Supporting, Informing & Connecting People in Foreclosure
From Banker and Tradesman
Wednesday, July 13, 2011,
A judge in federal bankruptcy court issued a ruling confirming Mortgage Electronic Registration System's (MERS) ability to assign mortgages in Massachusetts , reinforcing findings in local courts which support the firm's role in the mortgage industry and foreclosure process under Massachusetts law. But the embattled mortgage documentation firm's win may be only temporary.
The homeowners involved filed a motion for reconsideration Tuesday afternoon which highlights an unsettled aspect of law regarding shoddy loan documentation, according to bankruptcy law experts.
"As Massachusetts law allows a mortgagee with no interest in the underlying obligation to foreclose, the trustee's argument that MERS did not have a sufficient interest in the debtors' property to foreclose the mortgage fails," wrote U.S. Bankruptcy Judge Melvin Hoffman.
The case involved a homeowner who had declared bankruptcy. When they took out their loan in 2005, their mortgage (the right to foreclose) was assigned to MERS while the note (the I.O.U. itself) was held by their lender, Fieldstone Mortgage Company. The note was subsequently sold to a chain of lenders before being securitized and put into a trust serviced by HSBC. The ho me owners fell behind on their mortgage payments in 2007, and foreclosure proceedings began against them in 2009. At that point, MERS assigned the mortgage to HSBC.
Hoffman's ruling acknowledges that the chain of ownership of the note may have been clouded by its trip through the securitization process. But, he ruled, under Massachusetts law the mortgage doesn't necessarily follow the note, but has to be assigned separately. If the possessor of the mortgage doesn't own the note, it's still obligated to act in the interests of the note-possessor, and still has the power to assign ownership of the mortgage to another party.
Hoffman's judgment follows several other Massachusetts precedents.
"Judge Hoffman's ruling adds to the long list of decisions that affirm MERS' role as mortgagee, not only at origination, but throughout the life of the loan," said Janis Smith, MERSCORP's Vice President of Corporate Communications in a statement.
By granting HSBC leave to foreclose at this early state of bankruptcy proceedings, the judge may have closed off the ho me owner's ability to challenge any faulty docu me nts involved in the foreclosure - and that's not kosher according to current legal doctrine, argue the lawyers representing the ho me owners.
Katherine Porter, a professor of law at the University of Iowa and a contributing scholar to Harvard Law's Bankruptcy Data Project, says this particular issue is very fluid right now.
"I gave a program on this in March and I'm doing another in August and I had to totally redo my materials," Porter said.
Appeals courts have differed on the issue, with so me taking the view that questions of the validity of a lender's claims ought to have full evidentiary hearing before they get relief from bankruptcy stay. Others have said that banks need only prove they have a "colorable claim" - that is, that there's so me evidence they own the debt they're attempting to collect. The idea is that, "if there are any evidentiary issues, the homeowner can take them up in state court. In a non-judicial foreclosure state like Massachusetts , that's pretty difficult," because foreclosures aren't normally handled in court, Porter said.
MERS' critics suggest that me ans problematic assignments remain on the books, potentially clouding title years down the line.
"There's bad decisions being made based on fraudulent documents duping the judges, which is wrong and should be addressed," said Kevin Harvey, first assistant register of deeds in South Essex County . The South Essex County Registry and its leader, register John O'Brien, have been banging the drum about problems with deed registration that they blame on MERS for several months.
The fact that it's so tough for ho me owners to challenge the validity of documents presents a grave problem in states like Massachusetts , according to Porter.
"Thanks to the Ibanez decision, we really have very debtor-protective, strict rules," Porter said. "But we don't have a good opportunity to raise these arguments in advance. This may very well be a case where if the homeowner appeals this decision, they would win. But the courts are taking a wide enough variety of approaches."