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.