Foreclosure Blocked On "Show Me the Note" Objection

In what I believe is the biggest win yet for the "produce the note" movement, a U.S. judge in New Jersey recently blocked a foreclosure attempt by Bank of America, arguing that BoA did not have standing because of problems with its loan documentation.

In her November 16 ruling in the case John T. Kemp v. Countrywide Home Loans Inc., Chief Judge Judith H. Wizmur of the U.S. Bankruptcy Court in Camden ruled that BoA (which acquired Countrywide in 2008) could not foreclose on an investment property Kemp owned at 1316 Kings Highway, Haddon Heights, because Countrywide never delivered the mortgage note to its trustee Bank of New York and thus could neither claim to be the noteholder of record nor claim to be acting as a servicer for BoNY.

Wizmur's ruling gets into a level of minutiae that normal people may find daunting. Issues turn, for example, on whether papers correctly name Countrywide Home Loans, Inc. rather than Countrywide Home Loans Servicing LP. There are interesting conceptual questions as well, such as whether a trustee could be authorized to collect on a mortgage loan but not, because of confusion about documents, to consider that loan collateralized.

Some things that jump out at me:

* A lost note is not the issue here, and it appears that a properly motivated lender can still put together paperwork demonstrating -- even absent the original note or even (I could be wrong) a facsimile of it -- that somebody is authorized to collect. Countrywide tried to pretend it was that somebody but did not either get itself on record as owner of the original note (which it kept on its own premises, maybe), or properly get the note to BoNY and then act as BoNY's representative.

* Wizmur seems to be trying not to blaze a wide path for deadbeats to use document confusion as an escape from foreclosure. This was a good test case because Kemp acknowledges the debt he owes. ("In his complaint," Wizmur notes, "the debtor does not dispute that he signed the original mortgage documents in question.")

* For other reasons, this was not a good test case. Bank of America/Countrywide tested the court's patience by claiming that it had lost the note and had prepared a replacement note with an allonge (your word of the day, defined by Black's as "[a] slip of paper sometimes attached to a negotiable instrument for the purpose of receiving further indorsements when the original paper is filled with indorsements"), but then immediately afterward the bank claimed to have found the note and retracted the replacement. Maybe it was honest clerical trouble, but the loan documents required that Countrywide move the note to BoNY, and as a Countrywide rep accidentally testified, it was common practice not to bother. The company gave the impression of being lackadaisical about documents.

* The discussion of whether any of the lenders in this case qualified as "holder," "non-holder in possession" or "non-holder not in possession" (pages 12-19) is, I think, the section future lenders will look to as a guide for getting their ducks in a row prior to foreclosing.

At BankInvestmentConsultant.com, Kate Berry and Jeff Horwitz consider the implications from the testimony of Countrywide official Linda DeMartini, who blew the lid off the practice of keeping mortgage notes in-house rather than delivering them to the trustees:

"It's hard for B of A to back-pedal because she was their witness," [Kemp attorney Bruce] Levitt said. "This case was refreshing because the witness wasn't told how to spin things and actually told the truth. They can't dispute the fact that the note was never transferred because she was testifying proudly that Countrywide always retained the note and would never let it out of their sight. It was unscripted. That's why you won't find other testimony like this; this one slipped through."

There is little doubt that Countrywide was supposed to provide the physical note for Kemp's loan to the trust that purchased it, known as CWABS-2006-8.

In the Securities and Exchange Commission filing for that specific securitization, Countrywide and Bank of New York Mellon both attested that at the time of the trust's formation in 2006, "the Trustee has received … the original Mortgage Note … or, if the original Mortgage Note has been lost or destroyed and not replaced, an original lost note affidavit."

According to the testimony in the Kemp case, Countrywide never transferred the note and instead recreated documents weeks before the date of the hearing in an effort to prove its standing in the case.

Judge Wizmur noted in an exchange with Kaplan that the bank could salvage its position by demonstrating that the transfer of the documents was not legally necessary.

