Judges Take Notice of Subprime Mortgage Crisis

Just in case you missed it, here is the most recent addition to the list of famous last words: 'Your honor, you just don't understand how things work.' According to press reports, that is how Judge Christopher A. Boyko of the Federal District
Court in Cleveland, OH, characterized the foreclosing lender's counsel response to the judge's request for proof that the lender, Deutsche Bank, actually owned the 14 unpaid mortgages that the lender was asking the court to foreclose.

The mortgages were part of a package of thousands of such loans purchased as a part of a Structured Investment Vehicle ('SIV') by Deutsche Bank. Apparently, somewhere between the closing, the packaging of the mortgages, their securitization by the packager, and the sale of the package to Deutsche Bank, the original mortgage documents had been lost. The only thing that Deutsche Bank's counsel could produce was a document showing an 'intent to convey the mortgages.' In dismissing Deutsche Bank's foreclosure action, an exasperated Judge Boyko wrote that the banks 'seem to adopt the attitude that since they have been doing this for so long unchallenged, this practice equates with legal compliance.' (See Amir Efrati, The Wall Street Journal, Nov. 30, 2007, p. B6, and Gretchen Morgenson, 'Foreclosures Hit a Snag for Lenders,' The New York Times, Nov. 15, 2007)

Once word of Judge Boyko's decision reached the popular press, the blogosphere immediately lit up. One participant commented that lenders should be held to task and required to produce ownership of mortgages because such ownership is 'the heart of Western property rights since the Magna Carta.' (digg.com) Other comments were more inflammatory.

Heated Reactions

The reaction to Judge Boyko's decision soon moved from the virtual to the real world where the decision took on a life of its own. Based upon Judge Boyko's decision, the Ohio Attorney General filed motions throughout the state seeking to force other lenders to prove that they own the mortgages being foreclosed. Other judges throughout Ohio and the Midwest, in the areas hardest hit by subprime mortgage foreclosures, began to adopt the same position. The contagion, from the viewpoint of foreclosure attorneys, then began to spread outside of the Midwest by early 2008, even bankruptcy judges were getting into the act and taking lenders to task for not having their documents in order. (See Amir Efrati and Kara Scannell, 'Countrywide Draws Ire of Judges,' The Wall Street Journal, Jan.14, 2008, p. A3). In effect, the judiciary began to take notice of the subprime mortgage debacle and the looseness, if not disregard, which the marketplace viewed standard legal procedures. The courts began to force lenders and their counsels to prove that the lender actually held the mortgage that the lenders were petitioning the court to foreclose. That this would occur was not news to the title industry.

Blurred Lines

Within the last couple of years, people in the title industry began to notice that recorded mortgage assignment chains bore no relation to reality. The record in the Clerk's Office might indicate that HSBC issued a particular mortgage and then assigned to Chase, but the payoff letter would come from Countrywide. No one ever knew whether the payoff letter came from the actual owner of the mortgage or servicer of the loan. The distinction did not matter so long as we had proof that the new lender paid off the mortgage and hopefully, that the appropriate lender in the back chain would satisfy the mortgage of record. Behind the scenes on Wall Street, the very same mortgages taken out by a nurse's aide in Brooklyn or security guard in the Bronx, were being packaged, sliced and diced and put into different traunches or risk pools, securitized (turned into bonds) and then sold throughout the global marketplace. A mortgage secured by real property located in Tuckahoe could and probably did end up in
a CMO (Collateralized Mortgage Obligation) held by a bank in the Czech Republic.

In hindsight, it should have been apparent that the mortgages were moving around the world at warp speed and that the original documents could not possibly keep up. In the process, as the counsel for Deutsche Bank implied to Judge Boyko, the possession of the original mortgage documents lost its significance. That 'taking the eye off the ball' has become the Achilles heel of the foreclosure process. It turns out that Western jurisprudence, as pointed out by the bloggers, puts a great deal of importance upon the creditor's ability to prove the existence and the ownership of the debt before evicting the debtor from his or her home Without ownership of the mortgage, there is no standing to foreclose. (See Kluge v. Fugazy, 536 NY2d 92 (2^nd Dept. 1988) and Katz v. East-Ville Realty Co., 672 NYS2d 247 (2^nd Dept. 2007)) The nation's attention may have focused upon an 'Aha!' moment taking place in the Ohio courts, but jurists in New York had already begun to dust off ancient law treatises and to ask embarrassing and pointed questions of foreclosing lenders in this state, especially on Long Island. In courtrooms throughout the state, the late Clara Peller's iconic question, 'Where's the beef?' morphed into, 'Where's the mortgage?'

