Mortgage Documentation Issues Close to Home


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Mortgage Documentation Issues Close to (My) Home

posted by Jean Braucher

The Arizona Supreme Court currently has under review a mortgage documentation case, Vasquez v. Saxon Mortgage, Inc. Just by chance, the Court was on its annual visit to the University of Arizona law college, where I teach, for the oral argument on Sept. 22. So of course I was in the audience at the argument, along with my students from our new Mortgage Clinic and a related course, called the Mortgage Crisis. We’ve been analyzing and debating the opposing arguments since.

Although Arizona law is at issue, the questions presented may have resonance elsewhere. It is always hazardous to guess what any group of justices is thinking from the questions they ask, but of course, that’s what court watchers do. So here is my take: it was palpable that the bubble over the justices’ heads during the argument read: “Fixing this mess isn’t our job. Talk to the legislature.” And the burden of argument seemed to be on the homeowner side, to show where explicitly it says in the state’s statutes that any documentation is needed to conduct a non-judicial foreclosure sale. The most vocal members of the court seemed to join the lender side of the argument. As the lawyer for the Arizona Attorney General, arguing as an amicus on the borrower side, astutely noted in response to one loaded question, “That’s the bankers’ argument.” Alas, no member of the court raised the concerns of homeowners in general.

All Arizona homeowners (and I’m one) should care about having a transparent system of real estate ownership, including liens. Lax documentation affects property rights and real estate values. Foreclosure sales are a significant portion of all sales in Arizona these days, in some areas exceeding non-distressed sales. When purported owners of security interests in real estate pursue forced sales without having good evidence of a right to do so, prices are likely to be further depressed. Buyers may hesitate to show up at a foreclosure sale to buy from someone without an interest of record, and in cases where the property may be worth more than the debt outstanding, the absence of such buyers matters. The creditor will only bid in the loan amount. Also, even a very small number of mistaken foreclosures should concern us. Since most foreclosure sales in Arizona are non-judicial, after only 90-days’notice, they can easily go forward even if mistaken. Under the statutory scheme, later recourse is difficult at best.

The particular case is complex. It came to the Arizona Supreme Court on certified questions and a statement of facts from the Bankruptcy Court for the District of Arizona. When Deutsche Bank sought to foreclose on Julia Vasquez’s property non-judicially, she filed in bankruptcy to assert a predatory lending claim, but was barred by the statute of limitations, and then she sought to modify her loan in chapter 13. Halfway through the briefing period in the Arizona Supreme Court case, the lenders fired their lawyer and brought in new ones along with an army of heavy-hitting amici, from the Mortgage Bankers Association on down. Also during this period, the National Consumer Law Center, an amicus for the borrower/homeowner, discovered that the stipulated “facts” about how Deutsche Bank, the trustee for a securitized pool of loans, got the note were contrary to provisions of the sales and servicing agreement filed with the Securities and Exchange Commission (SEC). It seems that if Deutsche Bank got the note directly from the originator (Saxon Mortgage), as it said it did, it didn’t follow the securitization agreement designed to protect the investors in the pool for which the bank was trustee.

But let’s cut to the chase of the questions before the Arizona Supreme Court, awaiting decision. The questions boil down to: What does Arizona law require in the way of documentation to foreclose under a deed of trust (DOT), a type of real estate security interest, in a non-judicial sale? And why should anyone care? The Bankruptcy Court’s statement of facts includes that Deutsche Bank was assigned the note, but nothing is said about whether the note is a negotiable instrument. Indeed, use of the word “assigned” rather than “negotiated” suggests a non-negotiable instrument. The note, a copy of which is attached to the certified questions, provides for late fees, which may mean the note is not negotiable under Section 3-104(a) of the Uniform Commercial Code, which requires an “unconditional” promise, not a promise dependent in part on an event that may or may not occur. If the note isn’t negotiable, mere possession of it doesn’t by itself give a right to payment. Proof of the chain of assignments would be relevant to the question who currently owns the contract right to payment. This may be why the sale and servicing agreement (SSA) for this securitization, filed with the SEC, requires delivery to the investment pool’s trustee, Deutsche Bank, of “the original Mortgage note . . . with all intervening endorsements showing a complete chain of endorsement from the originator” as well as delivery of “each interim recorded assignment of such Mortgage, or a copy of each such interim recorded assignment of Mortgage. . . .” (Pp. 37-38)

As noted above, the loan was originated by Saxon Mortgage, and that happened back in 2005. There is no chain of endorsements on the note, and a written assignment of the deed of trust was executed and recorded only after an initiation of a foreclosure sale in 2008, with a purported retroactive effective date, to a few months earlier in 2008 (but long after a copy of a recorded assignment was supposed to be in the possession of the securitized trust, that is in 2005, as provided in the SSA, which contemplated transfers from Saxon Mortgage through at least one other Saxon entity, Saxon Asset Securities Company, to the trust, with Deutsche Bank as trustee, in order to make the trust bankruptcy-remote and the investments under it eligible for pass-through tax treatment).