"I'm raising the possibility that the Pooling and Servicing Agreement might contain provisions that would serve to offer Countrywide an out," Wizmur said, suggesting that B of A should comb the 270-page agreement for language suggesting that it was entitled to retain the notes as the trustee's proxy or that transfer at the time of sale was immaterial.

With the caveat that I have regular correspondents who tell me I’m in denial about the apocalyptic implications of the mortgage-note fiasco, I think the “immaterial” argument will have legs. Faced with having to undo a host of foreclosures in process – and even worse, having to interfere with already closed sales of REO property that had been foreclosed with similarly flawed paperwork – some court will come up with a bright line. There’s already a lot of material in this ruling that indicates how banks can handle future challenges to their standing to foreclose.

I just wouldn’t want to be the lawyer who has to figure it all out. Or actually, I would want to be that lawyer, because then I could charge Bank of America – and by extension the American taxpayers – a lot of money.

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  • Colonel_Angus||

    I am okay with this. Procedures stated in the contract should be followed.

  • robc||

    Ditto. You want to foreclose? Bring the fucking paperwork to court. It really isnt that fucking hard.

    Also, piece of advice: Dont buy up clearly fucked up businesses with lots of questionable liabilities.

  • Red Rocks Rockin||

    Agreed. When your business deals with (and, until the loan is paid off, essentially owns) a product whose cumulative values run into the hundreds of billions, you damn well better be sure to have the wet-sig paperwork on hand. These "my dog/ merger acquisition company ate it" excuses coming from the banks are getting tiresome and could be constituted as fraud.

  • hmm||

    In a completely irrelevant and probably not cared about comment. BoA's Countrywide debacle was what lead me to buying it at $3.25, I actually had a limit in and it gap opened lower.

  • Fist of Etiquette||

    I just wouldn’t want to be the lawyer who has to figure it all out.

    Of course, it is lawyers who created this maze which we have to pay other lawyers to navigate for us. Luckily, we elect lawyers to legislate the situation. Dick the Butcher was on to something.

  • Tim Cavanaugh||

    FOE, I rarely state this core belief of mine, figuring it can make me no friends. But:

    Show me a country without lawyers and I'll show you tyranny.

  • Douglas Fletcher||

    Good point.

  • Fist of Etiquette||

    As I recall, that's what Shakespeare's characters were banking on. But the burdensome regulatory environment which Reason regularly decries was implemented by attorneys. An abundance of lawyers doesn't seem to be inoculating us from oppression.

  • Anonymous Coward||

    At least 50% of all lawyers graduated in the bottom half of their class.

  • robc||

    Not true.

    Im sure some graduating classes had an odd number of students, in that case, the median student was neither in the top half nor the bottom half.

    This is ignoring the fact that Im sure that the tiny percent who graduate law school and dont pass the bar are primarily from the bottom half.

  • James J.B. n.k.a McMillon ||

    This also assumes that those bottom 50 remain in the profession and are not weeded out (for any reason).

  • James J.B. n.k.a McMillon ||

    Sorry posted below

    Also Robc -
    Some are enamored with the top of the law class. I went through and they (by and large) were some of the oddest mfers you'd ever meet.

    Some of the total douche bags who were in the top (who also couldn't stand in moot court, much less a real courtroom) also failed the bar.

    Law school for me was a bell curved grading system that allowed me to evaluate effort for return - i.e. if I worked really hard I could get an 89 or if I coasted I could get an 84. So I relaxed.

    In the real world - I have my own firm and if I work harder and longer I make more - so I work more.

  • Eryk Boston, Esq.||

    You've made a friend, thanks for the defense of my profession.

    Nevertheless, anytime a case is noteworthy because someone accidentally told the truth, it speaks very poorly for everyone involved.

  • ||

    Is there a website yet that rates lawyers? Because I figure thats what's really needed to drive costs down. $30 a hour sounds fair for most cases (hell they just plea bargain anyway).

