance to work something out with the real owner. Because what happens in foreclosures is that the wrongful party gets the home in a foreclosure sale, puts it back on the market for sale and sells it for about 80-90% of its CURRENT VALUE! Now, why not keep that same homeowner in the house and let them pay 80-90% of it’s current value??? Heck, make it 100% of current value. Granted this won’t work 100% of the time but I’m betting at least 50% of the time and probably closer to 70% is realistic. We have large financial institutions wrongfully foreclosing, kicking people out of their flippin homes and flipping those homes to someone else for a bargain while the hard working homeowner goes down the block to rent another foreclosed home from an institution that wrongfully kicked that homeowner out most likely! What the heck is wrong with us folks? We gotta take stand on this. This is the definition of absurdity ten times over!

So, to bring this full circle in relation to the latest talk of Banks, Bailout and the 700 Billion to do it, I want to know exactly what our taxpayer dollars are actually going to buy? I think we have the right to know this. I want to make sure that the Federal Gov’t is going to buy actual Notes and yes, the originals, not some fraudulent copy. I don’t trust one of these banks… These guys have bilked billions out of us and after what I have seen in what they file, what they are alleging in these foreclosures, etc. I put nothing past them including purposefully “losing” notes so that they can sell them multiple times to multiple Trusts or investors. And now they’re whining for a bailout to the madness they’ve brought on us all. I can’t tell you how many people I’ve talked to that have tried desperately and in good faith to work something out with these thieves and they don’t even answer the phone! You wait on hold for 30 minutes to talk to someone half way around the world who tells you to fill out 10 pages of information, fax it in and someone will get back to you – which never happens!!!

Folks, knowledge of these facts and issues is what we all need to make sure we can and do hold our government and these politicians to some sort of order and accountability before we just bail out one more flippin company!

Hope this helps educate you on the real happenings in this big convoluted mess we’re all in. If nothing else, you can now impress your cohorts at the water cooler with some sophisiticated mortgage speak.

Lane Houk

Jan
09

Investigate that Note!

By | Bank/Lender Failures, Corporate Greed & Corruption, Foreclosure Defense Research, General, Homeowner Resources

2 Comments

A law firm I work with had a case the other day that underscores the importance of this post… the Plaintiff (Taylor, Bean & Whitaker Mortgage Corp.) in the case was pushing for Summary Judgment. In preparation, they filed the “Original Note and Certified Copy of the Mortgage” in the case record. They also filed an “Affidavit in Support of Motion for Summary Judgment” the same day. The Affidavit was given and signed by an employee named Erla Carter-Shaw who was supposedly in charge of the record keeping, etc. In her “affidavit” she alleged that the Note had not been endorsed to anyone else and thus Taylor, Bean & Whitaker was the owner of the Note. Now, mind you that they had originally filed for a “Re-establishment of the Note” in the original Complaint because they alleged that it had been lost or destroyed… Well, purportedly, they found that original Note and they alleged it hadn’t been endorsed at all. Well, we investigated the Note they attached in their filing and what do you know, there’s an endorsement on the last page of the Note! It was endorsed in blank and guess who had signed the endorsement stamp? Oh yeah, you guessed it, Erla Carter-Shaw. So she alleges in her Affidavit that the Note has NOT been endorsed and then she attaches an Endorsed Note alleged to be the original.

Another simple but important issue to investigate is the Note that the Plaintiff actually attaches (if and when they do attach a copy of the Note). What you want to zero in on are the endorsements on the Note (or usually, the lack thereof). Understanding the securitization process is key in what you’re looking for on the Note. The endorsements should absolutely follow the chain of ownership from Originator to Seller to Sponsor/Master Servicer to Depositor to Trustee. If you’re not seeing at least 3 endorsements on the Note then you know that this is NOT an original Note regardless of what’s alleged and/or claimed as to its authenticity. We know Portfolio Lending is a dinosaur and literally >95% of all residential loans made since the late 1990′s are/were securitized. Given these facts, we know exactly what to look for.