In LaSalle Bank National Assoc- iation v. Lamy (New York Law Journal, (NYLJ), Aug. 17, 2006, p. 25), Justice Burke of Suffolk Supreme Court held that an undated endorsement by allonge to a note by the Mortgage Electronic Recording Service ('MERS') was insufficient to pass ownership of the note and mortgage to LaSalle. Therefore, MERS remained as the owner of the note and mortgage and since LaSalle's was not the owner of the note and mortgage, the Court denied its motion for an appointment of a referee. In Deutsche Bank v. Castellanos, (NYLJ, June 6, 2007, p. 21), Justice Arthur Schack of Kings County Supreme Court held that since Deutsche Bank did not have an assignment of the mortgage of record when it initiated the foreclosure action, it lacked standing to bring the foreclosure action. In Countrywide Home Loans Inc. v. Taylor (NYLJ, Oct. 10, 2007, p. 28), Justice Peter Mayer of Suffolk County denied an order of reference, inter alia, because Countrywide did not own the mortgage when it initiated the foreclosure action. Country-wide commenced the action on Feb. 6, 2007, but the mortgage was not assigned to it until a month later on March 6, 1997. Finally, in a revisit to Deutsche Bank v. Castellanos, (NYLJ, Jan. 24, 2008, p. 27), Justice Schack found not only a lack of standing to foreclose but even the possibility of a fraud on the court when in examining affidavits, the court discovered that the same person claimed to be an officer of both the assignor and assignee of the mortgage. Justice Schack's opinion is significant because he specifically called the large mega-lenders to task for the documentary chaos caused by the globalization and securitization of mortgage loans.

Notes on a Trend

The trend has become obvious. The judiciary has taken notice of the subprime crisis and has required proof that the lender actually owns the loan. One of the consequences of the rapid global movement of funds was that the old-fashioned, so-last-century, documentary evidence of the obligation to pay did not keep up with the digital, warp-speed transfer of the debt. Now, in the centuries-old foreclosure process, the courts are demanding that the debt sold as a part of the security catch up with the mortgage. Unless and until the appellate courts intervene and accept what the trial court judges 'just do not understand,' the catch-up process will be marked by fits and starts.

Conclusion

Facing situations where hundreds of thousands of people may end up losing their homes and in the process, devastating communities throughout the nation, calling for lenders to be sent to the gallows may be a little much, but asking our lenders, our foreclosure bar, and our courts for an attention to the detail required by centuries of Western jurisprudence should not be too much to ask.

Marvin N. Bagwell, former chief counsel for United General Title in White Plains, is the president of Bagwell & Associates, a title agency located in New York, N.Y.

Just in case you missed it, here is the most recent addition to the list of famous last words: 'Your honor, you just don't understand how things work.' According to press reports, that is how Judge Christopher A. Boyko of the Federal District
Court in Cleveland, OH, characterized the foreclosing lender's counsel response to the judge's request for proof that the lender, Deutsche Bank, actually owned the 14 unpaid mortgages that the lender was asking the court to foreclose.

The mortgages were part of a package of thousands of such loans purchased as a part of a Structured Investment Vehicle ('SIV') by Deutsche Bank. Apparently, somewhere between the closing, the packaging of the mortgages, their securitization by the packager, and the sale of the package to Deutsche Bank, the original mortgage documents had been lost. The only thing that Deutsche Bank's counsel could produce was a document showing an 'intent to convey the mortgages.' In dismissing Deutsche Bank's foreclosure action, an exasperated Judge Boyko wrote that the banks 'seem to adopt the attitude that since they have been doing this for so long unchallenged, this practice equates with legal compliance.' (See Amir Efrati, The Wall Street Journal, Nov. 30, 2007, p. B6, and Gretchen Morgenson, 'Foreclosures Hit a Snag for Lenders,' The New York Times, Nov. 15, 2007)

Once word of Judge Boyko's decision reached the popular press, the blogosphere immediately lit up. One participant commented that lenders should be held to task and required to produce ownership of mortgages because such ownership is 'the heart of Western property rights since the Magna Carta.' (digg.com) Other comments were more inflammatory.

Heated Reactions

The reaction to Judge Boyko's decision soon moved from the virtual to the real world where the decision took on a life of its own. Based upon Judge Boyko's decision, the Ohio Attorney General filed motions throughout the state seeking to force other lenders to prove that they own the mortgages being foreclosed. Other judges throughout Ohio and the Midwest, in the areas hardest hit by subprime mortgage foreclosures, began to adopt the same position. The contagion, from the viewpoint of foreclosure attorneys, then began to spread outside of the Midwest by early 2008, even bankruptcy judges were getting into the act and taking lenders to task for not having their documents in order. (See Amir Efrati and Kara Scannell, 'Countrywide Draws Ire of Judges,' The Wall Street Journal, Jan.14, 2008, p. A3). In effect, the judiciary began to take notice of the subprime mortgage debacle and the looseness, if not disregard, which the marketplace viewed standard legal procedures. The courts began to force lenders and their counsels to prove that the lender actually held the mortgage that the lenders were petitioning the court to foreclose. That this would occur was not news to the title industry.

