Posted on September 18, 2011 by Neil Garfield
EDITOR’S NOTE: If the Pretender Lenders follow true to form they will (1) have MERS execute an assignment of BOTH the Mortgage (or Deed of Trust) and the Note and (2) create some documentation that appears to give MERS the ownership of the note, leaving open the questions of whether the note was physically delivered (a necessary element of transfer of ownership) and of course whether the Note was factually a correct statement of the terms of the deal between the actual lender (investor) and the borrower (homeowner).(Remember that the note is only evidence of the transaction. The note is NOT the “obligation” which arises by operation of law, based upon a set of facts described in common law and statutes. Failure to recognize this simple fact learned by every law student in the first year of law school results in confusing decisions from trial and appellate courts, who assume that the note IS the obligation, not merely evidence of the transaction, subject, like all evidence to cross examination and rebuttal). Using the note as the basis for proceeding with foreclosure process or pleading, lenders get the benefit of presumptions that arise in favor of the party taking or seeking the position of “lender,” but they can (and should) be rebutted by the borrower with actual facts that constitute admissible evidence.A further factual question that will arise as litigation matures in this growing body of law, is whether even physically delivery or proper execution of documents is sufficient, given MERS express disclaimer of any interest in the obligation, note or mortgage. Absent evidence to the contrary, Such a disclaimer should (and MUST) be taken at its word, to wit: rejection of the assignment of the obligation, note or mortgage.The mistake being made here is that the courts are accepting the assignment as being complete merely upon presentation or even recording of the document. But the assignee must accept the assignment for the transaction dubbed “transfer” or “assignment” to reach legal completion — although such acceptance might be presumed. Thus an assignment of a mortgage that is purportedly in default raises the question of whether the assignee accepted the assignment and why a reasonable person would do such a thing. The absence of consideration adds to the argument that the assignment was never completed or was a fabrication whose creation was solely for the purpose of misleading the borrower and the court.Several Judges have mused over this contradiction, wherein the representation is that the assignee purchased the obligation knowing it was in purportedly default, that the security was impaired (having fallen in value sometimes by as much as 70%-80%), and the ability of the borrower to pay any deficiency is either blocked by statute or by financial circumstances that make it highly unlikely that the new “creditor” would ever see one penny.The explanation for this anomaly creates and even worse scenario for the pretender lender, to wit: they offer that the obligation was shown on the books as performing and that the creditor was still getting paid because of the pooling and servicing agreement and credit enhancements. Thus the transfer, they argue, was properly accepted, even if it was beyond the cutoff date set forth in the Prospectus and PSA. But you can’t pick up one end of the stick without picking up the other end as well. If the credit/investor was still getting paid, then the obligation is (a) not in default or had a default cured and (b) not in the amount cited in the affidavit of indebtedness.This in turn raises the additional issue that is the crux of all foreclosures: may the servicer claim that it is an interested party in the foreclosure when it was not in privity with the borrower as to the contract rights expressed in the security instrument? Payments by the servicer along with a report to the actual creditor that the loan was still a performing loan would appear to defeat any claim of default.The ensuing foreclosure in virtually all loans where there is a claim that the loan was “Securitized” presupposes a novel legal theory: that the servicer is somehow subrogated, at least ion part, to the rights of the creditor based upon the payments made “on borrower’s behalf” without borrower’s knowledge and without notification that the obligation to the creditor/investor has been corresponding reduced and that the borrower now has two creditors where there was only one creditor before the borrower stopped paying the servicer.The underlying theme here is that the Pretender Lenders, having no interest in the obligation, note or mortgage are fabricating, forging documents that create the appearance of an actual bona fide transaction for value, when no value or consideration was exchanged as recognized by law and the documents were created solely for the purpose of litigation or foreclosure proceedings — often without any notice to the real creditor, and often without any authority to proceed.The elephant in the living room is the validity of the original documentation wherein the the note and mortgage are created specifically intending to withhold information from the borrower as to the source of funds, thus depriving the borrower (and the public, once recorded) of any knowledge as to the identity of the entity who could execute a release, conveyance or satisfaction of the debt and the lien.It is basic black letter law that in order to have a perfected lien you must have some reasonable way to identify the property secured, the terms of the debt, and the identity of the parties to the transaction. In a loan transaction, if either side uses a nominee, then the principal must be disclosed or there are legal consequences. In this case (reported below), bifurcation of the obligation and the security instrument (mortgage) results in an unenforceable mortgage (i.e., no foreclosure permitted) which is not curable without getting a signature from the homeowner/borrower reflecting the full disclosure required by both common law and statutes (including the Truth in Lending Act).
