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Mortgage assignment gap controversy is blowing up
by Dave Pelligrinelli | 2010/04/07 |

In February 2009, I first began writing about the looming issue of mortgage assignment gaps as a title defect, particularly on foreclosed properties. I have updated the subject a few times since then as there were developments. In the United States, the open, public and discoverable nature of title records is a critical feature of secure property ownership. Recently, the issue has hit the mainstream. Attorneys and lenders are in crisis mode as even Realtors are now aware of the issue, and scrambling to figure out how to disclose the risk to foreclosure buyers.

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One broker sees "an explosion of litigation in this area" as the serious title defects are discovered. From the article:
"In the case of maintaining a public chain of title to real property, it was thought to be essential and generally required by the law. (Lenders) stopped recording the assignments in public and track them instead in an electronic data base that the major lenders would operate through a cooperative entity. Say hello to Mortgage Electronic Registration Systems, affectionately known as MERS. Not only did it save them a fortune in county fees and manpower, it turned out to be a cash cow. Never mind that the cost of maintaining a county recording system is paid, in part, by the recording revenue. They still have to maintain the apparatus, but now they aren't receiving the revenue intended to maintain the system. Many homes have been unlawfully foreclosed by entities not entitled to anything. The former owners of these homes have rights that will need to be addressed. Many people bought these homes and have potential future claims. If there is a cloud on title, the new owner is at risk of being unable to sell or encumber the property. If the foreclosure were unlawful, the borrower is entitled to their property.
The Bellistri v Ocwen case in Missouri, and the US Bank v Ibanez case in Massachusetts are the most often quoted examples of this potential issue. In these cases lenders foreclosure rights were challenged because of undocumented and unrecorded assignments of the notes underlying the mortgage. There is an alternate point of view. In Connecticut, the appellate court ruled in favor of a lender and upheld the validity of an unrecorded assignment, even a blank assignment. The premise was that a mortgage note is a bearer instrument.
"General Statutes § 49-17[ 6 ] permits the holder of a negotiable instrument that is secured by a mortgage to foreclose on the mortgage even when the mortgage has not yet been assigned to him.The "holder" is the person or entity in possession of the instrument if the instrument is payable to bearer. General Statutes § 42a-1-201 (b) (21) (A). When an instrument is endorsed in blank, it "becomes payable to bearer and may be negotiated by transfer of possession alone . . . ." General Statutes § 42a-32-05 (b).As stated previously, the subject promissory note was endorsed in blank by BNC Mortgage, Inc., and, therefore, is payable to bearer. The plaintiff, by way of its possession of an instrument payable to bearer, is a valid holder of the instrument and, therefore, is entitled to enforce it."
This contradicts the language used by the court in the Massachusetts ruling: ""The blank mortgage assignments they possessed transferred nothing.in Massachusetts, a mortgage is a conveyance of land. Nothing is conveyed unless and until it is validly conveyed.  The various agreements between the securitization entities stating that each had a right to an assignment of the mortgage are not themselves an assignment and they are certainly not in recordable form." Part of the what makes the cases different is the venue. Each state has different statutory requirements for the validity security instruments. Regardless, foreclosure defense is latching on to the potential weaknesses of unrecorded assignments as a strategy. The success of these claims is a combination of the specific strategy used by the attorney, and the laws in the state where the case is located. Some lenders attempt to correct this potential defect by creating assignments after the fact. Where it is done correctly, it sometimes works. When the execution is sloppy, it borders on fraud.
These Specially-Made Assignments have created havoc in the courts. In many cases, the Specially-made Assignments are dated AFTER the foreclosure action has been initiated, making it appear that the Trust somehow magically knew prior to the assignment that it would acquire the defaulting property several months after the foreclosure action was initiated. Repeatedly, courts have asked Trustees to explain why they were acquiring nonperforming loans and whether such acquisition was a violation of the trustee's fiduciary duty to the Trust. In lieu of valid Assignments, Trusts continue to rely on Assignments specially made by their own law firms and mortgage default service companies. Eventually, these fraudulent Assignments are being discovered by Courts, and the foreclosing trusts required to prove that they own the Mortgage and Note in the foreclosure action without reliance on Assignments that misrepresent the date of the actual transfer to the Trust the authority of the signers of the bankrupt original lenders. The problem is complicated by the bankruptcy of the major loan originators, including Option One Mortgage, and Countrywide Home Loans. When these big mortgage companies filed for bankruptcy, they did not disclose the mortgages already sold to the trusts as assets, because the transfers occurred months and years prior to the bankruptcy filing. Years later, when the Assignments were required for foreclosures, a bankruptcy court's permission was needed to Assign billions of dollars in mortgages. Most likely in fear that a Bankruptcy Judge would not rubber stamp such a request, no such permission has ever been sought.
If that isn't enough to worry about, some mortgage servicers were in a position to benefit from increased default rates, which they had control over.
The financial intermediary who had no actual loss also bought credit default swaps for themselves at multiple times the loan amount. There is an inherent conflict of interest in this scenario. The financial intermediaries, who actually have no risk, stand to gain enormously by collecting on the default swaps. As if debt securitization and betting on failure weren't lucrative enough, part of the plan included gaining every possible means of getting more of the borrower's money in fees. But even more important, by controlling servicing, they have the ability to actually control the exact number of defaults within specific pools by simply pushing people into default. The terms of the default swaps were dictated by the financial intermediaries. However, if they could control the performance of the underlying loans, they could manipulate the defaults in the pool. The best way to do that is to service the loan. They comb credit reports looking for changes in the patterns of payments. If they see more use of credit cards, late payments, grocery charges, types of stores and purchases; there antennas go up and they smell a victim in the making. If they suspect you might be running low on cash, they know that you can't put up much of a fight, particularly in a non judicial foreclosure state.
Attorneys I speak with are overwhelmed with cases, on both sides of the argument. Foreclosure defense firms are taking on more clients than they can handle. At the same time, firms representing lenders are inundated with foreclosure cases which are no longer a rubber stamp to completion. I receive a dozen calls per day from attorneys, lenders, and investors looking for documentation on these types of issues. If you are involved with this process, let me know if you have anything to add to this subject.

