The financial crisis of the past couple of years has brought with it a glut of mortgage foreclosures. With this huge increase in foreclosures has come a troubling increase in short cuts and sloppy work by institutional lenders and the “foreclosure mill” law firms handling a bulk of these proceedings in New York State.
One of the short cuts involves the commencement of the foreclosure before the paperwork, including the assignment of the mortgage to the plaintiff, has gotten to the lawyer. Courts and referees often miss the lack of standing, resulting in a defective foreclosure that could be set aside. Sometimes the situation has been caught by vigilant judges and the proceedings held up while the lender and its lawyers scramble to comply with the prerequisites that had been ignored.
The secondary market has exacerbated the situation. Some judges, already seeing prerequisites being ignored, have cast a steely eye on the modern practices of the secondary market relating to the ownership of mortgages and the promissory notes that they secure.
In the bygone days of the late 1970’s and early 1980’s (when I was handling foreclosures for local banks and savings and loan associations), aside from FHA and VA loans, most of the residential mortgages that were made and foreclosed were “portfolio loans” made by local savings banks, savings and loan associations and other local institutions. These lenders kept their loan documents in files in their locked vaults, and when the lender delivered a file to its outside counsel to handle a foreclosure, the original note and mortgage would in nearly all cases be provided to the attorney before the notice of pendency was even prepared.
Many of the mortgages being foreclosed today have wound themselves through a secondary market involving remote servicers and assignments to nominee institutions. Often, the beneficial ownership and servicing of the mortgages have been separated. The secondary market has also fueled the development of a market for pass-through bonds to “securitize” mortgages in order to tap the bond market as a source of funds for further lending. The proceeds of the pass-through bonds were then funneled back to fuel additional lending. The frenzy led to a housing bubble,
As borrowers went into default on mortgages they could not afford to pay, the volume of foreclosures increased beyond the capacity of the secondary market to keep up with the paperwork.
What used to involve a careful review of actual loan documents, preparation of assignments each time a mortgage and its note has changed hands, had turned into a largely electronic process that worked best when few mortgages went into default.
I have also seen referee’s deeds prepared in which the referee purports to be conveying on behalf of the foreclosed owner, and not exercising the referee’s power of sale authorized by the judgment of foreclosure and sale. But that is another issue entirely.
Insuring title passing through a foreclosure sale has become a very risky venture, even when the judgment of foreclosure and sale has been signed. Defective foreclosures are defective, even when the court has not caught the errors before rendering judgment.
There have been a number of cases, many emanating from Brooklyn and presided over by Justice Arthur M. Schack, where the increased scrutiny has stalled the process so that plaintiff could provide the proper documentation and proofs.
In one case, Justice Schack dismissed a foreclosure with prejudice and sanctioned plaintiff’s attorneys for commencing an action in which the plaintiff was not the record holder of the mortgage. Wells Fargo Bank, National Association v Reyes, 2008 NY Slip Op 51211U; 2008 N.Y. Misc. LEXIS 3509 (Sup. Ct. Kings, 2008). The decision can be read at:
The Appellate Division, Second Department, has weighed in on at least two of these “lack of standing” cases:
In the first, Wells Fargo Bank, N.A., v. Marchione, 2009 NY Slip Op 07624, 69 AD3d 204 (2d Dept. 2009) – which can be read at:
– the court held that a nunc pro tunc assignment dated only a week after the action was commenced, would be insufficient to allow the proceeding, holding concludes “a retroactive assignment cannot be used to confer standing upon an assignee in a foreclosure action commence prior to the assignment.”
One of the more troubling aspects of Justice Schack’s line of decisions is his difficulty understanding how MERS and the secondary market actually operate. Justice Schack has made an issue over MERS being a nominee, and not having capacity to hold or assign mortgages, and has taken issue with the system under which clerks at the servicer officers are also serving as officers (usually assistant secretaries) of the mortgagees and beneficial holders of the mortgages for the purpose of executing assignments and other documents,
The second of the second department cases seems to address the issue – Mortgage Electronic Registration Systems, Inc. v. Coakley, 2007 NY Slip Op 05478, 41 A.D.3d 674, 838 N.Y.S.2d 622 (2d Dept. 2007)
– the full text is at:
– in this decision, the court held that MERS has the capacity to hold the mortgages and to foreclose in its own name, despite being a nominee for the actual beneficial holders.
Reading these second department decisions together, the solution for lenders and lawyers in a rush may well be that in those cases in which an assignment has not been obtained at prior to the commencement of the foreclosure, a foreclosure could be commenced in the name of MERS (or the other record holder) and then after the assignment has been recorded, the proper plaintiff substituted, provided the MERS agreements permit this.
One situation in which this method won’t work, is where Fannie Mae is involved – a March 30, 2010 Announcement provides that foreclosures referred on or after May 1, 2010 may not be commenced under the name of MERS, where the loan is owned, or has been “securitized” (those “pass-through bonds” we mentioned earlier), by Fannie Mae. The Fannie Mae Announcement SVC-2010-05 is posted at: