Alabama Court: Busted Securitization Prevents Foreclosure


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“the judge found the securitization of the Horace loan wasn’t done properly, so the trustee — LaSalle National Bank Association, now part of Bank of America (BAC) — couldn’t foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn’t have the right to foreclose, period.”

EDITORIAL COMMENT: The fact that this case came from Alabama makes it all the more important to be watched and noted. Despite the reluctance of many Judges to give a free house to homeowners, this Judge picked up on the fact that the homeowner wasn’t getting a free house and that if he allowed the foreclosure it would have been the pretender lender getting the free house.

When it comes down to it, this really is simple: the trustee never got the loan. The asset-backed pool didn’t have it despite their claim to the contrary. Saying it doesn’t make so.

The Pooling and Service Agreement is very specific as to what can and cannot be done, it has an internal logic (the investors are expecting performing loans and are not authorizing acceptance of non-performing loans), and it specifies the manner in which the loan must be transferred. None of these things were e found in compliance. If you don’t get the deed then you don’t get the property. This is just common sense — a point disputed by securitizers who see an unparalleled opportunity to pick up trillions of dollars in homes that (a) belong to homeowners and (b) even if they were subject to foreclosure should be for the benefit of the people who put up the money — the investors who purchased bogus mortgage-backed securities.

The investors now easily recognize the invalidity of the liabilities, notes and mortgages and deed of trust, and the liability attached to wrongful foreclosure of invalid documents and making credit bids on property on which the creditor is not the bidder and has not been identified. This isn’t conspiracy theory stuff, this is application of Property 101, Contract 101, and Common sense as it has been applied in commercial and real estate transactions for hundreds of years in statutes and common law predating the creation of the United States and fully adopted by the U.S. when it came into existence.


Court: Busted Securitization Prevents Foreclosure

By Abigail Field Posted 6:25PM 04/01/11 Columns, Bank of America, Real Estate

On March 30, an Alabama judge issued a short, conclusory order that stopped foreclosure on the home of a beleaguered family, and also prevents the same bank in the case from trying to foreclose against that couple, ever again. This may not seem like big news — but upon review of the underlying documents, the extraordinarily important nature of the decision and the case becomes obvious.

No Securitization, No Foreclosure

The couple involved, the Horaces, took out a predatory mortgage with Encore Credit Corp in November, 2005. Apparently Encore sold their loan to EMC Mortgage Corp, who then tried to securitize it in a Bear Stearns deal. If the securitization had been done properly, in February 2006 the trust created to hold the loans would have acquired the Horace loan. Once the Horaces defaulted, as they did in 2007, the trustee would have been able to foreclose on the Horaces.

And that’s why this case is so big: the judge found the securitization of the Horace loan wasn’t done properly, so the trustee — LaSalle National Bank Association, now part of Bank of America (BAC) — couldn’t foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn’t have the right to foreclose, period.

Since the judge’s order doesn’t explain, how should people understand his decision? Luckily, the underlying documents make the judge’s decision obvious.

No Endorsements

The key contract creating the securitization is called a “Pooling and Servicing Agreement” (pooling as in creating a pool of mortgages, and servicing as in servicing those mortgages.) The PSA for the deal involving the Horace mortgage is here and has very specific requirements about how the trust can acquire loans. One of the easiest requirements to check is the way the loan’s promissory note is supposed to be endorsed — just look at the note.

According to Section 2.01 of the PSA, the note should have been endorsed from Encore to EMC to a Bear Stearns entity. At that point, Bear could either endorse the note specifically to the trustee, or endorse it “in blank.” But the note produced was simply endorsed in blank by Encore. As a result, the trust never got the Horace loan, explained securitization expert Tom Adams in his affidavit.

But wait, argued the bank, it doesn’t matter if if the trust owns the loan — it just has to be a “holder” under the Alabama version of the UCC (Uniform Commercial Code), and the trust is a holder. The problem with that argument is securitization trusts aren’t allowed to simply take property willy-nilly. In fact, to preserve their special tax status, they are forbidden from taking property after their cut-off dates, which in this case was February 28, 2006. As a result, if the trust doesn’t own the loan according to the PSA it can’t receive the proceeds of the foreclosure or the title to the home, even if it’s allowed to foreclose as a holder.

