There is a growing amount of discussion these days about possible defects in foreclosure proceedings commenced by loan servicers. A lot of this discussion concerns procedural matters, such as whether the correct steps are being taken to verify the accuracy of statements made in affidavits executed in connection with these proceedings.
However, more fundamental issues have been raised challenging both the validity of the procedures used to convey mortgage loans into securitization trusts and the qualification of the securitization trusts as a real estate mortgage investment conduit (“REMIC”) at the time those trusts were formed.
The reasoning here is:
- in order to satisfy procedural requirements in connection with foreclosure, certain steps must be taken in order to document the ownership of a mortgage loan by the securitization trust, and
- if not all of these steps were taken at the time of the securitization, the securitization trust may not own the mortgage loan. Some say this reasoning is faulty, because some of the steps that may be required under certain state laws in order to bring a foreclosure action are not required to transfer ownership of the mortgage loan.
The mortgage industry says that the industry standard procedures used for decades in transferring mortgage loans to securitization vehicles comply with the well-settled principles of law governing the transfer of mortgage loans, and therefore are effective to transfer ownership of the mortgage loans. And they are correct when these procedures are followed, and notes actually get transferred when they are supposed to be transferred. When Affidavits are actually made upon PERSONAL KNOWLEDGE, and the Affiants have actually reviewed the documents with a critical eye.
There are a set of standard procedures for transferring a mortgage loan. A mortgage loan can be thought of as a bundle of rights, including
- a borrower’s obligation to repay debt, which is evidenced by a note, and
- a lien on real property which is the collateral securing this obligation to repay the debt. This security is created by a mortgage or a deed of trust. (We will use the term, “mortgage” to include a deed of trust.) Please remember these are two separate items or documents, with different rules applying to each.
- Transfers of notes are governed by state contract laws including the Uniform Commercial Code (UCC).
- Transferring a mortgage or deed of trust is generally governed by state real property law. While these laws do not conflict, they do result in transfers of mortgage loans being legally complex. There is no single legally prescribed format for transferring a mortgage loan in the United States. In addition, in some states the ownership of a mortgage loan does not require the owner to have recorded an assignment of the mortgage in the real property records.
For decades there has been a custom and practice in the transfer of mortgage loans as between the originator and successive purchasers or into a securitization. And for decades, members of the banking and mortgage industry, complied with these customs and practices, laws and regulations.
When done legally, the practices used in conveying mortgage loans to private label securitization trusts are consistent with the practices used in transferring mortgage loans to Fannie and Freddie.
These standard transfer procedures are essentially designed to meet three objectives:
- document the parties’ intent to effect a sale of the mortgage loans and write down and document all terms and conditions of that sale,
- evidence the transfer of ownership by delivering the physical notes with endorsements consistent with UCC provisions, (read state laws) which protects the purchaser from being subject to adverse third party claims in the mortgage loans, and
- enable the purchaser to become the mortgagee of record as needed for foreclosure proceedings or other purposes including discharging the Note and Mortgage when paid in full.
So what are these general customs and practices to sell a Mortgage. The generally involve three steps:
- There should be a contract. In mortgage loan sale transactions, there is almost always a contractual agreement as between seller and purchaser which:
- clearly establishes and identifies the parties intent to sell the mortgage loans to the purchaser;
- it also identifies the specific mortgage loans being sold by use of a loan level schedule;
- contains granting language which states that it conveys ownership of the mortgage loans;
- identifies the time of sale;
- and specifies the governing law for the sale transaction (frequently, the laws of the State of New York are designated by the parties as the governing law).
- These contractual agreements typically also contain representations and warranties made by the seller. The usual contractual agreement for these transfers is typically a pooling and servicing agreement. This contract conveys the mortgage loans from the depositor to the trustee on behalf of the securitization trust. These documents are supposed to contain clear language that conveys ownership of all of the seller’s “right, title and interest in and to” the mortgage loans to the trustee on behalf of the securitization trust. There should be a schedule or exhibit to these documents that specifically identifies each loan sold under the agreement.
