|
The Legal Trump Card: Make Them Produce the Note
This is a forwarded message to Sovereign Trust which we believe everybody ought to know about.
A basic principle of contract law is that a plaintiff suing on a written
contract must produce the signed contract proving he is entitled to relief.
If there is no signed mortgage note or recorded assignment, foreclosure is
barred. The defendant must normally raise this defense, and most defaulting
homeowners, being unable to afford attorneys, just let their homes go
uncontested. But when the plaintiffs bringing subprime foreclosure actions
have been challenged, in most cases they haven't been able to produce the
notes.
Why not? It appears to be more than just sloppy paperwork. The banks that
originally entered into these risky subprime arrangements generally did so
because they had no intention of holding the loans on their books. The
mortgages were immediately sliced and diced, bundled up as mortgage-backed
securities (MBS), and sold off to investors. Loan originators sold the
mortgages to financial institutions or other banks, which then sold the
rights to the monthly mortgage payment income to investors, while
transferring the responsibility to collect these payments to specialized
mortgage servicing companies.
The result has been to slice up the mortgage contract, with no party
really having ownership of the original paperwork. When foreclosure has been
initiated, the servicer or trustee acting as plaintiff now has trouble
proving that it originated the mortgage or owned the loan. In order for a
second bank or financial institution to have standing to bring a foreclosure
lawsuit in court, it must have been assigned the mortgage; and with the
collapse of the housing market, many of the subprime lenders have gone out
of business, making it impossible to contact the originating mortgage
company. Other paperwork has just been lost in the shuffle .
Why weren't the mortgage notes assigned to the MBS holders when they were
first sold? Apparently because the investors aren't even matched up with
specific properties until after default. Here is how the MBS scheme works:
when the mortgages are first bundled by the banks, all of the subprime
mortgages go into the same pool. The bundled mortgages are chopped into
"securities" that are sold to many investors, with different "tranches" or
levels of risk banks, hedge funds, money market funds, pension funds.
The first mortgages to default are then assigned to the high-risk "BBB-"
tranche of investors. As defaults increase, later defaulting mortgages are
assigned down the chain of risk to the supposedly more secure tranches. That
means the investors get the mortgages only after the defendants breached the
agreement to pay.
It also means the investors weren't a party to the agreement when it was
breached, making it hard to prove they were injured by the breach.
The investors have another problem: the delay in assigning particular
mortgages to particular investors means there was no "true sale" of the
security (the home) at the time of securitization. A true sale of the
collateral is a legal requirement for forming a valid security (a secured
interest in the property as opposed to simply a debt obligation backed by
collateral). As a result, the investors may have trouble proving they have
any interest in the property, secured or unsecured.
The Dog-Ate-My-Note Defense
When the securitizing banks acting as trustees for the investors are
unable to present written proof of ownership at a time that would entitle
them to foreclose, they typically file what is called a lost-note affidavit.
April Charney is a Florida legal aid attorney well versed in these issues,
having gotten foreclosure proceedings dismissed or postponed for 300 clients
in the past year. In a February 2008 Bloomberg article, she was quoted as
saying that about 80 percent of these cases involved lost-note affidavits.
"Lost-note affidavits are pattern and practice in the industry," she said.
"They are not exceptions. They are the rule."
In the past, judges have let these foreclosures proceed; but in October
2007, an intrepid federal judge in Cleveland put a halt to the practice.
U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not
filed the proper paperwork to establish its right to foreclose on fourteen
homes it was suing to repossess. That started the ball rolling, and by
February 2008, judges in at least five states had followed suit. In Los
Angeles in January, U.S. Bankruptcy Judge Samuel L. Bufford issued a notice
warning plaintiffs in foreclosure cases to bring the mortgage notes to court
and not submit copies. In Ohio, where foreclosures were up by a reported 88
percent in 2007, Attorney General Marc Dann was reported to be challenging
ownership of mortgage notes in forty foreclosure cases.
Few defendants, however, are lucky enough to have such a committed
advocate in their corner, and most defaulting debtors just let their homes
go. A simple answer can be filed to the complaint even without an attorney,
and some subprime borrowers have successfully defended their own foreclosure
actions; but a word of caution to do-it-yourselfers: retaining an attorney
is strongly recommended. People representing themselves are often not taken
seriously, and they are likely to miss local rule requirements. With that
proviso, here is some general information on challenging standing to
foreclose:
Some states are judicial foreclosure states and some are non-judicial
foreclosure states. In a judicial foreclosure state (meaning the matter is
heard before a judge), if a promissory note or recorded assignment naming
the plaintiff is not attached to the complaint, the defendant can file a
response stating the plaintiff has failed to state a claim.
This can be followed with a motion called a demurrer to the complaint.
Different forms of demurrers can be found in legal form books in most law
libraries. In essence the demurrer states that even if everything in the
complaint were true, the complaint would lack substance because it fails to
set out a copy of the note, and it should therefore be dismissed. Ordinarily
there is no need to cite much in the way of statutes or case law other than
the authority reciting the necessity of showing the note proving the
plaintiff is entitled to relief.
In a non-judicial foreclosure state such as California, foreclosure is
done by a trustee without a court hearing, so the procedure is a bit
trickier; but standing to foreclose can still be challenged. If the
homeowner has filed for bankruptcy, the proceedings are automatically
stayed, requiring the lender to bring a motion for relief from stay before
going forward. The debtor can then challenge the lender's right to the
security (the house) by demanding proof of a legal or equitable interest in
it. A homeowner facing foreclosure can also get the matter before a court
without filing for bankruptcy by filing a complaint and preliminary
injunction staying the proceedings pending proof of standing to foreclose. A
judge would then have to rule on the merits. A complaint for declaratory
relief might also be brought against the trustee, seeking to have its rights
declared invalid.
Salvaging the Whole Economic Titanic
These defenses can be a lifeboat for the subprime class below deck, but
there is another class of passengers in need of a lifeboat, the investors in
the supposedly first class cabins. The investors include the pension funds
and 401Ks depended on by the beleaguered middle class for retirement. If the
trustees representing the investors cannot foreclose, does that mean the
defaulting borrowers can stay in their homes indefinitely without paying,
leaving the investors holding the bag? And if the investors manage to shift
liability back to the banks, won't the banks go down and take the economy
with them? How can the whole ship be saved from the massive debt iceberg now
looming from the deep? Those are complex questions, weighty enough to
warrant a separate article. Stay tuned.
Ellen Brown, J.D., developed her research skills as an attorney practicing
civil litigation in Los Angeles. In Web of Debt, her latest book, she turns
those skills to an analysis of the Federal Reserve and "the money trust."
She shows how this private cartel has usurped the power to create money from
the people themselves and how we the people can get it back. Her websites
are webofdebt.com and ellenbrown.com.
--- End forwarded message ---
|
