OREGON DEPARTMENT OF JUSTICE SEEKS TO STOP LENDERS FROM WRONGFULLY FORECLOSING
March 27, 2012
DOJ files an amicus brief in an Oregon foreclosure lawsuit pending before the 9th U.S. Circuit Court of Appeals.
Oregon Attorney General John Kroger today announced the filing of an amicus, or “friend of the court,” brief that seeks to protect struggling homeowners from wrongful foreclosures.
“Lenders using the MERS system have to follow Oregon law just like everyone else,” said Attorney General Kroger. “The Department of Justice will not tolerate lenders cutting corners in their rush to foreclose on Oregon homeowners.”
The legal brief was filed today with the 9th U.S. Circuit Court of Appeals in a homeowner lawsuit challenging the legality of a foreclosure. Oregon law allows foreclosures to be conducted outside the courthouse – so-called “non-judicial” foreclosures – but only if every transfer of the loan documents has been properly recorded.
As in many other cases in Oregon, the lender transferred its right to receive payments from the homeowner to another financial institution and used the Mortgage Electronic Registration System, Inc. (‘MERS’) as its agent. Although the lender’s right to receive payments was transferred multiple times, some of those transfers were never recorded.
The legal brief is the latest effort by the Oregon Department of Justice to protect struggling homeowners. Last month, Attorney General Kroger announced his support for a multi-state settlement with major lending institutions. The settlement includes the following:
An estimated $30 million to the State of Oregon.
An estimated $100 to $200 million in relief to distressed Oregon homeowners including “underwater” borrowers and homeowners facing foreclosure.
Tough new servicing standards that protect all homeowners from unfair and unscrupulous servicing practices. In addition, the Department of Justice this year adopted emergency rules to protect homeowners from illegal foreclosures.
If you are a homeowner facing foreclosure you may be entitled to additional assistance. To receive updates as more information becomes available please sign up at www.oregonattorneygeneral.gov/homeowners.
Frequently Asked Questions can be found at www.oregonattorneygeneral.gov/homeowners/faqs.shtml.Attorney General John Kroger leads the Oregon Department of Justice. The Department’s mission is to fight crime and fraud, protect the environment, improve child welfare, promote a positive business climate, and defend the rights of all Oregonians.
Counsels for Kristin Bain & Kevin Selkowitz attorneys Melissa Huelsman and Richard Jones (great voice) did a FANTASTIC, OUTSTANDING JOB!!!
BOMBSHELL: Listen and watch when they ask MERS’ counsel “Who is the holder of the note”? HE DOES NOT KNOW & CANNOT ANSWER!
Oral arguments: Bain v. Mortgage Electronic Registration Sys, et al and Selkowitz v. Little “Litton” Loan Servicing, LP, et al. (May a party be a lawful beneficiary under WA’s Deed of Trust Act if it never held the promissory note secured by the deed of trust?)
For the first time, a local homeowner’s fight to keep a house is headed to the state Supreme Court.
What happens there will effect thousands of people who’ve taken out mortgage loans in the past 10 years. If you own property, you need to know about a system known as MERS.
MERS stands for Mortgage Electronic Registration Systems. It was created by the real estate finance industry to simplify the process of transferring mortgage loans.
But struggling homeowners complain MERS also conceals the true note holder when your mortgage is sold to investors.
Kristen Bain’s comfortable condo in Tukwila is tied up in the MERS debate. First, she had to sue her mortgage broker and the lender for predatory lending and failure to provide proper documentation as required by law.
“If you’re going to take someone’s home away, you’ve got to prove you have the right to do it, and you have to follow the law when you do it,” Atty Glenn Russell said.
The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from home owners seeking to overturn seizures.
The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation’s oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn’t hold the note proving she was obliged to pay the mortgage.
“If the Massachusetts court says this defense works, that would have a huge ripple effect across the country,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.
The Massachusetts Supreme Judicial Court justices signaled last month they may rule in favor of Eaton when they asked parties in the case to submit briefs arguing whether such a decision should be applied retroactively or only to future lending. If retroactive, it would cloud the titles of the 40,000 Massachusetts properties seized in the last five years and while the ruling only applies to the state, it could serve as a model for homeowners trying to overturn foreclosures in other states.
The highest court in Massachusetts is poised to rule as soon as this month on a foreclosure case that could lead to a surge in claims from home owners seeking to overturn seizures.
The justices are deciding whether to uphold a lower court ruling that gave a Boston home back to Henrietta Eaton after Sam Levine, a 25-year-old Harvard Law School student, argued in front of the nation’s oldest appellate court that the loan servicer made mistakes when it foreclosed because it didn’t hold the note proving she was obliged to pay the mortgage.
“If the Massachusetts court says this defense works, that would have a huge ripple effect across the country,” said Kurt Eggert, a professor at Chapman University School of Law in Orange, California.
If you want to know where the bodies are buried, look no further. Here are a few snips from Marie’s brief:
In what has become common parlance among those investigating these securitization failures (including the Securities and Exchange Commission and the Department of Justice), we refer to this type of transfer as an “A to D” assignment because it skips over parties “B” and “C” and creates a “wild deed” (especially in title theory states such as Massachusetts).
The assignment of mortgage is the “breeder document” from which all other paperwork necessary to bring the foreclosure action; notice the sale; obtain judgment; and transfer title depends.
“The Eaton Defect” as described in our amicus brief occurs when an entity, such as Green Tree Servicing LLC takes the mortgage by assignment and prosecutes a foreclosure in itsown name when it neither owns nor holds the note.
“The Ibanez Defect” as described in this amicus brief occurs when an entity, such as OptionOne Mortgage Corporation, sells the loan for securitization purposes and later, after the loan has been sold multiple times, assigns the Note and Mortgage (or just the Mortgage) directlyto the Trustee of the Issuing Entity (securitized trust).
Supreme Judicial Court FOR THE COMMONWEALTH OF MASSACHUSETTS NO. SJC-11041 SUFFOLK COUNTY
HENRIETTA EATON, PLAINTIFF-APPELLEE,
FEDERAL NATIONAL MORTGAGE ASSOCIATION & ANOTHER, DEFENDANTS-APPELLANTS.
ON APPEAL FROM AN INTERLOCUTORY ORDER OF THE SUFFOLK SUPERIOR COURT
SUPPLEMENTAL BRIEF OF AMICUS CURIAE MARIE MCDONNELL, CFE
The system was widely used by the lending industry to streamline the packaging and selling of mortgages as securities without recording the deeds at county offices. In that role, it also started countless foreclosure proceedings.
The appeals court ruled that MERS did not own legal title to the properties and could not be the foreclosing party. That decision called into question the validity of thousands of foreclosures across the state, wreaking havoc in the housing market. Closings were canceled and homeowners who had purchased foreclosed houses wondered whether they had clear title to the property.
Elected justice moves swiftly. The Michigan Supreme Court handed down its opinion in Residential Funding Co. v. Saurman on Wednesday, a couple of weeks after oral argument. They were in a rush to get the opinion out, it seems. Unfortunately, it’s a terrible opinion. The Michigan Supreme Court reversed the appellate court to hold that MERS has the power to conduct non-judicial foreclosures (foreclosure by advertisement) in Michigan.
To reach this conclusion, the Michigan Supreme Court had to conclude that MERS had an interest in the indebtedness–that is an interest in the note. MERS, however, expressly disclaims any interest in the note. So it took some acrobatics and legerdemain and outright tautology to get no to mean yes. Here’s how they did it:
“The Michigan Supreme Court decision on Mers is an embarrassment, to those of us who care about the property records of this state, and more importantly the citizens who are affected by these foreclosures. Mers created a shadow registry system that makes it impossible for individual citizens and their government officials to track who owns a mortgage. At the Michigan Chambers request, they now have the right to masquerade as a bank and take a citizen’s home . It is unfortunate that Justices Young, Markman, Zahra and Mary Beth Kelly decided to side with special interest groups instead of Michigan citizens.“
The National Association of Independent Land Title Agents (NAILTA) filed an Amicus Brief in the Edwards v. First American case currently pending in the U.S. Supreme Court. The brief is filed in support of Denise Edwards, the Respondent, a consumer who closed a real estate transaction in Cleveland, Ohio with the Petitioner, First American. A copy of the brief is embedded below. Oral arguments for the case are set for November 28, 2011.