  • Russ 2000||

    Show me a country without lawyers and I'll show you tyranny.
    reply to this

    As always, dosage matters.

  • James J.B. n.k.a McMillon ||

    Yes, yes, it is all the fault of the lawyers. Nothing at all to do with the outright legions of zombies that live in this country that always bow to the state, want to control every move of your life - you know, most of the registered repubs and dems. But it is the lawyers, right.

    Now let's take this case - oh, the horror - the poor little bank had to prove its case. Boo-hoo. I guess we should just take them at their word - they wouldn't lie, right? I guess it is the lawyers fault that we have to go through the mess of a trial - where one side has to produce the evidence that proves their case... I mean we know he's guilty, owes the money, etc. right?

    Just like libertarianism happens to people... When its your home, your freedom, or your injuries, you want compentent counsel in your darkest moments.

  • ||

    Lawyers are necessary. They just don't deserve an exclusive position of cultural or legislative authority.

    If we all labored under rules devised and enforced by a confederation of electrical engineers or a league of all-powerful optometrists then we'd be in a terrible mess. A country run by a bunch of lawyers is just as bad.

  • ||

    Since Obama's courts have already broken contract law wrt bond holders, the 'fix' to the document issue will be whatever gives Obama the most power and / or biggest payoff to one of his cronies.

  • Bingo||

    That's a really cool photograph, what's the context/background of it?

  • ||

    That looks like the real Bonnie and Clyde.

  • ||

    "I'm raising the possibility that the Pooling and Servicing Agreement might contain provisions that would serve to offer Countrywide an out," Wizmur said,

    There *has* to be a record of who owns what; without that, how do the proceeds of the original mortgages find their way to the holders of the securities?

  • Some dude||

    Improperly?

  • Cuddly Soft Balls of Death||

    A big part of my job is tech support for a small real estate lending operation. With rates what they are, I wonder, just about daily, if they're really worth all the effort that goes into them.

    When we do a car loan for someone, roughly 97% of the time we've just created a no-muss-no-fuss money machine for the next 3-6 years. When we do a new mortgage loan, it's still going to be a pain in the ass for someone, somewhere, at least once a year, after I'm dead.

    No computer nerd should ever know as much about mortgage lending, as I do. It just ain't right.

  • ||

    I admit I owe the money, but you guys don't have all the paperwork right so I am not going to pay. In addition, I am going to get morally outraged that you are trying to collect the money I owe.

  • obijuan||

    If it was the reverse situation where the bank owed you money but your paperwork was messed up, what do you think would happen?

  • Dello||

    I owe the money, and I ain't payin' so your takin' my house. No problem. BUT: Since you F'd up your paperwork, I'm going to continue living in it for free for an extra 6 months while you get your act together.

    I have no problem with this.

  • robc||

    No, its "I admit I owe the money, but Im going to file bankruptcy and then it goes away. You have no proof of security for the loan."

  • Invisible Finger||

    Exactly. Assume the FDIC took over BofA (which they could since they are insolvent but FDIC doesn't want to deal with the mess right now).

    It would essentially be the federal government trying to take the house without any proof of security for the loan. I may not be the smartest libertarian in the room, but I'll assume that the government taking over houses without any actual legal claim might start getting people pissed off.

    With the banks in the shape they are, assume the banks = the federal government.

  • johnl||

    If the borrower was really funded, then how the originator and the trust manage transfers of paperwork is immaterial.

  • ||

    A note is a negotiable instrument under the UCC. If the original is lost, the maker (here, the home owner) is at risk of another party showing up and trying to collect on it (and given the sloppiness in the way paperwork was handled by lenders and their transferees, this is possible). Now, a lender that has lost the note can prove it up by other evidence (such as a copy) and have it "re-established", PROVIDED, however, it must provide adequate protection to the maker to cover them in any subsequent enforcement action.

    http://www.law.cornell.edu/ucc/3/article3.htm#s3-309

    Adequate protection might take the form of a bond, but we are talking about a shitload of bonds given all the lost notes. A more ominous solution I might expect to see attempted at some point is another "bailout", whereby the government creates a guarantee fund, to which the banks contribute, to insure lost notes generally. If these lost note cases start clogging the courts, especially in judicial foreclosure states, I will bet this idea surfaces.