Holder Status Can’t Solve Standing Problem

Allowing a trust to foreclose based on holder status when it doesn’t own the loan would seem to create yet another type of clouded title issue. I mean, it’s absurd to say the trust foreclosed and took title as a matter of the UCC, but to also have it be true that the trust can’t take title as a matter of its own formational documents. And what would happen to the proceeds of the foreclosure sale? That’s why people making this type of argument keep pointing out that the UCC allows people to contract around it and PSAs are properly viewed as such a contracting around agreement.

I’m sure the bank’s side will claim the judge was wrong, that he disagreed with another recent Alabama case that’s been heavily covered, US Bank vs. Congress. And there is a superficial if flat disagreement: In this case, the judge said the Horaces were beneficiaries of the PSA and so could raise the issue of the loan’s ownership; in Congress the judge said the homeowners weren’t party to the PSA and so couldn’t raise the issue.

But as Adam Levitin explained, the Congress decision was procedurally weird, and as a result the PSA argument wasn’t about standing, as it was in Horace and generally would be in foreclosure cases (as opposed to eviction cases, like Congress). And what did happen to the Congress proceeds? How solid is that securitization trust’s tax status now anyway?

In short, in the only case I can find that has ruled squarely on the issue, a busted securitization prevents foreclosure by the trust that thinks it owns the loan. Yes, it’s just one case, and an Alabama trial level one at that. But it’s still significant.

Homeowners Right to Raise Securitization Issue

As far as right-to-raise-the-ownership issue, I think the Horace judge was just being “belt and suspenders” in finding the homeowners were beneficiaries of the PSA. Why do homeowners have to be beneficiaries of the PSA to raise the issue of the trust’s ownership of their loans? The homeowners aren’t trying to enforce the agreement, they’re simply trying to show the foreclosing trust doesn’t have standing. Standing is a threshold issue to any litigation and the homeowners axiomatically have the right to raise it.

As Nick Wooten, the Horaces’ attorney, said:

“This is just one example of hundreds I have seen where servicers were trying to force through a foreclosure in the name of a trust that clearly had no interest in the underlying loan according to the terms of the pooling and servicing agreement. This conduct is a fraud on the borrower, a fraud on the investors and a fraud on the court. Thankfully Judge Johnson recognized the utter failure of the securitization transaction and would not overlook the fact that the trust had no interest in this loan.”

All that remains for the Horaces, a couple with a special needs child and whose default was triggered not only by the predatory nature of the loan, but also by Mrs. Horace’s temporary illness and Mr. Horace’s loss of overtime, is to ask a jury to compensate them for the mental anguish caused by the wrongful foreclosure.

Perhaps BofA will just want to cut a check now, rather than wait for that verdict. (As of publication BofA had not returned a request for comment.)

No one is suggesting the Horaces get a free house; they still owe their debt, and whomever they owe it to has the right to foreclose on it. Wooten explained to me that the depositor –in this case, the Bear Stearns entity –i s probably that party. Moreover if the Horaces wanted to sell and move, they’d have to quiet title and would be wise to escrow the mortgage pay off amount, if that amount can be figured out. But for now the Horaces get some real peace, even if a larger mess remains.

Much Bigger Than A Single Foreclosure

The Horaces aren’t the only ones affected by the issues in this case.

Homeowners everywhere that are being foreclosed on by securitization trusts — many, many people — can start making these arguments. And if their loan’s PSA is like the Horaces, they should win. At least, Wooten hopes so:

“Judge Johnson stopped a fraud in progress. I am hopeful that other courts will consider more seriously the very serious issues that are easily obscured in the flood of foreclosures that are overwhelming our Courts and reject the systemic and ongoing fraud that is being perpetrated by the mortgage servicers. Until Courts actively push back against the massive documentary fraud being shoveled at them by mortgage servicers this fraudulent conduct will not end.”

The issues stretch past homeowners to investors, too.

Investors in this particular mortgage-backed security, take note: What are the odds that the Horace note is the only one that wasn’t properly endorsed? I’d say nil, and not just because evidence in other cases, such as Kemp from New Jersey, suggests the practice was common. This securitization deal was done by Bear Stearns, which other litigation reveals was far from careful with its securitizations. So the original investors in this deal should speed dial their lawyers.

And investors in bubble-vintage mortgage backed securities, the ones that went from AAA gold to junk overnight, might want to call their attorneys too; this deal was in 2006, and in the securitization frenzy that followed processes can only have gotten worse.

Some investors are already suing, but the cases are at very early stages. Nonetheless, as cases like the Horaces’ come to light, the odds seem to tilt in investors’ favor — meaning they seem increasingly likely to ultimately succeed in forcing banks to buy back securities or pay damages for securities fraud connected with their sale. And that makes the Bank Bailout II scenario detailed by the Congressional Oversight Panel more possible.