Dave Pelligrinelli


1821 words | 11448 views | 4 comments | log in or register to post a comment

Excellent! This is what I have been looking for all week.

This issue piqued my interest a few days ago when the WSJ reported on the federal investigation of DocX, apparently regarding its conduct in creating after-the-fact assignments.  I wasn't really sure whether this was a truly big deal, or just kind of a "sign of the times" thing that would be interesting but of marginal importance.  If attorneys are "overwhelmed with cases", and there's an "explosion of litigation," I guess this is going to be a big deal in at least some states.

Recently, I came across some of the stuff on the Fraud Digest site that you linked to.  Is Lynn Szymoniak, the attorney who brought the Florida class action against DocX and also who edits the Fraud Digest site, one of the attorneys who you've been talking to?  Couldn't help but notice you were both from the same neck of the woods.  I saw that they had dropped that class action, but that they think they will be able to revive it

The idea of servicers engineering a particular default rate on a pool of mortgages for profit is a new angle I would have never even conceived of... jeaz, is someone really that sleazy?  Rhetorical question, of course...

Anyway, thanks for the post.  I felt really behind the curve on this issue a few days ago, and now, thanks to your post, I feel a little bit less behind the curve :-)

by Slade Smith | 2010/04/07 | log in or register to post a reply

Quite a sticky wicket...

I recently researched this issue in our local courts.  I was somewhat surprised to find the Fifth District Court of Appeals in Ohio has held that "Where a note secured by a mortgage is transferred so as to vest the legal title to the note in the transferee, such transfer operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered."  This was quoted by the court in a decision just this year.

On one hand, I think the courts should be holding lenders to higher standards.  On the other, someone is owed money by the homeowner and it should be no surprise to find that whomever that is has the right to foreclose.  I think the real question should be was the homeowner prejudiced by the lack of proper assignments of record?  If the homeowner was in default because he couldn't figure out who to pay, then I think there would be more punch to the arguement.  But that is rarely the case.

From a title perspective... I think it is a real shame that lenders aren't required to record their assignments.

by Robert Franco | 2010/04/08 | log in or register to post a reply

Nevada has NRS 111.315

I haven't been able to find any case support for this statute's proposition that any document

affecting title to or an interest in real property must be recorded.  If not, it is only binding on the

parties thereto. 

by stevie rocker | 2010/06/12 | log in or register to post a reply

Nevada SC Rules Complete Chain of Title is Necessary

Because Nevada is a title-theory state, an assignment of a deed of trust is a transfer  of real property.  The granting of a deed of trust is the granting of title to the real property.  The statute of frauds is implicated by transfers of real property.  Therefore, they must all be in writing . It appears to me from the glance I had time to take that implicit in this ruling is "no hiding behind MERS".  The court reached the decision in two cases involving mediation and ruled that banksters may not show up, which they must, without evidence of their right to mediate, including  a complete written chain of title for the deeds of trust,  A capsulization will not get it.  In one of the two cases, the SC remanded back to the lower court for sanctions against one of the bankster. These assignments were not done, of course, so I don't know how any of these pretenders will ever prevail.  It stands to reason, at least to me,  these same facts would apply to chains of title for foreclosure actions, and further may go so far as affording grounds to set aside foreclosures.  I hope any title company who wrote a title guarantee report for foreclosures charged  a fat fee and has good insurance of its own.   Well, actually, they better hope. 

I don't recall the names on the cases, but the two attorneys for the homeowners were Matthew Callister and David Crosby.    According to online reports, attorney Callister was frustrated over his own home's mediation process. 

by john gault | 2011/07/16 | log in or register to post a reply

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