William Chhun et al. : v. : Mortgage Electronic Registration Systems - The Court's Opinion

William Chhun et al. : v. : Mortgage Electronic Registration Systems

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William Chhun et al. : v. : Mortgage Electronic Registration Systems - A Victory

On February 4, 2014, the Rhode Island Supreme Court issued a decision that gave homeowners hope that the Court is sympathetic to their fight against the banks and servicers. In William Chhun et al. : v. : Mortgage Electronic Registration Systems, : Inc., et al. , the suit survived a motion to dismiss and the court found that the homeowners’ allegations were probable.  Specifically, Justice Golberg wrote:  “homeowners in Rhode Island have standing to challenge the assignment of mortgages on their homes to the extent necessary to contest the foreclosing entity’s authority to foreclose.” The homeowners are left to prove their allegations in discovery and at trial.

 This can be seen as a major victory in the State of Rhode Island that will allow the majority of homeowners to hold the banks and servicers accountable for practicing illegal foreclosure activities. This ruling provides hope and demonstrates that the Rhode Island Supreme Court is on the side of the homeowners when combatting illegal home foreclosure.  The public should be reminded that each ruling issued changes the landscape of foreclosure law and should be looked to nationally as an example. In each decision, the Rhode Island Supreme Court is redefining Rhode Island mortgage and foreclosure law.  All of the professionals who have tackled this issue should be seen as crusaders for the homeowner’s rights.

FEDERAL COURT HOLDS THAT HOMEOWNER CAN ATTACK POST-TRUST CLOSING ASSIGNMENT; REJECTS “LACK OF STANDING TO CHALLENGE AN ASSIGNMENT YOU ARE NOT A PARTY TO” ARGUMENT

FEDERAL COURT HOLDS THAT HOMEOWNER CAN ATTACK POST-TRUST CLOSING ASSIGNMENT; REJECTS “LACK OF STANDING TO CHALLENGE AN ASSIGNMENT YOU ARE NOT A PARTY TO” ARGUMENT

The United States District Court for the District of Rhode Island released its opinion last month in the matter of Cosajay v. Mortgage Electronic Registration Systems, Inc., 2013 WL 5912569 (D. Rhode Island, Nov. 5, 2013) which permits a homeowner to challenge a post-trust closing assignment in defending a foreclosure action. The Defendants’ “lack of standing because you are not a party to the assignment” argument was soundly rejected as an “absurd position” which would “unduly insulate assignments” and deprive homeowners of their legally protected right to have a foreclosure proceed legally and correctly.

The homeowner challenged a MERS assignment to a securitized mortgage loan trust which had occurred outside of the time specified by the securitized trust for such an assignment. The challenged MERS assignment was on March 12, 2008; however, the trust had closed on April 30, 2007, and thus no 2008 assignment was possible. The homeowner sought a declaration that the assignment was invalid, that the Defendants did not hold her mortgage and note, and that the Defendants lacked standing to foreclose or to enforce the note.

The Magistrate recommended that the case be dismissed because the homeowner lacked standing as she was not a party to the challenged assignments. The court rejected the Magistrate’s Report and Recommendation, and thoroughly and repeatedly rejected the Defendants’ “lack of standing to challenge the assignment” argument citing to holdings from the United States Court of Appeals for the First Circuit which held that there is “no principled basis for employing standing doctrine as a sword to deprive mortgagors of legal protection conferred upon them under state law”, and that the Defendants’ argument as to an alleged lack of standing by the homeowner to challenge the assignment was “extreme and incongruous”.

Bravo to the Hon. John J. McConnell, Jr. for this opinion, which is another in the recent line of cases permitting such challenges including the Glaski decision from California; the Erobobo decision from New York; and the In Re Saldivar decision from the Texas Bankruptcy Court, which follow the reasoning of the earlier Horace decision from Alabama and the Hendricks decision from Michigan (where Mr. Barnes represented the homeowner (Hendricks) with the court granting summary judgment to the homeowner when it was shown that there was no compliance with the mortgage loan transfer provisions of the PSA). A Federal court has cited Hendricks in another case, stating that its logic is plausible.

It has taken six long years of work across the US, but the courts are finally coming to the realization that the one-theme mantra of the banks and servicers of “we have the note, thus we win” no longer carries the day, and that the banks and servicers now have a lot more to allege and prove before they can be permitted to seek the drastic remedy of foreclosure.

NEW LEGAL ISSUES COMING UP IN TRIAL AND APPELLATE COURTS

NEW LEGAL ISSUES COMING UP IN TRIAL AND APPELLATE COURTS

With the release of the US Bank admissions per our post of November 6, 2013; the issuance of the opinions from the Supreme Courts of Oregon and Montana holding that MERS is not the “beneficiary”; and recent opinions from various jurisdictions which are now, finally, holding that securitization-related issues are relevant in a foreclosure, a host of new legal issues are about to be litigated in the trial and appellate courts throughout the country. It has taken six (6) years and coast-to-coast work to get courts to realize that securitization of a mortgage loan raises issues as to standing, real party in interest, and the alleged authority to foreclose, and that the simplistic mantra of the “banks” and servicers of “we have the note, thus we win” is no longer to be blindly accepted.