  • ||

    Bottom line; Do I still have to pay my mortgage? Because i'd rather not.

  • Fluffy||

    Countrywide never delivered the mortgage note to its trustee Bank of New York and thus could neither claim to be the noteholder of record nor claim to be acting as a servicer for BoNY.

    The reason this will eventually work itself out is because it's impossible for Countrywide to be neither.

    If they never delivered the Note, then they ARE the noteholder. What they can't be is the servicer.

    They are probably caught in between because they've got a bunch of documents claiming they're the servicer, but never transferred the Note.

    The way they get out of the situation is by huddling with the BONY trust admins off-line and pulling this loan out of the trust. Then they go back into court to re-foreclose as a standalone noteholder.

  • db||

    At what point does this all become so expensive for BoA/Countrywide that the cost to foreclose this house so greatly exceeds the potential proceeds from a sale that they just do nothing? Or would it be too dangerous for them to set that precedent?

  • Cyto||

    I'm sure they've already blown through any profit on the loan. But they don't do the calculus that way. The profitability is calculated on the entire portfolio of loans - that's why foreclosures are a bad thing when they come in bunches - the loan securitizations usually will have some threshold value for defaults before the entire portfolio is declared to be in default; something like 5%. Depending on the structure of the securitization this could have immediate consequences, or it could seriously damage the reputation of the bond issuer, raising costs of doing business going forward.

  • ||

    Part of the core problem here is that the governments that want to take on management of every facet of our lives were never able to adequately manage one of their core functions. Real estate contract law in both its forms and principles doesn't seem to have been significantly updated since the medieval era. While I have no problem with keeping the principles unchanged, even a cursory examination should have told everyone involved that the forms have been rendered woefully inadequate. In large part, the paperwork issues surrounding the mortgage market stem from trying to build band-aid fixes around these archaic forms.

  • J C||

    Part of the core problem here is that the governments that want to take on management of every facet of our lives were never able to adequately manage one of their core functions.

    Couldn't have said it better Myself.

  • ||

    Archaic or not, the physicalness of these forms does alot to reduce the potential for fraud getting through courts. I'm not opposed to digitizing notes and deeds of trust, but the technology has been abused in these cases specifically to make more money for the servicers by skipping out on very important legal steps. Commoditizing a loan just doesn't work, except for the servicer.

  • ||

    Its really simple. If the paperwork is incomplete, the debt is unsecuritized and banks can't forclose, they have to go through normal Chapter 11/7 (I can't remember which is which) with the homeowners. That is the "rule of law". Everything else is just bending the rules to help the banks or home-renters.

  • rhea||

    I once worked in a mortgage company and you’ll find foreclosure issues ad depreciating value of land/house an everyday occurrence even if there were government help. And up until now, foreclosures will still be at hand and there’ll still be many families who might lose their homes this Christmas. Let’s just hope for the better. One of a dependent variable here is to have a stable work that would equate a family’s spending.
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  • ||

    Go suck it spambot

  • ||

    The bigger problems here probably aren't on the foreclosure side. They are on the mortgage-backed securities side.

    Those MBSs are created based on representations that the trust that backs the MBS actually has mortgage. Somebody signed saying that the mortgages, including the notes, were actually delivered. There's only about 90 days to deliver these mortgages late.

    If the mortgages weren't delivered (and it sure looks like a lot of them weren't), then you have a fraud problem with the MBS itself. Worse, you have a tax problem, the details of which escape me.