AG Coakley Issues Statement on the SJC Decision in Bevilacqua v. Rodriguez
BOSTON – A decision by the Massachusetts Supreme Judicial Court (SJC) today in Bevilacqua v. Rodriguez, reaffirmed that a mortgage holder must have both “jurisdiction and authority” –a valid assignment of mortgage – in order to foreclose on a property.Attorney General Martha Coakley issued the following statement:
“This case is just one example of a much larger problem. In the rush to foreclose, the banks’ reckless origination and foreclosure practices have created a domino effect that has harmed Massachusetts homeowners as well as third-party purchasers who purchased properties after foreclosure.
This is yet another clear demonstration that the only way we are going to restore a healthy economy is to address the foreclosure crisis and hold the banks accountable for their actions.”
This case determined that because U.S. Bank did not hold a valid assignment of the mortgage at the time it initiated foreclosure proceedings, it failed to acquire title. As a result, not only did U.S. Bank foreclose without legal authority to do so, but its failure means that it was unable to transfer clear title to Mr. Bevilacqua.
As the SJC recently observed in U.S. Bank, N.A. v. Ibanez, many investors in the secondary mortgage market ignored longstanding requirements of Massachusetts law concerning when and how a mortgage holder may exercise its right to foreclose, resulting in numerous invalid foreclosures.
Mr. Bevilacqua was a third-party purchaser of property that was foreclosed upon by U.S. Bank prior to the Land Court’s initial decision in Ibanez. Mr. Rodriguez is the prior mortgagor. Because U.S. Bank did not hold a valid assignment prior to commencing foreclosure proceedings the foreclosure was deemed invalid. U.S. Bank foreclosed without legal authority and was unable to transfer clean title to Mr. Bevilacqua.
Bevilacqua brought an action under the so-called “try title” statute because the Ibanez decision had clouded Bevilaqua’s claim to the property. It allows the holder of a clouded title to initiate an action to clear title without waiting for adverse claimants to sue first. The try title process provides that if adequate notice is issued and an adverse claimant fails to respond then the petitioner may obtain an order barring that claimant from ever challenging the petitioner’s right to title.
The Land Court denied Bevilacqua’s petition, ruling that one seeking to use the try title process must have at least a plausible claim to the title. The Court ruled that Bevilacqua has no such claim to title where he acquired a deed following an invalid foreclosure. The Land Court held that Bevilacqua acquired whatever it was that U.S. Bank had to sell as of the foreclosure. Because, per Ibanez, at the time of the foreclosure, the bank held nothing, Bevilacqua acquired nothing and had no standing as a result.
Today, the SJC affirmed the Land Court decision and reaffirmed the essential holdings of Ibanez: that the mortgage holder must have a valid assignment of mortgage in order to foreclose on a property. The Court also held that one cannot use the try title process to extinguish the right of redemption – a mortgagee can only foreclose by strict adherence to the statutory processes for foreclosure by exercising the power of sale or foreclosure by entry.
The Attorney General’s Office filed an amicus brief in this case in April 2011 and presented oral arguments before the SJC on May 2, 2011.
In essence, the ruling upheld that those who had purchased foreclosure properties that had been illegally foreclosed upon (which is virtually all foreclosure sales in the last five years), did not in fact have title to those properties.
Given the fact that more than two-thirds of all real estate transactions in the last five years have also been foreclosed properties, this creates a small problem.
The Massachusetts SJC is one of the most respected high courts in the country, other supreme courts look to these decisions for guidance, and would find it difficult to rule any other way in their own states. It is a precedent. It’s an important precedent.
Here are the key components of the Bevilacqua case:
1. In holding that Bevilacqua could not make “something from nothing” (bring an action or even have standing to bring an action, when he had a title worth nothing) the lower land court applied and upheld long-standing principles of conveyance.
2. A foreclosure conducted by a non-mortgagee (which includes basically all of them over the last five years, including the landmark Ibanez case) is wholly void and passes no title to a subsequent transferee (purchasers of foreclosures will be especially pleased to learn of this)
3. Where (as in Bevilacqua) a non-mortgagee records a post-foreclosure assignment, any subsequent transferee has record notice that the foreclosure is simply void.
4. A wholly void foreclosure deed passes no title even to a supposed “bona fide purchaser”
5. The Grantee of an invalid (wholly void) foreclosure deed does not have record title, nor does any person claiming under a wholly void deed, and the decision of the lower land court properly dismissed Bevilacqua’s petition.
6. The land court correctly reasoned that the remedy available to Bevilacqua was not against the wrongly foreclosed homeowner but rather against the wrongly foreclosing bank and/or perhaps the servicer (depending on who actually conducted the foreclosure)
When thinking about the implications of Bevilacqua – the importance of point six cannot be overstated.
The re-foreclosure suggestion is not valid
Re-foreclosing on these properties in not likely as has been suggested by bank layers in light of the Bevilacqua ruling. We aren’t talking about Donald Trump here and we have a funny feeling he won’t be affected either. Mostly it’s guys like Bevilacqua who bought single or multi units, in the “hundreds of thousands” range. It seem unlikely that the majority of these folks would have the capital to eat their existing loses, re-foreclose at great expense, and on top of all of that come out as the highest bidder on the very property they formerly thought was their own. In many cases, as was the case in Bevilacqua, the original purchaser of the foreclosure may have already resold the property and moved on, thus leaving in their wake an even more serious problem; the likelihood of a property owner, who had nothing directly to do with a foreclosure, but is left with all the fallout of a post-Bevilacqua world.
Perhaps some enterprising young American will come up with some unscripted video series called “foreclosures gone wild”, that features foreclosure buyers spontaneously revealing the anatomy of their profane foreclosure deals in front of smart phones recording in HD video – some direct marketing firm could then make it available on some late night infomercial app where it will get billions of downloads on Ipads. We think this highly original (never before seen) business idea should be promptly explored. Surely there will be high demand coming from iPad owners in small Scandinavian countries where connoisseurs of vintage 2000-2006 MBS products reside in high concentrations.
All fun aside, re-bidding on these properties in a post-re-foreclosure scenario would be done in what is soon to be a new inflationary environment (most originally bid in a deflationary environment for housing), thus making the “re-foreclosure” blank threat all the more unconvincing and unlikely.
However, it should be easy enough for investors similarly situated to Bevilacqua to simply hire fee contingent attorneys who can promptly sue the banks and servicers for conveying fraudulent deeds – that seems like a much easier and logical proposition. When the potentially millions of lawsuits are added to the complaints filed by investors in MBS, we think the banks will finally be revealed as wholly insolvent. The only other way it could happen faster, is if the average American home owner, realizing he may never obtain clear title to his home (short of an indemnity from his bank), finally stops making his monthly payments on his invalid note (which completely lacks a valid security instrument). In this way, the existing insolvency of banks would be recognized in a matter of days rather than months or years.
The act of denial does not actually alter reality
Ostriches are said to have discovered this the hard way. On November 12th, 2010 in our article “Tattoos, Pyramid Schemes and Social Justice” we advocated that home owners, with securitized mortgages, regardless of their ability to pay, consider suspending their mortgage payments, and place those funds into a private escrow account instead. We wrote:
“Radical though it may seem, we believe the only way to stop the chaos of fraud and the breakdown of the rule of law in our courts, and most importantly to ensure that we ourselves are not participants in the fraud, is for homeowners who can afford their mortgage to stop paying it…”
The article goes on to say:
“For example, what is easier; to scorn those who are being foreclosed on because they can no longer afford their mortgage or to accept the possibility that our entire financial, and maybe justice system might be badly corrupted? Across all spectrums of crime, victims are often blamed, just ask attorneys who represent rape victims. This phenomenon is by no means unique to mortgage fraud, or those who have been raped by the institutions who carry out this trade. It has been made to appear as if those who have fallen on hard times are a matter of “incidental” inequalities in an otherwise procedurally just system. However, it is precisely the opposite which is true. Our financial institutions have created deliberate inequalities, through the use of procedurally unjust systems.”
We pointed out that suspending such payment might be done for the following reasons, which in light of the recent Bevilacqua decision, and the pending Eaton Decision, are increasingly being proven correct:
“1. They are not sure where or if their payments are going to the true note holder.