One issue which we and others are litigating relates to mortgage loans originated by Option One, which changed its name to Sand Canyon Corporation and thereafter ceased all mortgage loan operations. Pursuant to the sworn testimony of the former President of Sand Canyon, it stopped owning mortgage loans as of 2008. However, even after this cessation of any involvement with servicing or ownership of mortgage loans, we see “Assignments” from Option One or Sand Canyon to a securitization trustee bank or other third party long after 2008.

The United States District Court for the District of New Hampshire concluded, with the admission of the President of Sand Canyon, that the homeowner’s challenge to the foreclosure based on a 2011 alleged transfer from Sand Canyon to Wells Fargo was not an “attack on the assignment” which certain jurisdictions have precluded on the alleged basis that the borrower is not a party to the assignment, but is a situation where no assignment occurred because it could not have as a matter of admitted fact, as Sand Canyon could not assign something it did not have. The case is Drouin v. American Home Mortgage Servicing, Inc. and Wells Fargo, etc., No. 11-cv-596-JL.

The Option One/Sand Canyon situation is not unique: there are many originating “lenders” which allegedly “assigned” mortgages or Deeds of Trust long after they went out of business or filed for Bankruptcy, with no evidence of post-closing assignment authority or that the Bankruptcy court having jurisdiction over a bankrupt lender ever granted permission for the alleged transfer of the loan (which is an asset of the Bankruptcy estate) out of the estate. Such a transfer without proof of authority to do so implicates bankruptcy fraud (which is a serious crime punishable under United States criminal statutes), and fraud on the court in a foreclosure case where such an alleged assignment is relied upon by the foreclosing party.

As we stated in our post of November 6, the admission of US Bank that a borrower is a party to any MBS transaction and that the loan is governed by the trust documents means that the borrower is, in fact, a party to any assignment of that borrower’s loan, and should thus be permitted to seek discovery as to any alleged assignment and all issues related to the securitization of the loan. We have put this issue out in many of our cases, and will be arguing this position at both the trial and appellate levels beginning early 2014.

US BANK ADMITS, IN WRITING FROM THEIR CORPORATE OFFICE, THAT THE BORROWER IS A PARTY TO AN MBS TRANSACTION; THAT SECURITIZATION TRUSTEES ARE NOT INVOLVED IN THE FORECLOSURE PROCESS; HAVE NO ADVANCE KNOWLEDGE OF WHEN A LOAN HAS DEFAULTED; THAT THE “TRUE BENEFICIAL OWNERS” OF A SECURITIZED MORTGAGE ARE THE INVESTORS IN THE MBS; AND THAT THE GOAL OF A SERVICER IS TO “MAXIMIZE THE RETURN TO INVESTORS”

US BANK ADMITS, IN WRITING FROM THEIR CORPORATE OFFICE, THAT THE BORROWER IS A PARTY TO AN MBS TRANSACTION; THAT SECURITIZATION TRUSTEES ARE NOT INVOLVED IN THE FORECLOSURE PROCESS; THAT THE “TRUE BENEFICIAL OWNERS” OF A SECURITIZED MORTGAGE ARE THE INVESTORS IN THE MBS

We have been provided with a copy of U.S. Bank Global Corporate Trust Services’ “Role of the Corporate Trustee” brochure which makes certain incredible admissions, several of which squarely disprove and nullify the holdings of various courts around the country which have taken the position that the borrower “is not a party to” the securitization and is thus not entitled to discovery or challenges to the mortgage loan transfer process. The brochure accompanied a letter from US Bank to one of our clients which states: “Your account is governed by your loan documents and the Trust’s governing documents”, which admission clearly demonstrates that the borrower’s loan is directly related to documents governing whatever securitized mortgage loan trust the loan has allegedly been transferred to. This brochure proves that Courts which have held to the contrary are wrong on the facts.

The first heading of the brochure is styled “Distinct Party Roles”. The first sentence of this heading states: “Parties involved in a MBS transaction include the borrower, the originator, the servicer and the trustee, each with their own distinct roles, responsibilities and limitations.” MBS is defined at the beginning of the brochure as the sale of “Mortgage Backed Securities in the capital markets”. The fourth page of the brochure also identifies the “Parties to a Mortgage Backed Securities Transaction”, with the first being the “Borrower”, followed by the Investment Bank/Sponsor, the Investor, the Originator, the Servicer, the Trust (referred to “generally as a special purpose entity, such as a Real Estate Mortgage Investment Conduit (REMIC)”), and the Trustee (stating that “the trustee does not have an economic or beneficial interest in the loans”).

The second page sets forth that U.S. Bank, as Trustee, “does not have any discretion or authority in the foreclosure process.” If this is true, how can U.S. Bank as Trustee be the Plaintiff in judicial foreclosures or the foreclosing party in non-judicial foreclosures if it has “no authority in the foreclosure process”?

