Examination Of Pooling & Servicing Agreements In Foreclosure Cases Involving Mortgage-Backed Securities

January 14, 2013

A Michigan state court issued an important decision that many affect thousands of foreclosures, HSBC Bank, USA v. Young, No 11-693 (Cir. Ct. Mich. Oct. 16, 2012). HSBC filed an action for possession of Mary Young’s home after a mortgage foreclosure by advertisement. The district court granted HSBC’s motion for summary disposition and defendant Young was granted leave to appeal. The Court reversed the trial court’s summary disposition order and remanded for further proceedings. HSBC filed a motion for reconsideration.

     Young refinanced her home with Wells Fargo Home Mortgage on April 22, 2004. Young defaulted and received notices of default from Wells Fargo in February, April and August of 2008.  In January 0f 2009, Wells Fargo and Young entered into a Loan Modification Agreement.  The Agreement was on Wells Fargo letterhead and signed by an officer of Wells Fargo which was described as the lender.

     Young did not keep up with her payments.  On March 11, 2010, HSBC commenced foreclosure by advertisement and bought the house at sheriff’s sale.  On November 8, 2010, HSBC filed a complaint for possession in the district court.

     Young agued that HSBC lacked standing because neither the mortgage nor the note had been validly and effectively transferred to HSBC.

     Young claimed that a purported mortgage assignment to HSBC as Trustee for Wells Fargo Home Equity Loan Trust 2004-2, dated October 8, 2008, was void because it did not agree with the terms of the Pooling and Servicing Agreement (“PSA”) that governed the trust and because HSBC also did not have an ownership interest in the note.

     Young argued that HSBC did not own the note because HSBC produced a copy of the note in discovery on February 14, 2011, that showed the note was payable to Wells Fargo as lender and there were no endorsements or allonges.  About one month later, HSBC produced another copy of the same note, this one with a stamped and typed endorsement to Wells Fargo, with no date indicating when the endorsement occurred.

     HSBC argued that Young lacked standing to challenge the assignment because Young was not a party to the PSA or a third-party beneficiary, arguing that Michigan law was well-settled. But Circuit Court Judge Melinda Morris found that argument to be erroneous, and the issue undecided by the Michigan Court of Appeals or Supreme Court.  Noting conflicting authority in other jurisdictions, Judge Morris relied on the decision in Butler v. Deutsche Bank Trust Co. Americas, ___F Supp 2d___, ___; 2012 WL 3518560, *6-7 (D Mass 2012):

Courts in this district are in agreement that a mortgagor lacks standing to challenge the assignment of his mortgage directly if he is neither a party to nor a third-party beneficiary of the assignment contract…

     However, “the question of whether [a mortgagor has] standing to challenge [an] assignment is different form the question of whether [he has] standing to challenge the foreclosure on the basis that [the foreclosing entity] did not properly hold the mortgage at the time of the foreclosure.” …A number of decisions have held that mortgagors have standing to challenge a foreclosure sale as void due to an allegedly invalid assignment…

                                       *       *       *

     Mortgagors challenging foreclosure sales that are void due to invalid assignments have standing to do so because they have demonstrated “a concrete and particularized injury in fact, a causal connection that permits tracing the claimed injury to the defendant’s actions, and likelihood that prevailing in the action will afford some redress for the injury.” …

     I do not, however, hold that a mortgagor has standing to challenge a foreclosure on the basis of just any potentially invalidating deficiency in an assignment.  Massachusetts case law distinguishes between void and voidable assignments…If an assignment is voidable, but has not been avoided, then the assignee has legal title to convey to the purchaser at a foreclosure sale. If an assignment is void, then the assignee was assigned nothing and has nothing to convey to the purchaser at the foreclosure sale.  Where a “grantor has nothing to convey…[t]he purported conveyance is a nullity, notwithstanding the parties’ intent.”…

     Here, however, Butler fails to allege facts or present legal argument sufficient to establish that the assignments to Deutsche Bank were void due to their failure to comply with the Pooling and Servicing Agreement…

     This distinction is very important because in most foreclosure cases, the homeowner is not trying to enforce the PSA, but to present evidence that an assignment was invalid.  The vast majority of foreclosures involve cases with unendorsed notes or with endorsements that are not dated.  Like the Young case, the vast majority of foreclosures by trusts also involve mortgage assignments created years after the trust closing date and an assignment of a non-performing loan.  Assignments after the closing date and assignments of non-performing loans, and particularly the combination – assignment of a non-performing loan after the closing date – are almost always violations of trust PSAs.

     The simple truth is that trusts were established (and sold) with rules to protect investors from such foolhardy action on the part of a trustee such as suddenly acquiring non-performing loans years after the trust closing date.  When trust rules are violated, there can be serious negative tax consequences for the trust: the IRS could decide that the trust does not qualify for favorable REMIC status.

In the vast majority of cases, there is no real underlying financial transaction as reported in the mortgage assignment.  If the records of the loans entering and leaving the loan pool of the trust are examined, they simply do not match up with the assignments.  These later dated assignments were almost always made by document mills, mortgage servicers and foreclosure law firm employees solely to provide some proof to the courts that the trustee has standing to foreclose.  In other words, these later dated assignments are almost always fraudulent.

It is also important to note that these assignments are not just robo-signed, that is, signed by someone with no knowledge of the underlying facts, or signed by someone who is signing his or her (or someone else’s name) several thousand times a day.  These assignments falsely state the date on which the trust acquired the mortgage.

Because most note endorsements are non-existent or non-dated, the only date in most cases involving mortgages claimed by mortgage-backed trusts is the false date on these assignments.