- It has been said that the major problem for banks is mounting evidence is that originating lenders never transferred a vast number of loans into the securitized trusts in the first place. Josh Rosner, a well respected financial analyst, issued a client advisory in October 2010, advising of widespread violations of pooling and servicing agreements on mortgages. Mr. Rosner counseled that although PSA’s require transfer of the promissory notes into the securitized trusts, which hardly ever occurred in the white hot run-up of securitized loans in the last decade. He also says that the mortgage assignments which must accompany each note are routinely ignored or left blank. (This was the major problem in the Ibanez case)
- As we have seen in many recent cases, the Trustee who is foreclosing on these mortgages, many times cannot or will not produce this schedule or exhibit. This is so crucial to the process, that it cannot be ignored. If the Trustee says he owns the Mortgage being foreclosed upon, he should have at his fingertips the schedule of all the Mortgages that are contained in the “Pool” that he is overseeing. To be unable to produce this crucial document is absurd.
- The Mortgage Industry has said that the Notes may be delivered to the purchaser with an endorsement in blank. It is common for a mortgage note for a mortgage loan that has been sold to have stamped on it an endorsement to the effect of “Pay to the order of_____________, without recourse”, and signed by the originator or a subsequent purchaser. That means the real owner of the note at that time. Not some fictional “agent” of the owner, who has prepared the document well after the transfer.
A correct and legally binding endorsement, has the effect that any subsequent transfer of the note presumptively only requires physical delivery (i.e., with no additional endorsement). Therefore, when the same note is sold time and time again, the endorsement in blank by any prior holder is a sufficient endorsement for purposes of the most recent purchaser. For this reason, a mortgage note that has been transferred numerous times many times will only show one endorsement, which remains in blank, providing the original note is delivered to the owner.
Under the UCC in almost all states, and in almost all Pooling and Service Agreements, physical delivery of the Note to the purchaser or its agent, (together with a specific endorsement or an endorsement in blank) is an essential requirement for the Trustee of the Pooling and Service Agreement to sell the notes in a bundle with other notes. They need to have a list of the notes in the bundle (usually an exhibit to the Pooling and Service Agreement) and physical possession of the Note. Clearly possession of the mortgage note may be needed for enforcement of the note in the event of default, including by foreclosure.
3. Assignment of Mortgage. The final key step in transferring ownership of a mortgage loan is to provide an assignment of mortgage in recordable form to the purchaser. Typically, the assignment is in blank so the name of the assignee can be filled in later prior to recordation. As we previously mentioned, in Massachusetts, for example, the Ibanez Case held that an Assignment of Mortgage, since it conveys an interest in Real Property, cannot be an assignment in blank. It must have the new owners name noted on the assignment.
Before Ibanez, many mortgage industry pundits, took the position that because the mortgage “follows the note”, it secures the debt for the benefit of the note holder. They told their clients, the Trustees of these Pooling and Service agreements, that as between seller and purchaser it is not necessary to record the assignment in the name of the purchaser in order to convey rights under the mortgage to the purchaser. Now this avoided a lot of recording fees that would have normally been collected by the County Recording Office. In light of Ibanez, Essex County in Massachusetts is now seeking 22 Million Dollars in back recording fees from MERS. (See John L. O’Brian, Jr.’s press release dated February 22, 2011.)
However, in order to bring a foreclosure action under the mortgage against the borrower following default, it may be necessary, under certain states’ law, that the purchaser becomes the mortgagee of record. Delivery of an assignment of mortgage in recordable form in blank is intended to enable the purchaser to become the mortgagee of record by completing the assignment in its name and submitting it for recording. Because every recording of an assignment of mortgage involves a filing fee and other expenses, it is not unusual for these assignments to remain unrecorded until such time as is needed in connection with a foreclosure of a specific defaulted loan.