The final, very striking feature of this case is what didn’t happen: No piece of paper covered in the proper endorsements –an allonge — magically appeared at the eleventh hour. The magical appearance of endorsements, whether on notes or on allonges, has been a hallmark of foreclosures done in the robosigning era. And investors, as you pursue your suits based on busted securitizations, that’s something to watch out for.

My, but the banks made a mess when they forced the fee-machine of mortgage securitizations into overdrive. The consequences are still unfolding, but one consequence just might be a whole lot of properties that securitization trusts can’t foreclose on.

See full article from DailyFinance:

12 Responses

  1. “Is there a hole for me to get sick in?” (BD)

    Now this cracks me up. According to an article at housingwire, the attorney for LaSalle is whining that the homeowner might get a free home! Attorney
    Shaun Ramey is quoted as stating that the homeowner has no standing to argue that the note didn’t get into the trust. First of all, it’s a question of fact. Apparently, it didn’t. Another judge, Judge Todd in Raftigianis, has also ruled that the homeowner is an intended beneficiary of securitization. Just a reminder why that would be true. All the banksters hailed securitization as a vehicle to move more funds into the market by selling loans, getting them off their own books, freeing up capital to make new loans to homeowners. Good for the goose, but now not good for the gander? I’m thinking estoppel.

    But Ramey’s argument is just a red herring, anyway. LaSalle has no interest.
    And so, speaking of standing, where is yLaSalle’s standing to argue that the homeowner is getting a free home. And this would affect LaSalle how since they have no interest in the note?
    They have recourse – anyone who actually suffered a loss as a result can go after the yeahoos who didn’t get the note where it was supposed to be.
    After all, those yeahoo’s got free TARP funds in the billions, speaking of “free”.
    In my opinon, if there were any honor remaining among men in lofty towers, LaSalle and anyone connected to their own abysmal failure would own their mistake, let it go, and pay up as necessary.
    Otherwise the p—ing match is on about the UCC and its application, which is the appeal threatened.

  2. […] View the original article here LikeBe the first to like this post. […]

  3. Maybe there IS a spy in hte house of Usher. We were just discussing the ‘whereabouts’ of private mortgage insurance proceeds and their apparent misapplication. FNMA just issued this directive:


  4. Let’s not be lulled into a false sense of security regarding MERS. They are likely planning for Round II:

    They have hired some high profile lobbyists.Aw, geez. Give it a rest already. It’ll never end?

    They have also contracted with another company, the name of which starts with a “G”, to do what?
    Make a stab at diligence? Add another layer in their cloak and dagger m.o.? Get courts and the public away from their own bad name? Watch, it’ll all be about this new company…….
    I lost my link. Mr. Garfield? Anyone got it?



  6. @uprootedone – enjoyed your comments til they abruptly ended! I think you provided some valuable insight.

  7. Judging by last week’s performance, it sure looks as though the country’s top bank regulator is back to its old tricks.

    Though, to be honest, calling the Office of the Comptroller of the Currency a “regulator” is almost laughable. The Environmental Protection Agency is a regulator. The O.C.C. is a coddler, a protector, an outright enabler of the institutions it oversees.

    Back during the subprime bubble, for instance, it was so eager to please its “clients” — yes, that’s how O.C.C. executives used to describe the banks — that it steamrolled anyone who tried to stop lending abuses. States and cities around the country would pass laws requiring consumer-friendly measures such as mandatory counseling for subprime borrowers, or the listing of the fees the banks were going to charge for the loan. The O.C.C. would then use its power to either block or roll back the legislation.

    It relied on the doctrine of pre-emption, which holds, in essence, that federal rules pre-empt state laws. More than 20 times, states and municipalities passed laws aimed at making subprime loans less predatory; every time, the O.C.C. ruled that national banks were exempt. Which, of course, rendered the new laws moot.

    You’d think the financial crisis would have knocked some sense into the agency, exposing the awful consequences of its regulatory negligence. But you would be wrong. Like the banks themselves, the O.C.C. seems to have forgotten that the financial crisis ever took place.

    It has consistently defended the Too Big to Fail banks. It opposes lowering hidden interchange fees for debit cards, even though such a move is mandated by law, because the banks don’t want to take the financial hit. Its foot-dragging in implementing the new Dodd-Frank laws stands in sharp contrast to, say, the Commodity Futures Trading Commission, which is working diligently to create a regulatory framework for derivatives, despite Republican opposition. Like the banks, it views the new Consumer Financial Protection Bureau as the enemy.