In addition to whether the note is negotiable, other issues in the case are whether the security interest under the deed of trust was timely assigned or recorded. The Arizona deed of trust (DOT) statute, in Arizona Revised Statutes (A.R.S.) section 33-817, includes a provision that the security follows the contract obligation. However, the lack of clear proof of who owns the obligation (that is, through what chain of transfers), if not a negotiable instrument, and the belated effort in 2008 to assign the DOT directly from the originator to Deutsche Bank and to record Deutsche Bank’s DOT nterest at that time, both contrary to the SSA, raise questions about whether the note and security were separated and thus about who, if anyone, had rights to foreclose under the DOT. If no one did, Deutsche Bank might have to use a judicial foreclosure and go into court and prove its interest before trying to sell a home.

Because Deutsche Bank did not record an assignment of the DOT before it started the process of non-judicial foreclosure, there is an issue about compliance with the Arizona recording statute. The first sentence of A.R.S. section 33-411.01 requires that any document evidencing the transfer of “any legal or equitable interest” in real estate “shall be recorded by the transferor. . . within sixty days of transfer.” If Deutsche Bank got the interest in the DOT by virtue of assignment of a note in 2005, the assignment should have been recorded in the county records by 60 days later, not in 2008. A second sentence provides that in lieu of recording, “the transferor shall indemnify the transferee in any action in which the transferee’s interest in such property is at issue . . .,” a provision that is inapplicable as between a transferor and someone holding a prior interest in the property (that is the trustor/borrower, with its equitable ownership interest).

The recording statute goes on to deal with the effectiveness of unrecorded instruments of conveyance, explicitly mentioning deeds of trust and providing that unrecorded conveyances “shall be void” as to creditors and subsequent purchasers for value and without notice. A.R.S. 33-412.A. (And A.R.S. 33-818 repeats the importance of recording “assignment of a beneficial interest under a trust deed” as against subsequent purchasers for value.) So non-recording of assignment of an interest under a DOT, as in this case, certainly could dampen enthusiasm for purchasing at foreclosure, driving down prices. Buyers should be suspicious of a DOT sale initiated by someone not of record, because there might be an intervening claimant with priority.

In addition, A.R.S. 33-412.B provides that unrecorded instruments of conveyance “as between the parties and their heirs” shall be “valid and binding.” Notably missing from that provision is any reference to assigns. At the oral argument, one of the Arizona justices read this provision to the bankers’ attorney as though it supported that side of the argument, but of course Deutsche Bank and the borrower, Vasquez, were not both parties to an instrument. Deutsche Bank did not appear on the DOT (only Saxon Mortgage did). The formulation “parties, their assigns and heirs” or the like is common in the law; the pointed omission of assigns in the recording statute provision on the validity of unrecorded interests implies a lack of validity as between an assignee and the trustor. (The borrower, Vasquez, was the trustor who signed the DOT making Saxon Mortgage beneficiary; and the DOT was recorded in that form, with no further recording of any transfers prior to initiation of the foreclosure.)

At a minimum, the statute is ambiguous, saying that an unrecorded DOT conveyance is “void” against a good faith purchaser for value and “valid and binding” between immediate parties and their heirs. So where does the statute come down as between a trustor/borrower and an assignee from the beneficiary? The statute does not say either that the unrecorded remote assignee has a valid interest or an invalid interest, although it implies invalidity in the absence of recording. In these circumstances, it is open to the Court to interpret the statute according to the implication of invalidity. The recording statutes pre-date securitization, and the SSA here strongly suggests that the lender complex involved in this loan thought it necessary to document transfers of the note with a chain of endorsements and transfers of the DOT interest by recorded assignments. Securitizers could have complied with the law (as apparently intended under the SSA), or, if they wanted to be free not to provide documentation, they should have gotten statutory changes clearly saying so before proceeding with their new model. Instead, Deutsche Bank acted as though it knew the documentation was messed up, filing a recorded assignment with a purported retroactive effective date in 2008, only after initiating a foreclosure.