Here’s a real example from an actual SEC Filed Prospectus linked to a real live Trust (called RFMSI Series 2007-S8 Trust) for more context…
1. Homecomings Financial was the original Lender to John Doe. Homecomings Financial is the “Originator” and “Seller” of this loan and they are the actual “Payee” on the Note the borrower signed at closing.
2. Before the loan even closed, Homecomings Financial knew it was selling this loan to a company called “Residential Funding Company, Inc.” (RFC). RFC always appears as the “Sponsor” and “Master Servicer” in the Prospectus filings with the SEC. – I’ve read well over a dozen Prospectus filings regarding RFC and their roles as Master Servicer NEVER deviates.
3. Homecomings Financial sells the loan (in a pool of loans) to RFC. Here is where you should see the FIRST ENDORSEMENT on the last page of the Note. It’s usually a stamped endorsement that says “Pay to the Order of, Without Recourse” and then you’ll see “Residential Funding Company, Inc.” just below that and the signature of an authorized signor for Homecomings Financial. That’s Endorsement #1.
4. Now, RFC isn’t going to hang on to this Note (pool of Notes) for very long. They have already setup an arrangement to sell these loans (Notes) to a company called “Residential Mortgage Securities I, Inc..” well in advance. This company is called the Depositor. They purchase the loans/notes (the entire pool) from RFC.
5. Here’s where you should see the SECOND ENDORSEMENT on the last page of the Note. “Pay to the Order of, Without Recourse” to Residential Mortgage Securities I, Inc.
6. Residential Mortgage Securities I, Inc., as Depositor is now going to Deposit these loans into the Trust and endorse the Notes to the Trustee.
7. US Bank National Association is the Trustee in this transaction as disclosed in the Prospectus, Form 424B5 (which you can actually get online at www.sec.gov by doing a search on EDGAR; if you know the name of the Trust, you can plug that name in exactly as it appears in a Google Search bar surrounded by quotes and you’ll get all the filings on that specific Trust usually)
8. Here’s where you should see the THIRD ENDORSEMENT on the last page of the Note… payable to US Bank National Association.

Now, what’s material here is that in this particular foreclosure case, the Plaintiff was “Residential Funding Company, Inc.” – here’s a short Quiz question, “Who is Residential Funding Company, Inc.?”
Do you think they own this Note? Even if they actually have the original, it doesn’t mean they’re the holder in due course or the real party in interest. But, if you file a Request for Production of Documents in the foreclosure case the Plaintiff probably won’t respond or they ‘ll try to object to your request. Why? Because, if they can find the original Note it will have these Endorsements on it showing the chain of transfers on it and they will have just produced evidence to the court which clearly evidences that they ARE NOT the owner and holder of the Note as they alleged in their Summons and Complaint.

Now, if you can believe it, we have cases where they have produced the note with endorsements on the last page that DIRECTLY contradict their allegations in the complaint. The attorney’s that work for many of these foreclosure mills aren’t very bright nor do they even understand these things often times.

Thus, you can attack this point in the form of misrepresentation or fraud on the court by showing the court the SEC filings from the Trust that this loan was deposited into. The Form 424B5 (Prospectus) will clearly disclose the parties involved, the chain of ownership and their roles. This is your evidence (as an Exhibit) that the Note in question is either not an original or there are some serious issues with its authenticity or that it contradicts their allegations. No opposing counsel will want a judge to get his/her eyes on this and will usually suspend their prosecution of a foreclosure case if you make your case right with them first via phone. We draft a Motion to Dismiss and attach the evidence as an Exhibit (the SEC Filings) and in the Motion to Dismiss will be points and elements outlining the misprepresentation on the part of counsel and the Plaintiff. My wife will then send this to opposing counsel first and find out what they want to do…

Lastly, often times we’ll see some endorsement(s) on a separate page (not on the last page of the Note) or an “allonge” to the Note. This can be attacked as well. An allonge is easy to create after the fact as it is not an actual part of the Note. Check your state statutes but most states will require endorsements to be on the last page of the Note as long as there is room on the last page. You can easily fit 4-5 endorsements on the last page of a Note.

When the law firm gets a new case, our goal is to raise enough doubt to survive Summary Judgment. Once you survive any motion for Summary Judgment, these cases get dropped off the map. We also request a jury trial in every case along with a Request for Production. If the Plaintiff doesn’t produce what we request (and they usually won’t) for reasons stated above, you’ve got yourself a case. Hope this helps all you folks out there trying to figure out how best to fight these boys at their own game.