As part of a successful strategy to assist distressed borrowers, it is essential for practitioners to conduct forensic mortgage loan audits. Borrowers should be leery of companies that ask for up-front fees exclusively for the purpose of conducting such audits, However, a seasoned practitioner should review all documents for serious errors in loan papers that may be the basis for a defense in a foreclosure action. That is to say, although a borrower should never blindly hire a so-called loan auditing company in hopes of escaping foreclosure, an attorney should independently conduct such an audit to aid in the defense of someone facing foreclosure.
When reviewing and investigating a foreclosure complaint, a practitioner should first determine whether the party seeking to foreclose has standing. When a plaintiffs standing to commence a foreciosure action is placed in issue by the defendant, it is incumbent upon the plaintiff to establish its standing to be entitled to relief.’ Standing requires an inquiry into whether a litigant has “an interest.., in a lawsuit that the law will recognize as a sufficient predicate for determining the issue at the litigant’s request”.2
E.g., Deutsche Bank Nat’I Trust Co. v. Rivas, 2012 N.Y. Slip Op. 03800,95 A.D,3d 1061 (2d Dep’t May 15,
2012); çftjmortaelnc. vS ci, 89 A.D.3d 887, 888 (2d Dep’t 2011); U.S. Bank Nat’l Ass’n v. Madero, 80
A.D.3d 751,752 (2d Dep’t 2011); U.S. Bank. N.A. v. Collymore, 68 A.D.3d 752, 753 (2~” Dep’t 2009).
2 Bank of New York v. Siiverberg, 86 A.D.3d 274 (2d Dep’t 2011).
In the foreclosure context, a plaintiff establishes its standing by demonstrating that it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note, “either by physical delivery or execution of a written assignment prior to the commencement of the action.”3 Valid ownership of solely the note is sufficient to also prove ownership of the mortgage; however, ownership of only the mortgage is insufficient to also prove an ownership interest in the note, and thus satisfy standing requirements.
An assignment that is executed after the commencement of the foreclosure action, but dated retroactively before the commencement, is insufficient to confer standing upon the assignee.4 Such a retroactive assignment will only be valid where it is accompanied by proof that the assignment was properly executed before the commencement of the action, i.e. proof of prior physical delivery.5
When an assignment is dated retroactively, it raises the issue whether the transfers were valid or whether they ever occurred. Many mortgages are held in a Real Estate Mortgage Investment Conduit (“REMIC”) trust. If the mortgage and note are held in a REMIC trust, the assignment of such must also comply with the REMIC rules proscribed by the IRS, as well as the rules proscribed in the Pooling and Service Agreement (PSA”), which serves as the governing agreement for the trust.6
Aurora Loan Servs.. LLC v Weisbium, 85 A.D.3d 95, 108 (2d Dep’t 2011).
Wells Fargo Bank, N.A. v. Marchione, 69 A.D.3d 204 (2d Dep’t 2009); Lasalle Bank v. Ahearn, 59 AD,3d 911 (3rd Dep’t 2009); Deutsche Bank Trust Ams v. McCoy, 29 Misc. 3d 1202A (Suffolk Sup. Ct. 2010).
Deutsche Bank Trust Ams v. McCoy, 29 Misc. 3d 1202A (Suffolk Sup. Ct. 2010) (An assignment executed after commencement of a foreclosure action, which states it is effective as of a date preceding the commencement date, is valid only if accompanied by proof of physical delivery previously effectuated).
6 Meg Rehrauer, Note, Regaining the Wonderful Life of Hoineownership Post-Foreclosure: Defending Homeowners from Eviction afler Foreclosure by Attacking the Ownership Rights of the Foreclosing Entity, 2 Ne. U. L. 1. 5, 12 (Spring 2010), available at http://nulj.org/journal/rehrauer.pdf
REMIC trusts are tax “pass-through” entities, and as such, are not taxed; rather, the investors are taxed on the income received.7 To comply with REMIC rules and maintain its status as a pass-through entity, all assignments must have been true sales and transfers, executed within the life of the trust. These trusts are required to be passive vehicles. After the closing date, REMIC rules prohibit the trust from accepting belated transfers.8 Although solely violating the REMIC rules does not show a defect in the ownership interest, a showing that the paperwork was not transferred in the legally required manner does raise questions as to the validity and tax¬exempt status of the trusts in which the mortgages reside.9
The PSA governs and supersedes both the UCC and common law. It sets forth how the trust will operate, or specifically, “the exact steps necessary for a trust to be created, bundled mortgages to be transferred into the trust, issuance of securities by the trust to the depositer or on the open market, generally to institutional investors, and maintenance of the trust in order to achieve favorable [REMIC] tax status.”0 This document exists for each individual trust and is of public record, available on the SEC website. Each transfer must follow very specific language, called the “recital of the transfer” which outlines the steps necessary to transfer the mortgage to the trustee.”
In compliance with the PSA, the plaintiff needs to establish the unbroken chain of transfers, deliveries and acceptances of the mortgage note from the originator, to the sponsor who organized the securitization of the mortgage, to the depositor, and finally to the trustee.’2
Id. at 20.
Roy D. Oppenheim and Jacqueline Trask, Deconstructing the Black Magic of Securitized Trusts: How the
Mortgage-Backed Securitization Process is Hurting the Banking Industry’s Ability to Foreclose and Providing the
Best Offense for a Foreclosure Defense, Stetson L. Rev., 14 (forthcoming Spring 2012), available at
Rehrauer, supra note 6, at 21; Oppenheim, supra note 8, at 13.
‘°Id. at 12.
Id. at 22.
]2 Id. at 12.