    And, as we learned last week, it is doing its darndest to make sure the banks escape the foreclosure crisis — a crisis they created with their sloppy, callous and often illegal practices — with no serious consequences. There is really no other way to explain the “settlement” it announced last week with 14 of the biggest mortgage servicers (which includes all the big banks).

    The proposed terms call on servicers to have a single point of contact for homeowners with troubled mortgages. They would have to stop the odious practice of secretly beginning foreclosure proceedings while supposedly working on a mortgage modification. They would have to hire consultants to do spot-checks to see if people were foreclosed on improperly. (Gee, I wonder how that’s going to turn out?)

    If you’re thinking: that’s what they should have done in the first place, you’re right. If you’re wondering what the consequences will be if the banks don’t abide by the terms, the answer is: there aren’t any. And although the O.C.C. says that it might add a financial penalty, I’ll believe it when I see it. While John Walsh, the acting comptroller, called the terms “tough,” they’re anything but.

    No, the real reason the O.C.C. raced to come up with its weak settlement proposal is that last month, a document surfaced that contained a rather different set of terms with the banks. These were settlement ideas being batted around by the states’ attorneys general, who have been investigating the foreclosure crisis since late October. The document suggested that the attorneys general were not only trying to fix the foreclosure process but also wanted to penalize the banks for their illegal actions.

    Their ideas included all the terms (and then some) included in the O.C.C. proposal, though with more specificity. Unlike the O.C.C., the attorneys general had devised a way to actually enforce their settlement, by deputizing the new consumer bureau, which opens in July. And they wanted to impose a stiff fine — possibly $20 billion — which would be used to modify mortgages. In other words, the attorneys general were trying to help homeowners rather than banks.

    By jumping out in front of the attorneys general, the O.C.C. has made the likelihood of a 50-state master settlement much less likely. Any such settlement needs bipartisan support; now, thanks to the O.C.C., there’s a good chance that Republican attorneys general will walk away. The banks will be able to say that they’ve already settled with the federal government, so why should they have to settle a second time? If they wind up being sued by the states, the federal settlement will help them in court.

    “It’s a vintage O.C.C. move,” said Prentiss Cox, a law professor at the University of Minnesota who was formerly an assistant attorney general. “It is clearly an attempt to undercut the A.G.’s”

    Old habits die hard in Washington. The O.C.C.’s historical reliance on pre-emption should have died after the financial crisis. Instead, it’s merely been disguised to look like a

  8. Well, a note taken with notice of its dishonor (default)means the transferee is not and never can be a holder in due course. That means the note is subject to any and all defense by the maker, so it makes sense these notes would be inappropriate for the investors. This is a great ruling. Glad to hear about it.
    Did you know that you can now cite this case in your case? You can get it in under “emerging law”, I think it’s called. Something like that. This is a doctrine for cases which were not available, hadn’t been decided or published, when you made your arguments.

  9. You guys are slipping, as it took you over two weeks to get this up on your site.

    Everybody doing OK there?

  10. I believe strongly in the Wooten argument, and that eventually it will prevail repeatedly. However, the Horace case is only in a lower court, and in just one state. Alabama happens to be the home base of Wooten so he has put the argument forward there first.

    When this makes it up to superior courts, and is properly ruled on, then we’ll have something to REALLY hang our hats on.

  11. Similar situation in Florida: But the judge doesn’t understand or does not want to. I have complained regarding this same situation.

    I found that my alleged loan was intended to place into, but kicked out. After 2 years of closing of the securitized pool, they are alleging it is in this trust as of 2/09. (which was a retro-effective date) the alleged assignment was created (authenticity objected to) in june 09, 2 years a after the closing date. This servicer kept information regarding the alleged sale of the loan and kept vital information regarding the seller, which I could have had recourse against, since I was not aware of certain things at that time.

    Long story short, alot of collusion going on in aid to make it all fit among the parties and I believe this judge knows this, but just doesn’t give a s**t.

    I believe that since the buyer could not shove the junk back to the seller, due to BK, an affiliate collected on it, (junk debt buyer) and since the s**t hit the fan, they are readjusting. But the assignment goes directly from originator, (who did not fund the loan) (broker) to the trust. No perfected chain and refuse to turn over vital information requested in discovery. I have been warned not to file any more motions and have to ask leave of the court to do so and he didn’t even force them to produce when I brought that fact up.

    What the heck, we can’t even have our due process to defend and fight. BIAS

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