2. They no longer know who the true note holder is.
3. They have a legitimate concern that they may not be able to ever obtain clear title and/or title insurance (in the event of a sale) given what we now know about improperly conveyed titles and the illegitimacy of “MERS”.
4. They do not want to be an unwitting or passive participant in fraud.
5. They care about America, want our culture to be healed and recognize the dignity of every human being.”
Long before the Ibanez decision was handed down we wrote the following (taken from the same article):
“If these legitimate reasons are the cause to suspend mortgage payments, then what attack on these “non-co-operators” character can be levelled? In these cases, Judge’s will have to allow for proper civil procedure to take place in order for the legitimate inquiries of concerned Americans to come to light. Since banks virtually never produce adequate documentation (which appears to be by design), chances are things will escalate.”
We went on to discuss the unique risks of apathy and denial in the following:
“…Americans have a duty to ask critical questions about the operations of their financial institutions, and if evidence has been presented that a deal was made, but not everyone was playing by the rules, than those deals need to be looked at again. It is not good enough any longer to say, if it doesn’t affect “me” than, I’m not getting involved. We have a duty to one another as Americans, and more importantly as human beings, to care about truth and justice. What’s more, apathy, so long as we are not affected, is a short lived consolation. Ultimately, this crisis will affect everyone sooner or later.”
Certainly when the SJC handed down their opinion affirming Bevilacqua, perhaps hundreds of thousands, and ultimately millions of people who previously thought they were not affected, were suddenly well, affected. That is because there has been about six million foreclosures since the current economic crisis began, and those foreclosures may have resulted in many more interested parties, as was the case in Bevilacqua, who sold the subject property to four new owners, thus multiplying the number of parties involved, and ultimately the number of legal actions which could be brought. It is not hard to see where six million voided foreclosures might well result in new lawsuits in excess of that number – and if the courts advice is taken, these complaints would be directed, and properly so, at banks and servicers.
In the Ibanez article, which was written in January of this year we wrote the following:
“If you live in Massachusetts and your mortgage has been securitized, or if you have purchased a foreclosure property, we think it would be wise to consider suspending your mortgage payments if you haven’t already.”
We believe these particular words have become incredibly relevant given the implications of Bevilacqua.
We decided to call a few title insurance companies to get their “take” on it all. We made the mistake of identifying ourselves as “bloggers” in the first phone call – that call may well have set a new land speed record for the fastest time from answering to hanging up. Thinking there might be a smarter approach, we decided to identify ourselves as homeowners (equally true) on the next call – the results were a little better, but only slightly.
The underwriters and title examiners we spoke to kept asking if we were attorneys, or if we represented the home owner as “council”. We thought this was curious because we kept pointing out that we were ourselves just homeowners. Then it hit us, they have never actually spoken to a real, live, breathing customer on the policy origination side, they had only ever spoken to lawyer-brokers. We thought; what an interesting confluence of incentives this must create, and why is the buyer of the policy necessarily so far removed from the seller?
Follow the money trail – that’s what they say. Looking for answers, follow the money trail. What is the one piece of the equation upon which all else hinges? It’s not the lawyers, it’s not the judiciary, the answer lies in the investment banks – but they must first pass through the gatekeepers of real estate; title insurance companies. To understand the problem does require some understand of law, but really mostly it’s an understanding of finance and of business that is required above all else. Money in this case, cannot pass from bank depositor, to banker, to bank borrower in real estate transactions without the all-important “title insurance policy”.
So maybe there will be a happy ending after all, for once upon a time didn’t the likes of AIG insure a whole lot of CDS’s for Goldman Sachs who was then paid 100 cents on the dollar (in a 43 cents on the dollar world)? That worked out well – just think of the benefits of insurance – AIG is still around, Goldman’s stock price went on to quadruple in the following 18 months. The cost was relatively low, and mostly out of sight – voluntary shareholders in AIG were emancipated from their money-investment in AIG stock, and were swiftly replaced with involuntary shareholders – also known as; tax payers. It’s the bankrupt companies definition of “preferred” shareholder – although it veers slightly from the traditional one.
So does it matter what lawyers, bankers, bloggers and judges think? This is America and America is all about business, and in this case, business cannot be transacted without title insurance companies, and the good thing about insurances companies is they have actuaries, and actuaries calculate risk, this is especially important since the banking community has proven that they either cannot calculate risk or are not interested in doing so. Actuaries are not exciting people, they are number crunchers, they don’t do bridge jumping and they would never take inordinate risk, right?
The insurance business is interesting, even if their actuaries aren’t’. That’s because it’s really not about making money off writing policies, anyone who knows the insurance business (or has read a 10Q, an annual report or listened to a conference call of one) knows that insurance companies make their money from investing the “float“, that is to say the funds held in trust between the time policy revenue is paid in, and the time claims are paid out. It’s a good business, in fact it is so good – almost everyone wants in. this business has become so robust that it even supports its own cottage industry in off-shore jurisdictions where the return on the “float” can even go untaxed – or did you think those insurance executives jets just happened to have Bermuda, The British Virgin Islands, and the Caymans stuck in their GPS just because those places have nice beaches? Although we concede they also have very nice beaches.
Needless to say it’s an even better business, when you almost never have to pay out on a policy. Title insurance is unique in that way. Even the SJC conceded in Bevilacqua that this sort of “Try Title” action had not been presented before the SJC in over a hundred years. In fact, business is so good, that there is really no entry on the Profit and Loss statement of these firms for marketing expense – when was the last time you saw a TV ad, or an AD on the Internet for a title insurance company which had a better product at a better price? There is no Geico Gecko for the title insurance business. For that matter, don’t hold your breath on finding a deal on title insurance through Groupon either.
This piqued our interest. We were so drawn to the prospect that the answers to a multi-trillion dollar question may lie in this little known, little observed, obscure industry that we decided to pick up the phone and call a few title examiners, underwriters and brokers. What we learned was nothing short of fascinating. First they all clammed up and didn’t want to talk SJC cases. Second, they affirmed, after a bit of cajoling, that they will write a policy if any servicer gives them a “pay off” letter – we’re talking a one page letter from one perfect stranger to another – insuring ownership in hundreds of thousands if not millions of dollars in real property (per transaction), and of course trillions at the nation level. This one pager could then be recorded at any local registry with precisely zero oversight.
In a world where you can’t take hair conditioner on to a flight (even in all your barefoot glory), it turns out anybody can record title to a property worth large sums with absolutely no oversight or security checks. Frankly, we’re beginning to feel like we’ve been in the wrong business all these years.
When pressed on the Eaton case, and the fact, that servicers cannot actually discharge anything (as Green Tree Servicing, LLC admitted in the uber-important Eaton case), certainly not the debt, most hung up the phone quickly – although we were exceedingly polite, professional and even gentle in our approach. These conversations, where something like being in the twilight zone. Just when we thought we had contemplated the last layer of the onion, we couldn’t believe it, with just a few phone calls, the matrix of lies came streaming down before our face yet again, like vertical lines of green computer code – apparently the underwrites took the wrong pill.
How hard would it be for the title examiners and underwriters to simply go deeper than one page, or contemplate the importance of the decisions coming out of the land court and the SJC?
The failure to perform risk assessment in the insurance underwriting business really means a lapse in fiduciary responsibility. The Absence of fiduciary responsibility means the possibility of shareholder class action lawsuits.
Conflict of Interest? You think?
So if the insurance business isn’t about making money on writing policies (predicated on sound actuarial work), and if an insurance company can even lose money on underwriting as many often do, and still make a profit by investing “the float”, then there may be an incentive to write policies, that reflect less than prudent risk management – that is to say losses on the underwriting side of the business would be made up on the investment side. As long as this is successful, shares in these companies can be sold to investors. The best investors are large funds like mutual funds because they buy in large junks of shares, are run by investment managers who are generally not very shrewd, and they hold long enough for insiders to sell. Large mutual funds are also the ideal investors because they have a steady stream of cash from IRA’s and 401k’s. IRA’s and 401k’s are steady sources of cash to mutual funds because most of those folks who were wise enough to envision saving, were also determined to buy and own a home (rather than rent one), thinking (perhaps wrongly), that it represented a sound investment. In this way, the loop from policy purchaser, to indirect title insurance company shareholder is complete. It’s almost like a double tax on the unsuspecting home purchaser, which is subtle and goes almost entirely undetected. That’s is why most homeowners have no clue who their title insurance company is, but can tell you in half a second who insures their car, their health care, or their home.
So what sort of investments are the investment managers at insurance companies making? Well, we know the insurance culture isn’t fond of extreme sports, and as it turns out their not very enterprising when it comes to their investments either – let’s just say their passive, they like fixed income, you know, a few muni’s, maybe some treasuries, but above all, they like commercial bonds for their fixed income (and perceived safety), especially those which are derived from Residential Mortgage Backed Securities, or RMBS’s. The feeders of these funds – the mortgage origination and securitization industry, is none other than their very own customers – think of it as one big happy love triangle, or if you happen to live in Utah and prefer their par lance “plural marriage”. The title insurance companies, the mortgage origination and securitization industry and policy purchasers are like sister wives. Of course the husbands in these relationships of Asymmetrical Power, are the alchemists of the modern era, they are the engineers of derivatives, and they hide behind curtains in tall shiny buildings in an emerald city called wall street, turning their Copper into Gold. For more on this activity, it might be worth reading the article “Three Card Monte and other efficient ways of parting with your money“
Historically, title insurance companies almost never pay out. When was the last time you heard of a title insurance policy actually being used? Over the decades, it was nothing more than a simple entry on the closing HUD statement when real estate was bought or sold. Homeowners didn’t’ “shop” the policy, and they had no idea that when it showed up on their closing statement, that their lawyer was also a broker for the title insurance company, collecting some 70% of the premium – if they knew that, than they would know that their attorney might also have a conflict of interest when he oversaw / received the title exam, and the selection of the policy. Finding a defect or cloud on title in this circumstance meant no policy and therefore no commission – so the closing attorney’s themselves were incentivized not to scrutinize too much – and why was this agency relationship never revealed? Isn’t that in direct opposition to consumer protection laws?
So why were those underwriters so quick to get off the phone, as soon as we “dug a little deeper” into their criteria? Well, it’s because their options don’t look too good – in fact there are only two:
a) Acknowledge that the titles to 60 mln. plus homes are badly clouded and not insurable. In which case the entire operation of writing policies, taking in premiums, investing the float in MBS’s, so that mutual funds can take in funds from various and sundry retirement accounts of home owners and buy your stock suddenly stops.
b) Pretend like your not aware of the problem and deny or use the more complex version “deny, deny, deny”. In this operation, business can continue, at least for a while – although when the final reckoning comes, the problems will be many orders of magnitude larger.
We believe plan “B” has been the modus operandi of the industry for sometime now. However, like all parties, and indeed everything which has a beginning, this too must come to an end.
Title insurance underwriters and drug addicts; just likes peas in a pod
Why is the role of insurance companies in all of this not more closely examined? If it was an addiction we were speaking of (and maybe it is), we could think of the insurers as the “enablers”, and as any good interventionist, support group, or sponsor will tell you, the enabler is as much of an addict as the addict themselves.
But what is the addiction? In a way it’s money, but in another way it’s something more than that. It’s really power. Money of course, is power, because at the end of the day, its really a redemption slip on society, and when you possess many of these tiny slips of paper, you effectively have much you can ask of the society around you – and that is power. The Alchemist-Engineers know this, so the jig in title insurance is really no different than the funny business that took place during the “Golden Age” of loan origination – they both follow what we might call the “the Mozilo principle”.
How could we look at the addicts without looking at the enablers? Where are the insurance regulators? We marveled at the discovery that there may well exist an entire insurance industry that is predicated upon the complete lack of any sort of actuary role in it’s calculation of risk, or oversight in it’s conduct of business, an entire sub-species of the insurance animal where policy payouts are unheard of. In such an industry it’s easy to imagine that there would be total lethargy, apathy, and greed and accordingly there is.
Further to this point, it’s important to note that Bevilacqua did not just turn up yesterday, he turned up five years ago – his case was never really a true legal question, it was always a business question. It seems more business is conducted inside a court room than in marketplaces nowadays – we wonder what the chinese must be thinking of the efficiency of this model.
It could all come tumbling down suddenly
The banks settlement negotiations with the 50 states AG has focused on refinancing as a solution; why? Because refinancing ratifies, and puts good paper over bad fraudulent paper. As pointed out in “On the ethics of mortgage loan default” – that’s a bad deal for homeowners. Taking an asset with bad pricing, and which had a commensurate and corrupt security interest, and improving and perfecting the security through “refinancing”, but leaving the bad pricing in place (which is a direct derivative of fraud) is not a good deal for the homeowner. For a modest decrease in the monthly mortgage payment, the homeowner pays the price of somebody else’s fraud (although he may not know it).
Further it may be a mistake to speak of buyers of these foreclosure properties as “innocent third parties” as the banks suddenly (at least since Bevilacqua emerged) are fond of doing. Is this characterization really accurate? We know that about two-thirds of real estate transactions over the years have been foreclosure properties; we also know that a good deal of those transactions were cash deals. Does that sound like “the Joneses” to you?
The buyer of a foreclosure is somewhat more enterprising than his average home buying family man cousin who buys a home because he happens to like it. The buyer of a foreclosure is by definition more of an investor than someone merely looking for shelter. This is especially true in the case at hand – Bevilacqua – who was a developer, and who turned the subject property into four separate units with four separate buyers – probably at a profit to himself, but at great harm to the buyers. In this way, the banks fraud is magnified, through the buyers of foreclosures who are more often than not, enterprising, investment minded persons, with the ability to move at greater speed than the average homesteader.
Of course nearly all home buyers are functioning in some way as investors, in so far as the overwhelming majority are purchasing the largest investment of their life. So the buyer must do proper due diligence, regardless of their place on the investor spectrum. Where there is a failure to do even basic due diligence, there is at least some accountability. However, it is not as great as the accountability of the title insurers, or the bank-sellers, who maintain superior knowledge about the “back-room dealings” of these transactions.
We only point this out so that prospective buyers of foreclosures (and also all homeowners) will pause for a moment and consider the possibilities that Bevilacqua gives rise to. The buyers of foreclosures at least are not entirely innocent as has been suggested by an industry which seeks to persuade a panel of judges and deflect away from itself the possibility of legal reprisals. Why else would the American Land title Association, and the Mortgage Bankers Associations along with their TBL’s (Tall Building Lawyers), spend the time, energy and resources to file lengthy Amici Curiae briefs in Bevilacqua? It was a like a free legal defense for a small-potatoes property developer that no one had ever heard of.
It’s worth contemplating before making out that next mortgage payment. Maybe “home ownership” in the very near future simply means staying right where your at – or in the spirit of the protesters which has gripped our world – “occupying” the house your already in.
Can a valid policy be written on securitized mortgage loans in light of Bevilacqua? Without the enablers, no transactions would or could ever get done. Without policies getting written, no real estate would be transacted, and yet another Pyramid would come tumbling down.
About Gregory M. Lemelson
Author –Amvona.comblog. Entrepreneur. Find joy in teaching and writing. Founded companies in retail, real estate and Internet technology.
This goes to show not only does MERS assign after the Complaint/ Lis Pendens is filed, but also after the sale. BS!
The mortgage was assigned to it after the foreclosure sale by Merscorp Inc.’s Mortgage Electronic Registration Systems, a national database of mortgages.
A Massachusetts man who bought property in a faulty foreclosure sale didn’t have the right to bring a court case over the property because he isn’t the owner, the state’s high court ruled.
The Supreme Judicial Court, which in January found that banks can’t foreclose on a house if they don’t own the mortgage, went one step further in a closely watched case and said a sale after that foreclosure doesn’t transfer the property. Therefore, the buyer couldn’t bring his court action against a previous owner, the court ruled.
The high court upheld a lower-court decision that said Francis J. Bevilacqua III, the buyer of residential property in Haverhill, Massachusetts, never owned it because U.S. Bancorp foreclosed before it got the mortgage. Today’s ruling could have implications in the foreclosure crisis in which banks are accused of clouding home titles through sloppy transferring of mortgages.
NOTICE: The slip opinions and orders posted on this Web site are subject to formal revision and are superseded by the advance sheets and bound volumes of the Official Reports. This preliminary material will be removed from the Web site once the advance sheets of the Official Reports are published. If you find a typographical error or other formal error, please notify the Reporter of Decisions, Supreme Judicial Court, John Adams Courthouse, 1 Pemberton Square, Suite 2500, Boston, MA 02108-1750; (617) 557-1030; SJCReporter@sjc.state.ma.us
Jurisdiction, Land Court. Land Court, Jurisdiction. Practice, Civil, Parties, Standing, Dismissal. Real Property, Ownership, Record title, Mortgage, Bona fide purchaser. Mortgage, Real estate, Foreclosure, Assignment, Equity of redemption.
CIVIL ACTION commenced in the Land Court Department on April 12, 2010.
The case was heard by Keith C. Long, J.
The Supreme Judicial Court granted an application for direct appellate review.
Jeffrey B. Loeb (David Glod with him) for the plaintiff.
Richard A. Oetheimer (Natalie F. Langlois with him) for Mortgage Bankers Association.
Max Weinstein for WilmerHale Legal Services Center of Harvard Law School.
John M. Stephan & Amber Anderson Villa, Assistant Attorneys General, for the Commonwealth.
The following submitted briefs for amici curiae:
Mark B. Johnson for American Land Title Association.
Adam J. Levitin, of the District of Columbia, Christopher L. Peterson, of Utah, John A.E. Pottow, of Michigan, & Katherine Porter, pro se.
Edward Rainen, Carrie B. Rainen, & Ward P. Graham for Massachusetts Association of Bank Counsel, Inc.
In this case we must determine whether a plaintiff has standing to maintain a try title action under G.L. c. 240, §§ 1-5, where he is in physical possession of real property but his chain of title rests on a foreclosure sale conducted by someone other than “the mortgagee or his executors, administrators, successors or assigns.” G.L. c. 183, § 21 (statutory power of sale). See G.L. c. 244, § 14 (procedure for foreclosure under power of sale). On his own motion, a Land Court judge determined that the plaintiff, Francis J. Bevilacqua, III, “holds no title to the property at 126-128 Summer Street in Haverhill,” and thus lacks standing to bring a try title action. The judge dismissed the complaint with prejudice and Bevilacqua appealed. We granted Bevilacqua’s application for direct appellate review and now affirm the dismissal of his complaint but conclude that such dismissal should have been entered without prejudice. [FN1]
1. Procedural background. This case comes before us on a highly unusual procedural footing. The respondent, Pablo Rodriguez, has not been located and accordingly has not entered an appearance. As a result, it fell to the Land Court judge to raise the issue of Bevilacqua’s standing under G.L. c. 240, § 1. See Mass. R. Civ. P. 12(h)(3), 365 Mass. 754 (1974) (“Whenever it appears by suggestion of a party or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action”); Maxwell v. AIG Domestic Claims, Inc., ante 91, 99-100 (2011); Sullivan v. Chief Justice for Admin. & Mgt. of the Trial Court, 448 Mass. 15, 21 (2006); Litton Business Sys., Inc. v. Commissioner of Revenue, 383 Mass. 619, 622 (1981). The procedures applicable to such a sua sponte motion in a try title action are unclear and the judge did not specify the rule under which the dismissal was ordered. We have received no briefing on the issue from Bevilacqua, and those amici addressing the point note that the absence of precedent leads them to “presume[ ]” the applicable standard.
In considering the appropriate procedure, we note that a court’s sua sponte motion to dismiss for lack of subject matter jurisdiction is analogous to a party’s motion to dismiss under either Mass. R. Civ. P. 12(b)(1) or (6), 365 Mass. 754 (1974). Ordinarily, “[i]n reviewing a dismissal under rule 12(b)(1) or (6), we accept the factual allegations in the plaintiffs’ complaint, as well as any favorable inferences reasonably drawn from them, as true.” Ginther v. Commissioner of Ins., 427 Mass. 319, 322 (1998). Cf. Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007) (clarifying standards for dismissal under rule 12[b]  ). The unusual mechanics of G.L. c. 240, §§ 1-5, however, suggest that the analogy may not be perfect and that a different standard may be appropriate.
[FN2] We need not resolve the issue today, however, because we conclude that Bevilacqua’s complaint must be dismissed even if we apply the most favorable of the possible standards of review. See Ginther v. Commissioner of Ins., supra (standards for motion to dismiss for lack of subject matter jurisdiction). We thus “accept the factual allegations in [Bevilacqua's petition], as well as any favorable inferences reasonably drawn from them, as true.” Id. Those facts are as follows.
On March 18, 2005, Pablo Rodriguez granted a mortgage on the property to Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Finance America, LLC. The mortgage was recorded at the Southern Essex registry of deeds (registry). As of June 29, 2006, MERS had not assigned the mortgage to U.S. Bank National Association (U.S.Bank) but, on that date, U.S. Bank executed a foreclosure deed referencing the mortgage and purporting to transfer the property pursuant to a foreclosure sale from U.S. Bank (as trustee under a trust that is not further described) to U.S. Bank “as Trustee under the securitization Servicing Agreement dated as of July 1, 2005 Structured Asset Securities Corporation Structure Asset Investment Loan Trust Mortgage Pass Through Certificates, Series 2005-HEI.” Nearly one month later, on July 21, 2006, MERS assigned the mortgage to U.S. Bank in an assignment of mortgage recorded at the registry. A “confirmatory foreclosure deed” was then granted on October 9, 2006, by U.S. Bank to U.S. Bank as trustee under the servicing agreement. Eight days later, on October 17, 2006, U.S. Bank “as Trustee” granted a quitclaim deed to Bevilacqua.
On April 12, 2010, Bevilacqua filed a petition to compel Rodriguez to try title to the property. In his complaint Bevilacqua claimed to reside at the property and to hold record title. Because of the fact that MERS had not assigned the mortgage to U.S. Bank at the time of the foreclosure, Bevilacqua alleged that there is a cloud on his title in the form of “the possibility of an adverse claim by Rodriguez against Bevilacqua’s title to the [p]roperty.”
2. Statutory background. Bevilacqua seeks an order that either compels Rodriguez to bring an action to try his title or forever bars him from enforcing his adverse claims to the property. Try title actions under G.L. c. 240, §§ 1-5, are within the exclusive original jurisdiction of the Land Court. G.L. c. 185, § 1 (d ). If Bevilacqua cannot satisfy the jurisdictional requirements of the statute, then the Land Court is without subject matter jurisdiction and the petition must be dismissed. See Boston Edison Co. v. Boston Redevelopment Auth., 374 Mass. 37, 46 (1977); Riverbank Improvement Co. v. Chapman, 224 Mass. 424, 425 (1916) (“The Land Court is a statutory court, not of general but of strictly limited jurisdiction”).
The statute states, in relevant part:
“If the record title of land is clouded by an adverse claim, or by the possibility thereof, a person in possession of such land claiming an estate of freehold therein … may file a petition in the land court stating his interest, describing the land, the claims and the possible adverse claimants so far as known to him, and praying that such claimants may be summoned to show cause why they should not bring an action to try such claim.”
G.L. c. 240, § 1. There are thus two steps to a try title action: the first, which requires the plaintiff to establish jurisdictional facts such that the adverse claimant might be “summoned to show cause why [he] should not bring an action to try [his] claim,” and the second, which requires the adverse claimant either to disclaim the relevant interest in the property or to bring an action to assert the claim in question. [FN3] Id. See Blanchard v. Lowell, 177 Mass. 501, 504-505 (1901). The establishment of jurisdictional facts, although essential in all cases, is thus a matter of particular salience in the initial stage of a try title action.
There appear to be two jurisdictional facts that must be shown to establish standing under G.L. c. 240, § 1. First, it is clear on the face of the statute that only “a person in possession” of the disputed property may maintain a try title action. Id. Second, although less obviously clear, a plaintiff must hold a “record title” to the land in question. Blanchard v. Lowell, supra at 504. Arnold v. Reed, 162 Mass. 438, 440-441 (1894). Here, Bevilacqua has alleged that he resides on the property, a factual assertion that we accept as true and from which we draw the favorable inference that he is “a person in possession” as required by G.L. c. 240, § 1. [FN4] Bevilacqua also claims to hold record title to the property as required to support standing. See Blanchard v. Lowell, supra. In dismissing the petition the judge concluded that the facts alleged by Bevilacqua did not support his claim of record title and that, as a result, Bevilacqua lacked standing. This is the controversy presented on appeal.
