Consumers, Lawyers & Judges Play a Frustrating Game of Three-Card Monte, Where No One Knows the Rules and Everyone’s a Mark
§362 of the Bankruptcy Code is simple. Sort of. To seek relief from stay, one must be a party in interest. However, determining who qualifies as a party in interest is bewildering the Bar and leading to accusations of perceived dealing from the bottom of the deck.
Throughout the United States, sloppy recordkeeping is causing confusion amongst consumers, lawyers and Judges. The bench is fuming and even experienced attorneys are gun-shy about gambling with sanctions. Who should bear the responsibility of tracing and mending title? Attorneys can do it, but complete records of transfers and assignments are necessary. Creditors must lay the cards out on the table. Transparency is the only solution.
“…Mortgage Backed Securities – an alchemy that is little understood by the general public, much less the wizards who practice it these days…” In re Kang Jin Hwang, 393 B.R. 701 (2008)
The Set-Up (Securitization Process)
Securitization is the creation of debt instruments through the collection (“pooling”) of mortgage loans, transferring those payment obligations to a trust, and selling investor groups an interest in the trust’s pool of mortgage loans. The trustee holds legal title to the loans, while a servicer collects and distributes the loan payments. The servicer, while performing necessary functions, is really just a middleman whose role creates a smokescreen between borrowers and lenders. Mortgage servicers monitor payments, yet they work only for the investors and have no relationship with homeowners.
The Eye in the Sky
Roughly 640 miles of Interstate 90 separate the Massachusetts Bankruptcy Court and the U.S. District Court for the Northern District of Ohio. However, in the effort to force lenders and their attorneys to deal straight, the two sit together at the head table. The Ohio court has a docket packed with over 1,000 foreclosure cases; up from fewer than a dozen in 2002. The meteoric rise in foreclosure cases and general ineptitude about proper procedure led to a Court order outlining the filing requirements. The order requires that a foreclosure plaintiff must attach certain documentation to a filing. Documentation is “proper” if the assignment of a mortgage is recorded in real property records for the county in which the property is located, and the assignment documents are executed prior to the date of the filing.
Procedural matters under the microscope arise when notes are assigned, servicers are the moving parties, parties either fail to bring a copy of the assignment to court, or parties fail to repair other holes in the chain of title from the original mortgagee. Sanctions follow egregious behavior. Volcanic rhetoric from the bench is now commonplace.
“Unfortunately the parties’ confusion and lack of knowledge, or perhaps sloppiness, as to their roles is not unique in the residential mortgage industry.” Nosek v. Ameriquest, 386 B.R. 374 (2008)
Rules of the Game
In a foreclosure action, a plaintiff must produce the mortgage and the unpaid note to qualify as a real party in interest. In many jurisdictions, standing requires that the party be the holder of the note and mortgage on the date of the foreclosure. Attorneys can no longer assume they will obtain a judgment if they appear in court without an endorsed note. Some jurisdictions even require an assignment to be recorded.
If the mortgage is not produced, plaintiff must clearly trace title by providing executed assignments. The sheer volume of transfers (a note might be sold three or four times before the default) complicates matters as does the fact that assignments are typically not recorded at the time of securitization. The original note and assignment provided to the trustee are usually executed in blank and held by a third party. This custom is fertile ground for miscommunication between clients and attorneys and, worse, the court.
The requirement of recording is a murky standard. For instance, Massachusetts and Michigan do not require that an assignment of a mortgage be recorded, whereas Ohio does. Requiring that an assignment be recorded is logical in Ohio since that state seems to be demanding that ownership be clearly traced from the day of the filing. This is in contrast to other jurisdictions, of which some allow ownership to be traced up until the day of the judgment.
Local attorneys covering hearings for out-of-state lenders must be wary of conflicting standing tests for the state and federal level. In a departure from the aforementioned Ohio District Court, the Ohio state appellate court upheld an assignment of a note and mortgage from Countrywide Home Loans to Bank of New York, even though the assignment occurred after Bank of New York had commenced foreclosure proceedings. The Court reasoned that since the filing of the assignment preceded the judgment, the mortgagor had sufficient notice that the bank was a real party in interest.
Servicers are responsible for collecting payments and therefore suffer the “injury in fact” required to seek relief. However, depending on the jurisdiction, a party in interest is not always a real party in interest. The real party in interest standard is not a constitutional requirement like standing, but is a judicial creation as a “consideration” for standing.