Blurred Lines

Within the last couple of years, people in the title industry began to notice that recorded mortgage assignment chains bore no relation to reality. The record in the Clerk's Office might indicate that HSBC issued a particular mortgage and then assigned to Chase, but the payoff letter would come from Countrywide. No one ever knew whether the payoff letter came from the actual owner of the mortgage or servicer of the loan. The distinction did not matter so long as we had proof that the new lender paid off the mortgage and hopefully, that the appropriate lender in the back chain would satisfy the mortgage of record. Behind the scenes on Wall Street, the very same mortgages taken out by a nurse's aide in Brooklyn or security guard in the Bronx, were being packaged, sliced and diced and put into different traunches or risk pools, securitized (turned into bonds) and then sold throughout the global marketplace. A mortgage secured by real property located in Tuckahoe could and probably did end up in
a CMO (Collateralized Mortgage Obligation) held by a bank in the Czech Republic.

In hindsight, it should have been apparent that the mortgages were moving around the world at warp speed and that the original documents could not possibly keep up. In the process, as the counsel for Deutsche Bank implied to Judge Boyko, the possession of the original mortgage documents lost its significance. That 'taking the eye off the ball' has become the Achilles heel of the foreclosure process. It turns out that Western jurisprudence, as pointed out by the bloggers, puts a great deal of importance upon the creditor's ability to prove the existence and the ownership of the debt before evicting the debtor from his or her home Without ownership of the mortgage, there is no standing to foreclose. (See Kluge v. Fugazy , 536 NY2d 92 (2 nd Dept. 1988) and Katz v. East-Ville Realty Co., 672 NYS2d 247 (2 nd Dept. 2007)) The nation's attention may have focused upon an 'Aha!' moment taking place in the Ohio courts, but jurists in New York had already begun to dust off ancient law treatises and to ask embarrassing and pointed questions of foreclosing lenders in this state, especially on Long Island. In courtrooms throughout the state, the late Clara Peller's iconic question, 'Where's the beef?' morphed into, 'Where's the mortgage?'

In LaSalle Bank National Assoc- iation v. Lamy (New York Law Journal, (NYLJ), Aug. 17, 2006, p. 25), Justice Burke of Suffolk Supreme Court held that an undated endorsement by allonge to a note by the Mortgage Electronic Recording Service ('MERS') was insufficient to pass ownership of the note and mortgage to LaSalle. Therefore, MERS remained as the owner of the note and mortgage and since LaSalle's was not the owner of the note and mortgage, the Court denied its motion for an appointment of a referee. In Deutsche Bank v. Castellanos, (NYLJ, June 6, 2007, p. 21), Justice Arthur Schack of Kings County Supreme Court held that since Deutsche Bank did not have an assignment of the mortgage of record when it initiated the foreclosure action, it lacked standing to bring the foreclosure action. In Countrywide Home Loans Inc. v. Taylor (NYLJ, Oct. 10, 2007, p. 28), Justice Peter Mayer of Suffolk County denied an order of reference, inter alia, because Countrywide did not own the mortgage when it initiated the foreclosure action. Country-wide commenced the action on Feb. 6, 2007, but the mortgage was not assigned to it until a month later on March 6, 1997. Finally, in a revisit to Deutsche Bank v. Castellanos, (NYLJ, Jan. 24, 2008, p. 27), Justice Schack found not only a lack of standing to foreclose but even the possibility of a fraud on the court when in examining affidavits, the court discovered that the same person claimed to be an officer of both the assignor and assignee of the mortgage. Justice Schack's opinion is significant because he specifically called the large mega-lenders to task for the documentary chaos caused by the globalization and securitization of mortgage loans.

Notes on a Trend

The trend has become obvious. The judiciary has taken notice of the subprime crisis and has required proof that the lender actually owns the loan. One of the consequences of the rapid global movement of funds was that the old-fashioned, so-last-century, documentary evidence of the obligation to pay did not keep up with the digital, warp-speed transfer of the debt. Now, in the centuries-old foreclosure process, the courts are demanding that the debt sold as a part of the security catch up with the mortgage. Unless and until the appellate courts intervene and accept what the trial court judges 'just do not understand,' the catch-up process will be marked by fits and starts.

Conclusion

Facing situations where hundreds of thousands of people may end up losing their homes and in the process, devastating communities throughout the nation, calling for lenders to be sent to the gallows may be a little much, but asking our lenders, our foreclosure bar, and our courts for an attention to the detail required by centuries of Western jurisprudence should not be too much to ask.

Marvin N. Bagwell, former chief counsel for United General Title in White Plains, is the president of Bagwell & Associates, a title agency located in New York, N.Y.