Before analyzing whether Bevilacqua has demonstrated the existence of record title, and in light of the fact that it has been more than a century since this court last examined standing under G.L. c. 240, §§ 1-5, we first consider the history and purposes of the statute. [FN5] The initial try title statute was enacted in 1851 and provided:
“Any person in possession of real property, claiming an estate of freehold … may file a petition in the supreme judicial court, setting forth his estate … and averring that he is credibly informed and believes, that the respondent makes some claim adverse to the estate of the petitioner, and praying that he may be summoned to show cause, why he should not bring an action to try the alleged title, if any.” St. 1851, c. 233, § 66.
Prior to enactment of this statute, the principal means of trying title to land was the writ of entry, which permitted a plaintiff to “obtain possession of real estate from a disseisor who is in possession and holds the demandant out.” Mead v. Cutler, 208 Mass. 391, 392 (1911). See Black’s Law Dictionary 472 (6th ed. 1990) (disseisor is “[o]ne who puts another out of the possession of his lands wrongfully. A settled trespasser on the land of another”). See also Black’s Law Dictionary 541 (9th ed. 2009). The writ was limited, however, by the fact that it could only be brought where the plaintiff was “held out.” See Mead v. Cutler, supra. As a result, there were “cases where a party in possession of real estate would be obliged to abandon his accustomed possession and use, in order to [bring a writ of entry and] try the right of an adverse claimant.” Munroe v. Ward, 4 Allen 150, 151 (1862). In recognition of the fact that such abandonment “would be unreasonable and contrary to sound policy,” the try title statute was enacted so that property owners might remain in possession while requiring that adverse claims be either asserted or disavowed rather than lingering indefinitely. Id.
Under the early versions of the try title statute the sole jurisdictional requirement was “actual possession and taking of profits” from the land. Id. at 152. See St. 1873, c. 178; St. 1852, c. 312, § 52; St. 1851, c. 233, § 66. Pursuant to these statutes, record or legal title to the property was irrelevant. See Orthodox Congregational Soc’y v. Greenwich, 145 Mass. 112, 113 (1887) (“[M]ost of the facts … bear only upon the question of title. These we need not consider”); Leary v. Duff, 137 Mass. 147, 149- 150 (1884) (“not of importance that the title asserted by the petitioner rests upon an alleged … adverse possession,” rather than on legal title).
These early enactments were repealed in 1893, however, and the modern form of the statute was adopted. St. 1893, c. 340. One of the principal amendments was the addition of an opening clause, referring to “the record title of real property.” St. 1893, c. 340, § 1. Contrast Pub. Sts. (1882), c. 176, §§ 1, 2. Almost immediately following the 1893 amendment, this court was required to consider the meaning of the new statutory language. In the case of Arnold v. Reed, 162 Mass. 438 (1894), a putative property owner filed a try title action alleging possession and relying on a recorded deed purporting to convey good title to the property. Id. at 439-440. The court held that mere possession was no longer sufficient and that, under the new statute, title appearing on “the record” was also necessary. [FN6] Id. at 440. The court thus read the new introductory clause as limiting the types of disputes– i.e., only claims based on record title–that might be resolved in a try title action. See St. 1893, c. 340, § 1 (“When the record title of real property is clouded by an adverse claim”). The limitation added by the Legislature in 1893 remains operative in the present statute and the jurisdictional requirement of “record title” is thus applicable to Bevilacqua’s claim. Compare G.L. c. 240, § 1 (“If the record title of land is clouded by an adverse claim …”), with St. 1893, c. 340, § 1. We turn, then, to consider Bevilacqua’s various claims to record title.
3. Standing as owner of the property. [FN7] Bevilacqua alleges that he has record title to the property because he is the owner by virtue of a quitclaim deed granted to him by U.S. Bank. There appear to be two theories that underpin this argument. First, the quitclaim deed may be sufficient by itself to support record title to the property. Second, if the quitclaim deed itself does not constitute record title, then that instrument coupled with the chain of grants on which it relies is sufficient as a whole to demonstrate record title. The first theory is incorrect as a matter of law. The second theory is unpersuasive in light of the facts alleged by Bevilacqua.
In addressing the first theory, that a single recorded deed purporting to transfer title is sufficient to establish record title, the Land Court judge made the trenchant observation that such a doctrine would render the “Brooklyn Bridge” problem insoluble. Specifically, the judge wrote that “in the classic example, a litigant could go to the registry, record a deed to the Brooklyn Bridge, commence suit, hope that the true owners ignored the suit or … could not be readily located and [would thus] be defaulted, and secure a judgment.” Leaving aside the fact that public property cannot be the subject of a try title action, see G.L. c. 240, § 5, an interpretation of the try title statute permitting such a result cannot be the law.
We are not persuaded by this “single deed” theory for a number of reasons, not least of which is the fact that there is nothing magical in the act of recording an instrument with the registry that invests an otherwise meaningless document with legal effect. See S & H Petroleum Corp. v. Register of Deeds for the County of Bristol, 46 Mass.App.Ct. 535, 537 (1999) (“The function of a registry of deeds is to record documents. It is essentially a ministerial function …”). Recording may be necessary to place the world on notice of certain transactions. See, e.g., G.L. c. 183, § 4 (leases and deed); G.L. c. 203, §§ 2-3 (trust documents). Recording is not sufficient in and of itself, however, to render an invalid document legally significant. See Arnold v. Reed, 162 Mass. 438, 440 (1894); Nickerson v. Loud, 115 Mass. 94, 97-98 (1874) (“mere assertions … whether recorded or unrecorded, do not constitute a cloud upon title, against which equity will grant relief”). As a result, it is the effectiveness of a document that is controlling rather than its mere existence. See Bongaards v. Millen, 440 Mass. 10, 15 (2003) (where grantor lacks title “a mutual intent to convey and receive title to the property is beside the point”). The effectiveness of the quitclaim deed to Bevilacqua thus turns, in part, on the validity of his grantor’s title. Accordingly, a single deed considered without reference to its chain of title is insufficient to show “record title” as required by G.L. c. 240, § 1.
The second theory supporting Bevilacqua’s ownership claim addresses this point by asserting that the chain of deeds recorded at the registry is sufficient to demonstrate record title. Under this theory Bevilacqua may trace his chain of title back from the quitclaim deed, through the foreclosure deed, and ultimately to the mortgage granted by Rodriguez to MERS as nominee for Finance America. Bevilacqua has alleged, however, that U.S. Bank was not the assignee of the mortgage at the time that it purported to foreclose on the property and conduct a sale pursuant to the power of sale contained in the mortgage.
As we recently held in the Ibanez case, Massachusetts “adhere[s] to the familiar rule that ‘one who sells under a power [of sale] must follow strictly its terms’ ” so, where a foreclosure sale occurs in the absence of authority, “there is no valid execution of the power, and the sale is wholly void.” U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 646 (2011), quoting Moore v. Dick, 187 Mass. 207, 211 (1905). “One of the terms of the power of sale that must be strictly adhered to is the restriction on who is entitled to foreclose.” U.S. Bank Nat’l Ass’n v. Ibanez, supra at 647. See Bongaards v. Millen, supra. By alleging that U.S. Bank was not the assignee of the mortgage at the time of the purported foreclosure, Bevilacqua is necessarily asserting that the power of sale was not complied with, that the purported sale was invalid, and that his grantor’s title was defective. See U.S. Bank Nat’l Ass’n v. Ibanez, supra. In light of its defective title, the intention of U.S. Bank to transfer the property to Bevilacqua is irrelevant and he cannot have become the owner of the property pursuant to the quitclaim deed. See Bongaards v. Millen, supra. Bevilacqua’s theory based on the chain of title is thus unpersuasive.
In this regard we note that Bevilacqua’s try title action based on ownership of the property faces an insurmountable obstacle. A try title action may be brought only where record title is “clouded by an adverse claim, or by the possibility thereof.” G.L. c. 240, § 1. However, the very fact that raises the possibility of an adverse claim–U.S. Bank’s lack of authority to foreclose at the time it purported to foreclose–is fatal to Bevilacqua’s claim to “own” the property. The basic problem is that, instead of presenting a potentially viable claim and seeking to test it against the claims of a rival, Bevilacqua effectively admits that he does not presently have record title and seeks a declaration, if Rodriguez were to default, that the defect is cured. In light of the pleaded facts it is thus impossible for us to conclude that Bevilacqua’s ownership theory demonstrates the jurisdictional facts necessary to maintain a try title action. See G.L. c. 240, § 1.