The Mortgage Electronic Registration System (“MERS”), as nominee, has no ownership interest, and so lacks the authority to assign mortgages or transfers notes.’3 Any such assignments to the trust with MERS as assignor violate the chain of title requirements set forth in the PSA. In addition to proper chain of title, the plaintiff must also establish that the note and mortgage were transferred to the trust within the window of time between the origination and closing dates, usually 90 days, that the trust could accept assets.’4 If the original transfers do not comply with the method and timing requirements of the PSA, the belated transfers are void.’5
When a REMIC trust is found to have violated its PSA, courts have now begun to forestall foreclosure proceedings based on the lack of standing. An Alabama state court said as much in a 2009 decision order which permanently enjoined the plaintiff from foreclosing on the borrower.’6 In that case, the court noted that the defendant trust violated its own PSA and NY law in attempting to receive an assignment of plaintiff’s note3 and mortgage. The court also stated that plaintiff was a third-party beneficiary of the PSA, since it made it possible for plaintiff and other mortgagors similarly situated to obtain financing.’7
POSSIBLE ROBO-SIGNING ISSUES
Robo-signing refers to the fraudulent practice where, within a short time-frame, an affiant signs numerous affidavits and legal documents asserting the lender’s right to foreclosure, despite having no personal knowledge of the facts contained in them.’8 There have been reports of individual bank representatives signing off on thousands of documents on a monthly basis.
3 Rehrauer, supra note 6, at 25; Lasalle Bank Nat’l Ass’n v Lamy, 12 Misc. 3d 11 9lA (S. Ct. Suffolk Cty. 2006).
~ Oppenheim, supra note 8, at 13.
~ Oppenheim, supra note 8, at 14.
16 Id. at 28.
~ Id. at 28.
38 LaSalle Bank N.A. v. Munoz, 33 Misc, 3d 1203A, 938 N.Y.S,2d 228, 2011 NY Slip Op. 51674U, slip op. at 1(S.
Ct. Queens Cty. 2011); Am. Express Centurion Bank v. Bajek, 29 Misc. 3d 1226A, 918 N.Y.S.2d 396, 2010 NY
Slip Op. 52005U, slip op. at 2, n. 2 (5. Ct. Orange Cty. 201W; Washington Mut. Bank v. Phillip, 29 Misc. 3d
1227A, 2010 NY Slip Op. 52034U, slip op. at 1-2,4(5. Ct. Kings Cty. 2010).
This practice called into question the validity of thousands of mortgage foreclosures across the country. The internet has been used as a rich resource for determining “known” robo-sigining violators. When the practice recently came to light, four major banks, J.P. Morgan Chase, Ally Financial/OMAC, Bank of America and Wells Fargo all called a halt to foreclosure actions in 23 states.
In Deutsche Bank Natl. Trust Co. v. Ramotar, 2011 N.Y.Slip. Op. 500l.7U (S. Ct. Queens Cty. 2011), the Honorable Robert Markey observed recent efforts to combat this fraudulent practice:
Just recently, Massachusetts highest court, its Supreme Judicial Court, in U.S. Bank National Association v. Ibanez, 941 N.E.2d 40 (2011) unanimously held that two banks, U.S. Bank and Wells Fargo, failed to prove that they owned the mortgages when they foreclosed on the homes. The fact that the homeowners owed a lot of money on the mortgages was conceded in the Court’s ruling that the banks did not properly prove ownership.
An excellent article discussing the abuses of the banks foreclosure cases is by David Streitfeld, writing for the New York Times, in “Facing Scrutiny, Banks Slow Pace of Foreclosures”, NY Times, Jan. 8, 2011 (Some mortgage lenders and banks “were revealed to have used so-calied robo-signers to process thousands of foreclosures without verifying the accuracy of the data)…
The Chief Judge of the Court of Appeals, the Honorable Jonathan Lippman, in 2010, aware of growing abuses in documents relied upon by New York state courts in reviewing mortgage foreclosure cases, instituted new rules designed to curb widespread deficiencies in “robo-signing of documents….” Examples of such abuses are found in the testimony recited in the opinion of in Washington Mut. Bank v. Philip, 29 Misc. 3d I227A, 2010 NY Slip 0p. 52034U (Sup. Ct. Kings Cty. 2010) (Schack, J.). Robo-signing and other abuses by plaintiff institutions are discussed in the written testimony of Justice Winslow to Congress, on December 2, 2010, available at several web-sites, including http://www.foreclosurefraud.org.
Robo-signing issues continue to arise in the Courts. In denying foreclosures to proceed on default of the borrower, the Courts have continued to take notice of robo-signer issues. In a recent case, the Hon. Bernice Siegal noted that the assignment that was attached to the lenders papers was signed by someone known to the Courts as a proven robo-signer.’9 In another recent case, the Hon. Jerry Garuilo, the Court noted that the Defendants raised troubling facts in that plaintiff, inter alia, submitted an affidavit of merits from a known robo-signer, where the affidavit appeared to have all the indicia of a robo-signed document.2°
When analyzing standing requirements, the practitioner should remember that standing is all about the form; the issue is not whether the defendant owes money but whether the plaintiff has the proper documentation to prove its ownership interest at the commencement of the action. When reviewing all relevant foreclosure documents, a practitioner should be aware of possible standing issues, amongst other possibly applicable defenses. This article was intended to identify some possible defenses to residential mortgage foreclosure proceedings. A comprehensive list of all relevant statutes and possible defenses would be cumbersome and is beyond the scope of this article.
‘~ H.S.B.C. Bank U.S.A., NA, v. Farmer, 2012 N.Y. Misc. LEXIS 3023, 2012 NY Slip Op. 3l675U (S. Ct. Queens Cty., June 20, 2012)
20 State of New York Mtge. Agency v. Vaccerino, 2012 N.Y.Slip Op. 31299U (S. Ct. Suffolk Cty. May 7, 2012)