The second page also states: “All trustees for MBS transactions, including U.S. Bank, have no advance knowledge of when a mortgage loan has defaulted.” Really? So when, for example, MERS assigns, in 2011, a loan to a 2004 Trust where the loan has been in default since 2008, no MBS “trustee” bank (and note that it says “All” trustees) do not know that a loan coming into the trust is in default? The trust just blindly accepts loans which may or may not be in default without any advanced due diligence? Right. Sure. Of course. LOL.

However, that may be true, because the trustee banks do not want to know, for then they can take advantage of the numerous insurances, credit default swaps, reserve pools, etc. set up to pay the trust when loans are in default, as discussed below.

The same page states that “Any action taken by the servicer must maximize the return on the investment made by the ‘beneficial owners of the trust’ — the investors.” The fourth page of the brochure states that the investors are “the true beneficial owners of the mortgages”, and the third page of the brochure states “Whether the servicer pursues a foreclosure or considers a modification of the loan, the goal is still to maximize the return to investors” (who, again, are the true beneficial owners of the mortgage loans).

This is a critical admission in terms of what happens when a loan is securitized. The borrower initiated a mortgage loan with a regulated mortgage banking institution, which is subject to mortgage banking rules, regulations, and conditions, with the obligation evidenced by the loan documents being one of simple loaning of money and repayment, period. Once a loan is sold off into a securitization, the homeowner is no longer dealing with a regulated mortgage banking institution, but with an unregulated private equity investor which is under no obligation to act in the best interest to maintain the loan relationship, but to “maximize the return”. This, as we know, almost always involves foreclosure and denial of a loan mod, as a foreclosure (a) results in the acquisition of a tangible asset (the property); and (b) permits the trust to take advantage of reserve pools, credit default swaps, first loss reserves, and other insurances to reap even more monies in connection with the claimed “default” (with no right of setoff as to the value of the property against any such insurance claims), and in a situation where the same risk was permitted to be underwritten many times over, as there was no corresponding legislation or regulation which precluded a MBS insurer (such as AIG, MGIC, etc.) from writing a policy on the same risk more than once.

As those of you know who have had Bloomberg reports done on securitized loans, the screens show loans which have been placed into many tranches (we saw one where the same loan was collateralized in 41 separate tranches, each of which corresponded to a different class of MBS), and with each class of MBS having its own insurance, the “trust” could make 41 separate insurance claims AND foreclose on the house as well! Talk about “maximizing return for the investor”! What has happened is that the securitization parties have unilaterally changed the entire nature of the mortgage loan contract without any prior notice to or approval from the borrower.

There is no language in any Note or Mortgage document (DOT, Security Deed, or Mortgage) by which the borrower is put on notice that the entire nature of the mortgage loan contract and the other contracting party may be unilaterally changed from a loan with a regulated mortgage lender to an “investment” contract with a private equity investor. This, in our business, is called “fraud by omission” for purposes of inducing someone to sign a contract, with material nondisclosure of matters which the borrower had to have to make the proper decision as to whether to sign the contract or not.

U.S. Bank has now confirmed, in writing from its own corporate offices in St. Paul, Minnesota, so much of what we have been arguing for years. This brochure should be filed in every securitization case for discovery purposes and opposing summary judgments or motions to dismiss where the securitized trustee “bank” takes the position that “the borrower is not part of the securitization and thus has no standing to question it.” U. S. Bank has confirmed that the borrower is in fact a party to an MBS transaction, period, and that the mortgage loan is in fact governed, in part, by “the Trust’s governing documents”, which are thus absolutely relevant for discovery purposes.

Happy Birthday Shawna - please stay 17 forever. :)

OCWEN LOAN SERVICING ADMITS IN WRITING: WE DO NOT KNOW WHO OWNS YOUR LOAN

OCWEN LOAN SERVICING ADMITS IN WRITING: WE DO NOT KNOW WHO OWNS YOUR LOAN

Several of our clients have recently received letters from Ocwen Loan Servicing in response to inquiries as to who owns the homeowner’s loan. The response from Ocwen is a form letter, which states: “There is no single investor of the loan. The loan is one of many in a securitized investment trust (with name of the trust). Ocwen is the servicer of the loan, and not necessarily the owner of the loan. Although the ownership of the loan may change, the ownership has no bearing on the servicing of the loan.”

Look at that series of admissions very carefully. We know that Ocwen is a servicer, and is never an “owner” of a loan. A servicer is (allegedly) working to service the loan on behalf of some owner. Who is that owner? Ocwen does not know, and admits that the ownership may change.

Servicing rights are conveyed by a servicing contract. Who is Ocwen working for? It does not say. What rights have been conferred upon Ocwen by whoever owns the loan? Ocwen does not say. What amount is the owner claiming is owed and under what facts? Ocwen does not say.

Ocwen does admit that the loan was securitized. This admission implicates all of the securitization issues, including authority of the servicer, whether the loan was properly transferred to the trust, whether there were any paydowns or payoffs of the note through insurances, credit default swaps, reserve pools, etc. depending on the current state of the law in whatever jurisdiction a foreclosure is pending. As you know, some states have case law which permits inquiry into the issues; some do not; and some are undecided.

This letter alone warrants intensive discovery in any foreclosure case in view of the admissions of Ocwen, which admissions generate a wealth of issues of fact for discovery and trial as well.