4. Standing as assignee of the mortgage. As an alternative to the claim that he owns the property in fee simple, Bevilacqua argues that he holds record title because he is the assignee of the mortgage granted by Rodriguez to MERS as nominee for Finance America. Bevilacqua does not develop the argument at length but it is an intriguing one given that Massachusetts is a “title theory” State in which “a mortgage is a transfer of legal title in a property to secure a debt.” U.S. Bank Nat’l Ass’n v. Ibanez, supra at 649. If a mortgagee’s legal title suffices to establish “record title” under G.L. c. 240, § 1, then Bevilacqua may be able to demonstrate standing to proceed with this try title action. We conclude, however, that Bevilacqua’s claim to record title as mortgagee is inconsistent with the relief he seeks, namely, that Rodriguez be compelled either to “show cause why he should not be required to bring an action to try title” or to “be forever barred from having or enforcing any claim in the property.” Accordingly, we conclude that Bevilacqua’s theory of record title as mortgagee is untenable and cannot support standing under G.L. c. 240, § 1.
We begin our analysis of this question by noting that Bevilacqua’s claim to be holder of the mortgage has at least a plausible basis despite the fact that he has never taken an express assignment. This court has held that it is possible for a foreclosure deed, ineffective due to noncompliance with the power of sale, to nevertheless operate as an assignment of the mortgage itself. See Holmes v. Turner’s Falls Co., 142 Mass. 590, 591 (1886); Dearnaley v. Chase, 136 Mass. 288, 290 (1884); Brown v. Smith, 116 Mass. 108 (1874). The theory is that “where a deed of real estate shows by its language that it was intended to pass title by one form of conveyance, by which however title could not pass, courts have made the deed effective by construing it as a deed of some other form, notwithstanding the inappropriateness of the language.” Kaufman v. Federal Nat’l Bank, 287 Mass. 97, 100-101 (1934). Bevilacqua argues in his brief that “the foreclosure deed constituted an assignment of the mortgage on the [p]roperty to Bevilacqua.” As stated, this proposition cannot be correct because Bevilacqua was not a party to the foreclosure deed. Further, Bevilacqua has alleged that U.S. Bank was not the assignee of the mortgage at the time it executed the foreclosure deed so it is impossible for that instrument to be construed as an assignment of mortgage. See U.S. Bank Nat’l Ass’n v. Ibanez, supra at 654 (“Because an assignment of a mortgage is a transfer of legal title, it becomes effective … only on the transfer; it cannot become effective before the transfer”). We assume without deciding, however, that Bevilacqua might be able to establish a chain of assignments passing from his quitclaim deed, through the “Confirmatory Foreclosure Deed,” through the recorded assignment from MERS, and thus ultimately back to Rodriguez’s original deed of mortgage. See supra at [2-3] (regarding drawing of favorable inferences). We may thus assume, without deciding, that there is a factual basis on which Bevilacqua may claim to be the assignee of the mortgage.
The title that Bevilacqua might claim as mortgagee, however, would be inconsistent with the relief that might be provided under G.L. c. 240, §§ 1-5. The problem, from Bevilacqua’s perspective, arises from the nature of a mortgage. In Massachusetts, a “mortgage splits the title in two parts: the legal title, which becomes the mortgagee’s, and the equitable title, which the mortgagor retains.” Maglione v. BancBoston Mtge. Corp., 29 Mass.App.Ct. 88, 90 (1990). The purpose of the split is “to give to the mortgagee an effectual security for the payment of a debt [while] leav[ing] to the mortgagor … the full control, disposition and ownership of the estate.” Santiago v. Alba Mgt., Inc., 77 Mass.App.Ct. 46, 49 (2010), quoting Charlestown Five Cents Sav. Bank v. White, 30 F.Supp. 416, 418-419 (D.Mass.1939). The title held by a mortgagee is defeasible and “upon payment of the note by the mortgagor … the mortgagee’s interest in the real property comes to an end.” Maglione v. BancBoston Mtge. Corp., supra.
Inherent in this concept of the mortgagee’s defeasible title is the mortgagor’s equity of redemption:
“[T]he mortgagor’s equity of redemption [is] the basic and historic right of a debtor to redeem the mortgage obligation after its due date, and ultimately to insist on foreclosure as the means of terminating the mortgagor’s interest in the mortgaged real estate.”
Restatement (Third) of Property (Mortgages) c. 3, Introductory Note at 97 (1996) (addressing common law applicable in both title theory and lien theory States). “[A]n equity of redemption is inseparably connected with a mortgage,” Peugh v. Davis, 96 U.S. 332, 337 (1877), and endures so long as the mortgage continues in existence:
“When the right of redemption is foreclosed, the mortgage has done its work and the property is no longer mortgaged land. Instead, the former mortgagee owns the legal and equitable interests in the property and the mortgage no longer exists.”
Santiago v. Alba Mgt., Inc., supra at 50. See G.L. c. 244, § 18 (mortgagor holds equity of redemption until mortgagor forecloses); Maglione v. BancBoston Mtge. Corp., supra (“upon payment of the note by the mortgagor … the mortgagee’s interest in the real property comes to an end”). Following default, therefore, a mortgagee may enter and possess the property but his or her title remains subject to the mortgagor’s equity of redemption. See G.L. c. 244, §§ 1, 2; Joyner v. Lenox Sav. Bank, 322 Mass. 46, 52-53 & n. 1 (1947); Maglione v. BancBoston Mtge. Corp., supra at 91 (this right of entry and possession distinguishes title and lien theory States). This state of affairs persists until either the mortgagee brings a proceeding to foreclose on the equity of redemption, see Negron v. Gordon, 373 Mass. 199, 205 n. 4 (1977) (listing four methods of foreclosing equity of redemption), or until the mortgagor redeems the property and brings the mortgagee’s interests in the property to an end. See Maglione v. BancBoston Mtge. Corp., supra at 90. See also G.L. c. 260, § 33 (limitations period for foreclosure proceedings). The crucial point is that a mortgage, by its nature, necessarily implies the simultaneous existence of two separate but complementary claims to the property that do not survive the mortgage or each other.
This point controls the present case because a litigant who asserts that he or she is the holder of a mortgage necessarily asserts that the mortgage continues to exist and that the mortgagor’s claims to the property remain valid. For this reason, a plaintiff in a try title action may be heard to claim that a mortgage no longer exists, that claims to the contrary are adverse, and that the putative mortgagee should be required to bring an action trying the claim. See, e.g., Brewster v. Seeger, 173 Mass. 281 (1899). For a plaintiff to both claim record title as holder of a mortgage and to dispute the respondent’s continuing equitable title or equity of redemption would be oxymoronic, however, because the only circumstances in which the respondent’s rights would not be upheld are circumstances in which there is no mortgage for the plaintiff to hold. This is the circumstance in which Bevilacqua finds himself.
To assert that he holds legal title as mortgagee, Bevilacqua must necessarily accept that Rodriguez has a complementary claim to either equitable title (if there has been no default) or an equity of redemption (if default has occurred). In either case, and although their economic interests may diverge, Bevilacqua cannot be heard to argue that Rodriguez’s claim is adverse to his own. This fact necessarily precluded Bevilacqua from establishing a necessary element of his try title action–the existence of an adverse claim. [FN9] See G.L. c. 240, § 1 (action may be brought “[i]f the record title of land is clouded by an adverse claim …”). The legal title possessed by a mortgagee is not, therefore, a basis of standing that would be consistent with maintenance of Bevilacqua’s action against Rodriguez. Accordingly, we conclude that it is not open to Bevilacqua to rely on such title in attempting to demonstrate the necessary jurisdictional facts. [FN10]
5. Standing as bona fide purchaser for value. In concluding his arguments, Bevilacqua asserts that he “could not have known, when he purchased the [p]roperty, that this title problem existed” and that as a result he must be permitted to proceed under the try title statute or be left without an adequate remedy. Certain of the amici expand on this point, arguing that Bevilacqua is a bona fide purchaser for value and without notice such that he holds good title to the property. Under this theory, Bevilacqua’s quitclaim deed transferred good title to the property that, in addition to his possession, satisfies the standing requirements of the try title statute. [FN11] G.L. c. 240, § 1. We need not address the legal merits of the argument because Bevilacqua is not a bona fide purchaser without notice of the defects in his grantor’s title.