Now to perhaps the key question: does proper documentation matter? As I have already suggested, all homeowners in Arizona should care that real estate values not be dragged down by lenders’ failure to document who owns a loan, holds a security interest in a home, and thus who has a right to foreclose upon default. Deutsche Bank did not follow its own roadmap, laid out in the SSA filed with the SEC, for the documentation of the transaction. It was supposed to get delivery of both the note, with the chain of ownership established by endorsements, and a copy of a recorded assignment of the DOT. When purported owners of loans cannot crisply show that they are entitled to enforce, this will discourage potential buyers at DOT sales, with ripple effects for all homeowners. This is particularly true with the volume of distressed sales occurring during the current mortgage crisis, brought on by a spree of extreme risk-taking and now compounded by sloppy documentation (and failure to make modification deals that would be win-win, compared to foreclosure). With no competitors at a DOT sale, purported owners of a loan can buy with a credit bid at the loan amount; there is no reason to bid more even when the home might be worth more.

We should also care about mistaken foreclosures, which are a risk with a quick non-judicial process, and it would be unfortunate if the Arizona Supreme Court blesses sloppy procedures that can lead to them. The dimensions of that problem have not been studied, and we cannot assume it away.

Finally, borrowers have an interest in being able to find out who owns their loans. Servicers all too frequently refuse to say but also say they lack authority and refuse to approve modifications that would improve returns to investors while providing relief to borrowers. Having a placeholder in the real estate records makes it hard or even impossible to find out whom to approach about a modification. In 2010, Arizona’s legislature added a provision to the DOT statute (A.R.S. 33-808.01.A) requiring “the lender” (undefined) on a residential loan to contact the borrower at least 30 days before notice of sale to explore options to avoid foreclosure, showing a legislative interest in more workouts. Interpreting the recording statute to make assignees have to be of record, as implied by the Arizona recording statute, would make the entire system more coherent.

October 3, 2011 at 7:00 PM in Mortgage Debt & Home Equity

5 Responses

  1. […] title, rescission, RESPA, securitization, TILA audit, trustee,WEISBAND « Mortgage Documentation Issues Close to Home LAWYERS TAKING NOTE OF TITLE PROBLEMS AND HOW TO […]

  2. Here’s what the UCC says about “unconditional promise to pay,” which is required of a “negotiable instrument”:

    “(a) Except as provided in subsections (c) and (d), “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if it:
    (1) is payable to bearer or to order at the time it is issued or first comes into possession of a holder;
    (2) is payable on demand or at a definite time; and
    (3) does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor. ”

    So the way I read this is as follows:

    A negotiable instrument can only consist of an “unconditional” promise to pay. The word “unconditional” isn’t quite correct, because the law goes on to enumerate some permissible conditions. The permitted condition I’m most interested in is the one that says a note can be “payable on demand or at a definite time.” Most standard notes that I’m familiar with choose the latter of those two options, the “definite time” requirement. That is, the promised payment must be made by a definite time, usually 30 years.

    It seems to me, however, that the standard note adds more conditions than the UCC actually allows for treatment as a “negotiable instrument.” Namely, the standard note requires that payment be made monthly and within a 15-day window. That is a condition which is NOT allowed by the UCC. The UCC quote above contemplates an unconditional promise to pay by the date of maturity, not an unconditional promise to make a monthly payment. In fact, the requirement to make a monthly payment makes the promise to pay conditional above and beyond the conditions that the law allows.

    Essentially, then, the situation contemplated by the UCC is that a borrower and the lender agree on a definite time by which the promise to pay must be fulfilled. In my case, that date is 30 years from the date I signed the note. Obviously it makes sense to pay monthly, unless I can’t for one reason or another. Maybe I have a bad couple of months and can’t afford to pay the mortgage those months. The UCC formulation above seems to indicate that such a situation should be A-OK as long as I make the required payments of principal and interest by the “definite date”–30 years in the future. So if I miss a monthly mortgage payment, the lender really shouldn’t be able to do diddly-squat to me. Of course, that just means I have to play catch up on my payments which would be hard on me, but I should be good as long as I pay it all back when 30 years are up.