NOTABLE QUOTES FROM THE CASE:
“broad language “cannot overcome the requirement that the foreclosing party be both the holder or assignee of the subject mortgage, and the holder or assignee of the underlying note, at the time the action is commenced.”
“although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes.” The court determined that assignment of the notes was beyond MERS’ authority as nominee. Moreover, the record failed to show that the notes were physically delivered to MERS. Thus, because BoNY “merely stepped into the shoes of MERS,” BoNY had an interest only in the mortgages — not the notes — leaving BoNY without the power to foreclose.” (E.S.)
New York Appellate Court rejects validity of loan assignments by MERS
The New York Appellate Division, Second Department, has held that a lender does not have standing to commence a foreclosure action when the lender’s assignor was listed in the underlying mortgage instruments as a nominee and mortgagee for the purpose of recording, but never actually held the underlying notes. Bank of New York v. Silverberg, 926 N.Y.S.2d 532 (2d Dep’t 2011). The court’s decision casts doubt on the validity of loan assignments executed by the Mortgage Electronic Registration System (“MERS”), and has significant ramifications for the foreclosure process in New York, suggesting that foreclosing lenders may have to present substantially more robust documentation concerning the mortgage note’s history of assignment and transfer.
The Mortgage Agreements
In October 2006, Countrywide Home Loans, Inc. (“Countrywide”) allegedly loaned $450,000 to Stephen and Frederica Silverberg (“defendants”) to purchase residential real property. The mortgage named MERS as the mortgagee for purposes of recording, but stated that the underlying promissory note was in favor of Countrywide.The mortgage stated: “’MERS holds only legal title to the rights granted by the [defendants] . . . but, if necessary to comply with law or custom,” MERS had the right to foreclose and “to take any action required of [Countrywide].” Subsequently, in April 2007, the defendants allegedly signed a second mortgage on the same property, which again named MERS as the nominee and mortgagee of Countrywide, and executed a promissory note in Countrywide’s favor. The promissory note provided that Countrywide “may transfer this Note.”
In April 2007, the defendants signed a consolidation agreement which merged the two prior notes and mortgages into one loan obligation, once more naming MERS as nominee and mortgagee of Countrywide. While the consolidation agreement named Countrywide as the lender and note holder, Countrywide was not a party to this agreement. All of these agreements were recorded in the Suffolk County, New York Clerk’s office. In December 2007, the defendants allegedly defaulted on the consolidation agreement. On April 30, 2008, MERS assigned the consolidation agreement to the Bank of New York (“BoNY”), as trustee for a mortgage securitization vehicle, through a “corrected assignment of mortgage.”
On May 6, 2008, BoNY brought a foreclosure action against defendants. The defendants moved to dismiss the complaint for lack of standing. The trial court denied the motion to dismiss because MERS assigned the mortgages, as nominee of Countrywide, to BoNY before the foreclosure action commenced. The defendants appealed this decision and set forth several arguments as to the plaintiff’s lack of standing: (i) MERS and Countrywide did not transfer or endorse the notes described in the consolidation agreement to plaintiff, in violation of the Uniform Commercial Code; (ii) MERS never had authority to assign the mortgages; (iii) the mortgages and notes were unenforceable because they were bifurcated; and (iv) the trial court should not have considered the “corrected assignment of mortgage” because it was not authenticated.
Role of MERS
The Appellate Division first described the role of MERS in the mortgage process. Real estate mortgage participants created MERS in the 1990’s to “track ownership interests in residential mortgages.” MERS members subscribe to the MERS system for electronic processing and tracking of ownership and transfers of mortgages. As part of membership, members agree to appoint MERS as an agent for all mortgages registered with MERS. Further, in local county recording offices MERS is named the mortgagee of record. With the creation of MERS, banks were able to transfer mortgage interests more expeditiously and avoid the expense and inefficiency of recording each time a transfer occurs.