In a recent bankruptcy case from California, the loan servicer qualified as a party in interest under §362(d) but failed to show they were a real party in interest pursuant to Fed. R. Civ. P. 17. The Court, based on California substantive law of promissory notes, ruled against the servicer, and reasoned that the real party in interest rule requires the holder (and only the holder) to bring the motion for relief. The case decision also notes a jurisdiction-specific requirement — according to Judge Samuel L. Bufford, “developments in the secondary market for mortgages” has led the court to require that the original note be brought to the hearing for inspection. This additional requirement mirrors concerns from around the country.
Lenders like Deutsche Bank and Wells Fargo often have little contact with the local foreclosure firms to which they farm cases. Those firms are rarely in possession of the original mortgage documents courts now demand. Often, once the referral reaches the local firm, the job of organizing assignments and notes is left to paralegals, creating yet another degree of separation between the lender and the attorney filing the motion. With firms churning through a high case volume, accuracy demands that they are given access to all relevant information and documentation the lender possesses.
“…this Court possesses the independent obligations to…jealously guard federal jurisdiction…neither the fluidity of the secondary mortgage market, nor…economic considerations of the parties…supersede those obligations.” In re Foreclosure Cases, 2007 U.S. Dist. LEXIS 84011 (2007)
Parties foreclosing in Massachusetts have two ways to play their hand and establish standing. First, a party may bring the actual assignment to the hearing and in doing so eliminate the headache of evidencing (“tracing”) chain of title. Second, if the original assignment is not produced, then chain of title must be clearly laid before the court for inspection. It is at this point that parties find themselves staring at the death card.
Forcing attorneys to hurriedly reconstruct chains of title is an invitation for error. Courts are adamant that a debtor is entitled to an unmistakable paper trail connecting the current mortgage holder to the mortgage originator. Nothing would do more to alleviate standing issues then for lenders to stop playing their hands so close to the chest. Instead of waiting for a default and scrambling to patch together a chain of title after-the-fact, each assignment should be documented and readily available for the attorney. Leave the reconstructing of history to the paleontologists.
If properly documenting an assignment sounds like too much of a hassle, consider the alternatives. In In re Schwartz, Deutsche Bank properly argued that an assignment was proper even though it was not recorded because Massachusetts does not require recordation prior to foreclosure. Their black letter law was spot on but irrelevant because the assignment provided to the Court was not signed until after the foreclosure sale. Similarly, in In re Maisel, the creditor presented the Court with an assignment of the mortgage which was dated four days after the filing of the motion for relief. The creditor was therefore without standing to seek relief because at the time the motion for relief was filed, the creditor was an unrelated third party. A costly four days.
Knowing the rules and paying attention would have saved the parties in both cases.
As evidenced by a recent bankruptcy decision from the Eastern District of New York, fatal mistakes in some jurisdictions are harmless in others. In In re Rosemarie Conde-Dedonato, the claimant filed an objection to the confirmation of proposed plan and attached a copy of the original note and mortgage, but forgot to attach a written assignment tracing the transfer from First National to Deutsche Bank. Luckily, in New York, a mortgage and note can be transferred via delivery and need not be evidenced by a written assignment.
Despite the fire and brimstone rained upon the unsuspecting covering attorney, courts usually dismiss procedural errors without prejudice and occasionally go out of their way to inform the lender of their option to re-file. Judges understand that the industry requires the ability of lenders to foreclose on delinquent loans. In one recent footnote of a case where a procedural hitch saved a debtor who had made exactly two post-petition mortgage payments in 14 months, Judge Joan Feeney stated that although the lender failed to trace the mortgage from the original holder – “Debtor may have won the battle, but she still may lose the war.”
There are of course, exceptions. In Nosek, $650,000 in sanctions were levied on Ameriquest Mortgage Company, Ameriquest’s local law firm, one of the firm’s partners, Ameriquest’s national law firm and Norwest Bank, Minnesota, N.A. (now Wells Fargo), because the Court found that the parties misrepresented the role Ameriquest played regarding the mortgage and mortgage note. In a scathing attack, the Court even berated the local law firm for relying on Ameriquest’s proof of claim and noted that the firm could not shield itself from institutional knowledge. Effectively, the Court viewed the mega-lender and the local firm as one institution, as if they shared office space. If local law firms are to be held at such a standard, where courts expect such complete fluidity of information, transparency of information becomes even more necessary.
In a street corner game of Three-card Monte, the dealer and the shill(s) quickly shuffle the cards to deceive an unsuspecting mark. It is a game the mark cannot win unless the cards are turned face-up. With clear communication between lenders and their attorneys, the con can be avoided and the cards revealed. The trick is to work together, and to know the rules.