    But we all know that’s not how it works in the “real world.” But the above is the scenario that the actual letter of the law appears to contemplate.

    Even if one argued that “definite time” means that a monthly payment is an acceptable condition to the supposedly “unconditional” promise to pay, how is a 15-day window for a monthly payment a “definite time?” A 15-day window is the antithesis of a “definite time.” A 15-day window is an approximate time, which is the antithesis of a “definite” time. The

    Again, just my thoughts. I’m not a lawyer. I’m not saying I would use the above in court, but then again I don’t rule out using it in court. As I pointed out below, the banks certainly acted as if the notes weren’t negotiable. Maybe that’s because the banks knew the notes actually were NOT negotiable instruments so there was no need to treat them as such until somebody lifted up the rock they live under to see what they were actually attempting to do.

  3. This article brings up a very important point, namely, are the standard promissory notes in fact negotiable? Quite interesting that the notes were almost uniformly NOT treated as negotiable in that they were not endorsed. How do we know this? Linda Demartini’s testimony (in Kemp v. Countrywide) was that she had never seen an endorsed note and she worked at Countrywide for ten years. Fortune Magazine did a study of a small sample of notes and found that NONE of the Countrywide notes they studied were endorsed. And then there’s the lawyer whose name escapes me at the moment (Max Gardner, maybe) who says if he ever saw a properly endorsed note, he’d have to have it framed or give a reward to the person who brought it to his attention.

    As we can all attest to here, the standard practice for the banks when sued or when suing is to submit a note that is NOT endorsed, only later submitting one with an endorsement if the opposing party makes an issue of it. This is exactly what happened to me, among many others. So the writer of the above article has made a very good point, one that hasn’t been explored much in foreclosure defense (that I have seen, anyway). It very well could be that the biggest fraud of them all is that the notes are in fact NOT negotiable, which is why the banks/originators/pretender lenders routinely DID NOT endorse them.

    And the non-endorsement makes sense in the context of the securitization scam–it saves a step, for starters. For another thing, non-endorsement allows endorsements to be added to a note only when needed, as in a lawsuit. Never mind that endorsement is required for negotiability–the pretender lenders just treated the notes as negotiable even though they arguably weren’t, all with a “wink, wink” and a “we’ll make sure to record the transfers on MERS–or not–who will ever find out” and so forth.

    As the writer points out, the UCC states that negotiability requires an UNCONDITIONAL promise to pay. However, all standard promissory notes, it could and probably should be argued, have a number of conditions, such as:

    1) CHANGING NOTEHOLDER; The person to whom the money is to be paid can change. My note, which is identified as being a Fannie Mae standard note, says that the person who is to be paid can change. That is a very–if not the most– important condition, and one that may or may not come up. Basically the note says “You have to pay the Lender UNLESS the note is transferred to someone else.” Conditions don’t get more conditional than that, and the question of to whom the money should be paid is an inextricable part of the “promise to pay.” Indeed, the very phrase “promise to pay” begs the question of whom you are promising to pay.

    2) TIME/PLACE OF PAYMENT: These are certainly conditions. The time/place of payments is “an express condition to payment,” as the UCC puts it. The place of payment is also conditional, as under the original conditions of the note, payments are to be sent to a specified place but when conditions change, the borrower gets a notice to start sending payments to a different place. In fact, regarding place of payment, my note uses the most conditional word of all: that I must pay to a certain address or to a different address “IF required by the Note Holder.”

    3) INTEREST/LOAN CHARGES: Again with the “if”–my note says “IF a law…is finally interpreted, etc.” The use of “if,” denotes a condition.

    As the writer notes, late fees are a condition. My note again uses “if”: “IF the Note Holder has not received payment” within 15 days, I will be charged a late fee.

    Just my thoughts. I’m not a lawyer and don’t want to be one.


    Re. these two sentences from article
    “Finally, borrowers have an interest in being able to find out who owns their loans. Servicers all too frequently refuse to say but also say they lack authority and refuse to approve modifications that would improve returns to investors while providing relief to borrowers.”

    Question: Even of they (servicers), do “approve” a mod (on false default debt),—the supposed “investors” mentioned here would get NO RETURN—correct??? More smoke and mirrors???

  5. Neil—seriously—why can’t you stop rehashing the same old BS?

    Get to the whole truth—PLEASE.

    The complete fraud at origination is the most important thing to be investigating right now. We cannot move forward in any way without it. We are just prolonging the inevitable.

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