The Court’s Analysis
The Appellate Division presented the issue in the case as “whether MERS, as nominee and mortgagee for purposes of recording, can assign the right to foreclose upon a mortgage to a plaintiff in a foreclosure action absent MERS’s right to, or possession of, the actual underlying promissory note.” Generally, “in a mortgage foreclosure action, a plaintiff has standing where it is both the holder or assignee of the subject mortgage and the holder or assignee of the underlying note at the time the action is commenced.” The court noted that while a mortgage typically follows the assignment of a promissory note, the reverse is not true. A transfer of a mortgage does not automatically transfer the note, and the underlying debt will be a nullity if not transferred along with the mortgage.
First, the court rejected the defendants’ argument that BoNY did not own the notes and mortgages based on the failure to provide proof of recording the corrected assignment, because an assignment need not be in writing; physical delivery will also effectuate an assignment. The court then found, however, that the consolidation agreement did not give MERS authority to assign the notes. Specifically, “as ‘nominee,’ MERS’ authority was limited to only those powers which were specifically conferred to it and authorized by the lender . . . . Hence, although the consolidation agreement gave MERS the right to assign the mortgages themselves, it did not specifically give MERS the right to assign the underlying notes.” The court determined that assignment of the notes was beyond MERS’ authority as nominee. Moreover, the record failed to show that the notes were physically delivered to MERS. Thus, because BoNY “merely stepped into the shoes of MERS,” BoNY had an interest only in the mortgages — not the notes — leaving BoNY without the power to foreclose.
Furthermore, the court commented that its earlier decision in MERS v. Coakley, 41 N.Y.S.2d 622 (2d Dep’t 2007), holding that MERS’ standing to foreclose is limited to circumstances where MERS actually holds the note before a foreclosure action is commenced. In the BoNY case, MERS never held the note, and thus the court found that Coakley did not apply. Even though BoNY contended that the language in the first and second mortgages gave MERS the right to foreclose, the consolidation agreement superseded those mortgages. Either way, broad language “cannot overcome the requirement that the foreclosing party be both the holder or assignee of the subject mortgage, and the holder or assignee of the underlying note, at the time the action is commenced.”
The court concluded that the corrected assignment was a nullity as MERS was never the lawful holder or assignee of the notes described in the consolidation agreement, and therefore did not have authority to assign the power to foreclose to plaintiff. Thus, plaintiff did not have standing to foreclose and the court granted defendants’ motion to dismiss.
The Appellate Division’s Silverberg decision may have broad implications for New York foreclosure practice. The decision suggests that, before commencing foreclosure proceedings, lenders must pay more careful attention to the documentation demonstrating that the entity bringing foreclosure proceedings holds the note and the mortgage in question. Where this documentation is arguably deficient, such deficiencies may often be curable, but where prior lenders in the chain of assignment have ceased to exist, or refuse to cooperate to remedy possible documentary deficiencies, the Appellate Division approach may significantly complicate efforts to foreclose on real property.
Other New York courts have upheld note assignments executed by MERS, and theSilverberg decision adds to a substantial body of conflicting authority regarding the question of MERS’ standing to bring foreclosure proceedings, and to assign mortgages and notes to entities that subsequently bring such proceedings. Compare In re Agard, 44 B.R. 231 (Bank. E.D.N.Y. 2011) (concluding that MERS lacks authority to assign mortgage notes) and LaSalle Bank N.A. v. Bouloute, 28 Misc. 3d 1227A (N.Y. Kings Co. 2010) (holding that a MERS assignee lacked standing to foreclose because MERS had limited agency powers) with Bank of New York v. Sachar, No. 0380904/2009 (N.Y. Bronx Co. 2011) (finding that MERS had broad power to assign mortgage and assignee took physical delivery of the note) and U.S. Bank v. Flynn, 27 Misc. 3d 802 (N.Y. Suffolk Co. 2010) (upholding MERS assignment of mortgage and note). Until the New York Court of Appeal, New York’s highest court, rules on these issues, the state of the law in New York concerning foreclosure standing is likely to remain unsettled.
Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor,Mortgage, securities fraud Tagged: | 926 N.Y.S.2d 532 (2d Dep’t 2011), assignment, bank of new york, Bank of New York v. Silverberg, bankruptcy, borrower, CHADBOURNE & PARKE LLP,CONSOLIDATION AGREEMENT, countrywide, disclosure, foreclosure, foreclosure defense,foreclosure offense, foreclosures, fraud, LOAN MODIFICATION, MERS, modification, Obligation,quiet title, rescission, RESPA, securitization, TILA audit, trustee, WEISBAND
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