In some cases, at the time of the securitization it is known that the seller will be unable to produce the physical note because it had been previously lost or destroyed. [These are some of the ones that pose the thorniest issues at foreclosure]. This fact alone should place the Trustee of the Pooling and Servicing Agreement on notice that there is a problem.
In these cases, a lost note affidavit should be executed by the seller would be delivered to the trustee which affidavit would confirm that the seller (i) had owned the loan, (ii) had possession of the original note, and (iii) had attached a true and complete copy of the original note to the affidavit, and also that the original note had been lost or destroyed at the time that they were to deliver the original note. The securitization governing documents by their terms would still nevertheless convey ownership of those mortgage loans to the trustee. This does not address the additional issues that the Trustee might face when foreclosing these mortgages in some states. With respect to mortgage loans where, as of the time of the securitization, the mortgage was held through the MERS system, instead of delivering an assignment of mortgage, the seller would transfer its beneficial interest in the mortgage to the trustee through MERS. In jurisdictions where the noteholder must be named as the mortgagee of record in order to complete a foreclosure, relatively simple steps can be taken to accomplish this, thereby permitting foreclosure if necessary. Severe problems may arise when an intervening Mortgage Holder no longer exists, perhaps having gone bankrupt.
Validity of original transfer procedures. For the reasons described above, these standard procedures, when properly followed, are sufficient to validly transfer ownership of the mortgage loans to the securitization trusts, consistent with the clear and unambiguous intent of all parties to the transactions (including the investors) at the time. The use of an endorsement in blank on the mortgage note is fully consistent with a sale in some states.
But what happens when document preparation companies simply make up intervening assignments of the Note and Mortgage? This is the typical “Robo-Signer” scenario.
Recordation of an assignment of mortgage to the securitization trust is not necessary to evidence ownership of the mortgage loan by the trust. However, courts are becoming much more vigilant when looking at the chain of title in foreclosure cases.
This may require additional steps at the time of foreclosure in order to comply with those pesky procedural or documentary requirements. For example, an assignment of the mortgage may need to be recorded to the securitization trust. Any such additional steps would not convey any new or additional ownership rights to the securitization trust and would not negate the sufficiency of the transfer procedures described above to convey ownership of the mortgage loans to the securitization trust at the time of issuance. In many states, this must be done before the Foreclosure Action can be filed. Other states seem to hold that if it is completed before the Foreclosure Sale, that is sufficient. Still others haven’t addressed the issue.
The Supreme Court in Massachusetts has held that an “assignment in blank” of a Mortgage is void. As stated in U.S. Bank National Association vs. Ibanez, the Court said “We have long held that a conveyance of real property, such as a mortgage, that does not name the assignee conveys nothing and is void; we do not regard an assignment of land in blank as giving legal title in land to the bearer of the assignment. See Flavin v. Morrissey, 327 Mass. 217, 219 (1951); Macurda v. Fuller, 225 Mass. 341, 344 (1916). See also G.L. c. 183, § 3.
As we noted above, there is a difference between the assignment of the Note and the assignment of the Mortgage. A note is generally a negotiable instrument and controlled by the UCC as adopted in each state. A Mortgage is a transfer of interest in Real Property, and thus controlled by the Real Property laws of each state which might be, and usually are very different from the UCC.
It should not be surprising that additional steps may be needed at the time of foreclosure. It’s one thing to sell commercial paper, it’s quite another to take someone’s real property from them.
The standard transfer procedures described above are used in the context of transactions between sophisticated financial institutions and institutional investors, who clearly mutually intend for the transactions to be sales.
As commercial transactions, the steps taken are certainly sufficient to legally convey ownership and protect the rights of the purchaser, but do not include additional steps not required to convey ownership of the Real Property, which certainly involves additional time or expense.
Remember as well, that the foreclosure process is adversarial and in that context it is understandable that extra requirements could be imposed over and above those necessary to convey ownership of the loan itself.