    The mortgage lawsuits are interesting (and its very difficult, BTW, to "replace" a note that you have "lost" so you can enforce it). But the MBS trust problems are bigger, and may not be fixable at all.

    And yes, lawsuits have been filed. IMO, those are the lawsuits to watch, because if the MBS-holders win, and the trustees/issuers lose, we are talking about the utter destruction of "too big to fail" institutions.

  • Cyto||

    And to underscore what you are saying: this has absolutely nothing to do with the homeowner or foreclosure. Nothing here relates to homeowners getting screwed out of anything, or foreclosed by evil banks to steal their house.

    The real danger here is to the note holder. It is their ownership that is being questioned. If BoA can't produce the documents that show that they are the person who has standing to bring foreclosure proceedings, then they'll just track down the correct party.

    I'm not sure where all of the media/government/regulator and now court hysteria over this issue is coming from. Whatever paperwork issues they've described, they don't impact the homeowner in any way. Nobody is alleging that they actually shouldn't be foreclosed on. They are just grasping at straws for a loophole to get out of their obligations.

    In this particular case I can't figure out what this guy and his attorney are up to. They are going to lose in the end. They are just jacking up their costs in legal fees. I suppose if they are massively upside down on the loan and the property is producing rental income, they can conceivably turn a profit while paying for their lawyer. But in the end they'll still be foreclosed on and they'll owe the money for the cost of collection as well. Because the property is upside down, they can probably still be liable for any unsecured debt as well, meaning their investment partnership will not be able to export any profits to them from other deals either.

  • Invisible Finger||

    They are just grasping at straws for a loophole to get out of their obligations.

    They're simply buying time. Pretty much what ever state in the union and the federal government are doing, kicking the can down the road and hoping they hit the lottery.

    You can't say it isn't learned behavior.

  • ||

    And yes, lawsuits have been filed. IMO, those are the lawsuits to watch, because if the MBS-holders win, and the trustees/issuers lose, we are talking about the utter destruction of "too big to fail" institutions.

    Bummer.

    And, on BoA specifically- let the shareholder suits begin! It wouldn't hurt my feelings one bit to see Ken Lewis end up as a pauper.

  • ||

    And, on BoA specifically- let the shareholder suits begin! It wouldn't hurt my feelings one bit to see Ken Lewis end up as a pauper.

    Frankly, I think the banks should be forced to pay their obligations to MERS BEFORE they can file for foreclosure. Right now they are acting on "behalf" of a pool they don't have a strong legal connection to other than they got paid for the note they issued. Given the murkly status of MERS legal ownership of the note, I say banks have to restablish their connection to the house by buying back all the notes from MERS before foreclosure can happen. Swallow that poison pill BOA.

  • bubba||

    Shouldn't there be some sort of penalty when the home owner challenges a foreclosure he knows to be valid?

    Sure, demand the i's dotted and t's crossed, but if he's piling on legal fees just to be a dick about a loan he actually took, then he should have his wages garnished to pay them.

  • robc||

    Its not "valid" until the other person who claims to have the ability to foreclose shows in court that they do, in fact, have this ability. The homeowner isnt denying that SOMEONE has the ability, they are questioning whether its this specific bank or not. And that is easy to prove, by PULLING THE FUCKING PAPERWORK OUT OF YOUR BRIEFCASE. If I was a judge and a bank showed up to court without them, I wouldnt just deny the foreclosure, I would send the fucking lawyer to jail for contempt until they were produced. If they are lost, you rot for life (or whatever the limit for contempt is).

  • ||

    Shouldn't there be some sort of penalty when the home owner challenges a foreclosure he knows to be valid?

    Only if

    (1) its in the contract, or

    (2) the bank has to pay all the homeowners costs if it loses the foreclosure suit.

  • ||

    According to the testimony in the Kemp case, Countrywide never transferred the note and instead recreated documents weeks before the date of the hearing in an effort to prove its standing in the case.

    To me, that sounds very like perjury, fraud on the court, the kind of thing for which Little People go to jail.

