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Attacking standing - or arguing that a party does not have the right to foreclose - is a common foreclosure defense tactic. This is particularly true when the foreclosing party is a trustee acting on behalf of a trust. Such a party will likely have a name such as The Bank Inc., as trustee for the Certificate holders of the XYZ Asset-Backed Certificates, Series 2125-9 (“Trustee”). Despite clarity in the servicing rights - and a clear chain of title contained in the register of deeds - foreclosure defense attorneys use the lengthy name, as well as unfamiliarity in the secured mortgage industry, to create false questions of fact regarding the entity’s right, or standing, to foreclose the subject mortgage. Rather than address germane issues, such as payments, mortgage terms and laws allowing foreclosure, attorneys attempt to change and confuse issues.

The trust is a part of the securitization of a mortgage loan. The trust - and the relationships amongst the relevant parties to the trust - enters into a pooling and servicing agreement (PSA). The PSA contains terms and agreements involving the servicer, subservicer, investors and others. Often, there will be a clause in the PSA requiring all transfers of interest to be completed on a specific date. If the record assignment of mortgage post-dates the transfer date contained in the PSA, foreclosure defense attorneys will argue that the mortgage was never properly assigned and, therefore, the foreclosing entity lacks standing. This ignores the likely timely, non-public assignment of the loan and physical transfer of the promissory note to the trustee and holder.

There are multiple misperceptions regarding assignments of mortgage (or deed of trust) and the terms of PSAs. First, an interest in the mortgage as contemplated in a PSA is not necessarily the same as an assignment of mortgage. In some cases, the PSA will refer to transfers of the loan, rather than the transfer of an actual mortgage interest. In other cases, there will be an exception to the transfer date requirement when the mortgagee is Mortgage Electronic Registration Systems Inc.

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The most common confusion, however, is the belief that the PSA applies to a foreclosure action. For example, a California appellate court recently tackled this issue. The question was whether an assignment of mortgage was void. The court found that a borrower could not challenge the validity or effectiveness of an assignment unless the defect in the assignment would void the assignment. The court decided to address whether a post-closing-date transfer of a mortgage into a securitized trust would render an assignment void. To do so, the court looked at New York law, as the trust in question was organized in New York. The California court then determined that any transfer or conveyance in contravention of a trust is void. Therefore, according to this California court, the assignment of mortgage was void. (See Glaski v. Bank of America, 218 Call App 4th 1079 - July 31, 2013.)

The California court may or may not have interpreted New York law properly, but that is not the issue. The court simply went too far. There was no proper challenge to the mortgage transfer as the borrower lacked standing. Regardless of all arguments that may be associated with compliance with a PSA, the underlying fact in most cases is that a borrower, or former borrower, simply lacks standing to challenge the validity or compliance with the PSA. Thus, there was no basis for the court to even review the PSA.

Another California appellate court, when addressing a similar argument regarding a post-closing-date transfer, found that a borrower could not show an actual controversy regarding an alleged improper transfer as she was an unrelated third party to the securitization and, therefore, lacked standing to enforce the investment trust’s PSA. (See Jenkins v. JPMorgan Chase Bank NA, 216 Cal App 4th 497 - May 17, 2013.)

There may be various causes of this confusion: perhaps a general distrust of the industry, which would lead to a presumption of errors. As was evident in the first California case referenced above, there is a lack of understanding. That court did not understand that the PSA was separate and distinct from the foreclosure and that the borrower had no standing to even bring the argument. There is no shortage of “legaleze” in the PSAs. In addition, there are plenty of cases that discuss interpretation of contracts. An attorney can fill pages discussing the PSA and compliance, without ever addressing standing, thereby confusing the court and the triable issues. In other words, disinformation by foreclosure defense attorneys is their best defense.

The PSA argument requires the use of slight of hand. The attorney must convince the court to ignore some basic facts, such as a mortgage and note that require regular payments, the failure of the mortgagor to make payments, and all the elements that lead to foreclosure. The trick is to convince the court that the true issue is not the default but, rather, an underlying attempt to defraud the homeowner out of his property, despite the fact that there is no denial of the default.

Controlling the conversation is the key to education. While some discussion may be necessary to explain the inter-workings of the PSA, the first and foremost tool must be to convince the court that the PSA, in its entirety, should not be discussed. The borrower is not a party to the agreement and is not a third-party beneficiary.

A typical PSA is hundreds of pages long, involves multiple parties and, often times, thousands of loans. Courts, both federal and state, have regularly found that borrowers lack standing to challenge PSAs. A borrower is not affected by compliance or non-compliance with the agreement, nor do such issues determine the borrower’s contractual obligations.

Courts that allow the questions of compliance to a PSA are opening the doors to not only question the legitimacy of an assignment, they are opening the doors to a full examination of a PSA. They are allowing a third party to challenge what the actual parties of interest have not challenged. This is contrary to the accepted legal norm throughout the country - that a litigant must himself have a personal interest in the controversy. Whether or not a PSA was followed does not change or alter a borrower’s responsibilities and rights in a mortgage loan. s

 

 

Matthew D. Levine is an associate attorney focusing his practice on litigation with Trott & Trott PC, a Farmington Hills, Mich.-based real estate finance law firm. He can be reached at mlevine@trottlaw.com.

Foreclosure

Addressing Pooling And Servicing Agreements In Foreclosures

By Matthew D. Levine

Courts that allow questions of compliance to a PSA are opening the doors to full PSA examination.

 

 

 

 

 

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