  • Tim Cavanaugh||

    Thou sayest. I used the phrase "lackadaisical about paperwork" because if the judge didn't rush to judgment why should I? But, yeah.

  • ||

    Countrywide and Bank of New York Mellon both attested that at the time of the trust's formation in 2006, "the Trustee has received … the original Mortgage Note

    There's your securities fraud right there. And I don't see how this could help on that front:

    "I'm raising the possibility that the Pooling and Servicing Agreement might contain provisions that would serve to offer Countrywide an out," Wizmur said, suggesting that B of A should comb the 270-page agreement for language suggesting that it was entitled to retain the notes as the trustee's proxy or that transfer at the time of sale was immaterial.

  • ||

    Nobody is alleging that they actually shouldn't be foreclosed on.

    Unfortunately, that isn't completely true.

    There was a foreclosure case a year or more ago in which the buyer was successfully able to convince the judge (note careful wording) that the paperwork was in such disarray, *nobody* could prove standing to foreclose. The judge awarded free and clear ownership of the home to the "owner"/occupant.

    I can't remember if Cavanaugh had a post about it; I know I saw one on Felix Salmon's blog.

  • Cyto||

    so the one person that the judge knew for sure didn't in fact own the home free and clear, that's the one he awarded it to. Nice.

  • robc||

    He owns the home. It just may have been used for collateral for a loan. No one can prove that, so he keeps it. Makes perfect sense to me.

  • James J.B. n.k.a McMillon ||

    Also Robc -
    Some are enamored with the top of the law class. I went through and they (by and large) were some of the oddest mfers you'd ever meet.

    Some of the total douche bags who were in the top (who also couldn't stand in moot court, much less a real courtroom) also failed the bar.

    Law school for me was a bell curved grading system that allowed me to evaluate effort for return - i.e. if I worked really hard I could get an 89 or if I coasted I could get an 84. So I relaxed.

    In the real world - I have my own firm and if I work harder and longer I make more - so I work more.

  • ||

    I did a quick google, but couldn't come up with the specific case I am thinking of.

  • Efi Pylarinou||

    On the moral hazard issue of the missing mortgage notes (a fiction "lost and found" effort). Enjoy
    http://www.youtube.com/watch?v=lwG_00mHQgk

  • jms||

    The bigger point is that if the bank can't provide the note, then they can't provide a guarantee that they have the authority to discharge the mortgage when it is paid in full. Before I pay a third of my income for the rest of my working life, I need to be damn sure that when I make that last mortgage payment, I don't get a letter from some other bank saying that there's been some big mistake, and that they hold the note and I need to start paying them because I've been paying the wrong people for 20 years.

    The amazing fact is that mortgage companies like Countrywide had file cabinets full of documents with cash values of hundreds of thousands of dollars each, and shredded them. And now they are trying to escape the consequences of destroying billions of dollars worth of negotiable instruments. Sure, I took out a mortgage. And I received a letter from a new mortgage company that says that they purchased the mortgage, and I am supposed to pay them instead of the company I originally took the mortgage out from. So far, I have taken them at their word, but if they cannot produce proof that they purchased the note, then why should I pay them. An obligation to repay a mortgage is not an obligation to pay it to a random party, especially if there is no guarantee that the party I am paying my mortgage to is even legally able to close the mortgage.

    For the record, I'm up to date on my mortgage and have no intention of ceasing payment. But you have to accept that for a little guy this sort of thing is unnerving, and not the sort of problem that can be solved by a sufficient amount of hand-waving.

  • Reverse Mortgage loan||

    A reverse mortgage should be an income source of last resort. There are a lot of pitfalls with taking out a reverse mortgage in its current form, not the least of which are the high fees to the banks and mortgage brokers. Here are links to two articles describing some of the cautions and drawbacks of a reverse mortgage.
    http://www.reversemortgagelend.....-mortgage/
    http://www.reversemortgagelend.....gage-work/

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