We begin analysis of this bona fide purchaser theory by noting that “[t]he law goes a great way in protecting the title of a purchaser for value without notice or knowledge of any defect in the power of the vendor to sell….” Rogers v. Barnes, 169 Mass. 179, 183 (1897). For that reason, the purchaser’s “title is not to be affected by mere irregularities in executing a power of sale contained in a mortgage, of which irregularities he has no knowledge, actual or constructive.” Id. at 183-184. There are limits to the protections provided to bona fide purchasers, however, and “[t]he purchaser of an apparently perfect record title is not protected against all adverse claims.” Brewster v. Weston, 235 Mass. 14, 17 (1920). Where the bona fide purchaser is not protected against an adverse claim the purchaser “must rely upon the covenants of his deed” rather than dispossession of the true owner– that is, there are situations in which it is the purchaser rather than the original owner who must seek recovery from a third person rather than being awarded possession of the property itself. Id. See 3 J. Palomar, Land Titles § 677, at 374-375 (3d ed. 2003) (listing circumstances in which actual facts may rebut presumption of record title and true owner will prevail over innocent purchaser).
Generally, the key question in this regard is whether the transaction is void, in which case it is a nullity such that title never left possession of the original owner, or merely voidable in which case a bona fide purchaser may take good title. See Brewster v. Webster, supra. Cf. Restatement (Second) of Contracts § 7 comment a (1981). Here, the dispute as to title revolves around the validity of the unauthorized foreclosure sale conducted by U.S. Bank. Certain of the amici argue that the category in which such a transaction belongs, void or merely voidable, has not been addressed definitively in Massachusetts. Our recent decision in the case of U.S. Bank Nat’l Ass’n v. Ibanez, 458 Mass. 637, 647 (2011), however, concluded that “[a]ny effort to foreclose by a party lacking ‘jurisdiction and authority’ to carry out a foreclosure under [the relevant] statutes is void.” We decline the invitation to revisit this issue. In any event, a factual prerequisite–purchase by Bevilacqua without notice of the defects in U.S. Bank’s title–does not exist.
Bevilacqua’s petition alleges that a number of documents were recorded with the registry, provides the book and page number applicable to each document, but fails to provide the dates on which recording occurred. We take judicial notice, however, of the fact that the registry assigns book and page numbers to recorded instruments in a sequential manner. See Mass. G. Evid. § 201(b) (2011). We therefore may conclude that instruments with lower book and page numbers were recorded prior to instruments with higher book and page numbers. [FN12] Here, the book and page numbers demonstrate recording of documents in the following order: (i) the mortgage from Rodriguez to MERS (executed on March 18, 2005); (ii) the assignment of mortgage from MERS to U.S. Bank (executed on July 21, 2006); (iii) the purported foreclosure deed from U.S. Bank “as Trustee” to U.S. Bank as trustee under the servicing agreement (executed on June 29, 2006); (iv) the “Confirmatory Foreclosure Deed” from U.S. Bank “as Trustee” to U.S. Bank as trustee under the servicing agreement (executed on October 9, 2006); and (v) the quitclaim deed from U.S. Bank to Bevilacqua (executed on October 17, 2006). We cannot be sure of the precise date on which the foreclosure deed became a matter of public record, but we do know that this occurred after the assignment of mortgage had been recorded. As a result, Bevilacqua must have attempted to purchase the property from U.S. Bank (in some capacity) either when the registry’s records showed the bank to be a complete stranger to title, when the registry’s records showed the bank to be no more than an assignee of the mortgage, or when the registry’s records showed that the bank conducted the foreclosure sale before receiving assignment of the mortgage. In none of these circumstances could we conclude that Bevilacqua is a bona fide purchaser for value and without notice that U.S. Bank’s title was doubtful. See Demoulas v. Demoulas, 428 Mass. 555, 577 (1998) (parties may not “establish themselves as bona fide purchasers simply by claiming that they were ‘blissfully unaware’ of” facts to which they closed their eyes). We therefore are unconvinced by Bevilacqua’s claim to record title based on the theory that he is a bona fide purchaser for value and without notice.
6. Dismissal with prejudice. As a final matter we consider whether the Land Court judge properly specified that Bevilacqua’s complaint be dismissed with prejudice. As discussed above, the precise procedural mechanism under which the judge decided the sua sponte motion to dismiss is unclear. What is clear, however, is that the judge’s dismissal was based on lack of standing and thus want of subject matter jurisdiction. See Mass. R. Civ. P. 12(h)(3) (“Whenever it appears by suggestion of a party or otherwise that the court lacks jurisdiction of the subject matter, the court shall dismiss the action”); Sullivan v. Chief Justice for Admin. & Mgt. of the Trial Court, 448 Mass. 15, 21 (2006), and cases cited (“The issue of standing is one of subject matter jurisdiction”).
A complaint that is dismissed for lack of jurisdiction is not an adjudication on the merits. See Mass. R. Civ. P. 41(b)(3), as amended, 454 Mass. 1403 (2009) (involuntary dismissal or “any dismissal not provided for in this rule, other than a dismissal for lack of jurisdiction … operates as an adjudication upon the merits”). It is thus inappropriate to attach preclusive effects to the dismissal beyond the matter actually decided–the absence of subject matter jurisdiction. See Restatement (Second) of Judgments § 11, at 108 (1982) (“A judgment may properly be rendered against a party only if the court has authority to adjudicate the type of controversy involved in the action”). The obvious rationale for this rule is that a court without subject matter jurisdiction over a controversy is without authority to issue a binding judgment regarding that controversy. See id. at comment a. The conclusion that Bevilacqua lacks standing to bring a try title action is thus binding on him in future actions but dismissal of this action for want of subject matter jurisdiction does not bar him from bringing other actions regarding title to the property.
7. Conclusion. The Land Court judge properly raised the question whether Bevilacqua has record title to the property such that he has standing to bring a try title action. Bevilacqua has identified no basis on which it might be concluded that he has record title to the property such that a try title action may be sustained. As a result, the Land Court was without jurisdiction to hear the try title action. Dismissal of the petition was therefore proper. The dismissal should have been entered without prejudice, however, and we therefore remand to the Land Court for entry of judgment consistent with this opinion.
FN1. We gratefully acknowledge the amicus briefs submitted by the American Land Title Association; the Attorney General of the Commonwealth; the Massachusetts Association of Bank Counsel, Inc.; the Mortgage Bankers Association; Professors Adam J. Levitin, Christopher L. Peterson, Katherine Porter, and John A.E. Pottow; and the WilmerHale Legal Services Center of Harvard Law School.
FN2. It may not be desirable merely to assume the accuracy of a plaintiffs’s
factual assertions. If a plaintiff brings a try title action and the respondent defaults, “the court shall enter a decree that [the respondent] be forever barred from having or enforcing any such claim adversely to the petitioner.” G.L. c. 240, § 2. As a result, a property owner whose whereabouts are unknown and who is not reached through publication notice might be divested by a plaintiff who is put to no greater evidentiary test than having pleaded facts that the court is obliged to accept as true. See Ginther v. Commissioner of Ins., 427 Mass. 319, 322 (1998). But see G.L. c. 240, § 4 (remedies for those dispossessed by default judgment). Here, for instance, there are no recorded instruments in evidence and Bevilacqua merely has alleged their existence and contents.
A better approach, consistent with the procedure followed in the case of a motion to dismiss due to lack of subject matter jurisdiction, may be to place the burden of proof on the nonmoving party (here, Bevilacqua) to prove jurisdictional facts. See, e.g., Caffyn v. Caffyn, 441 Mass. 487, 491 (2004). As discussed further, infra at–, the existence of record title is a requirement for standing under G.L. c. 240, § 1, and thus a jurisdictional fact. That said, application of a preponderance of the evidence standard may be inappropriate at this stage of a try title proceeding if it is indistinguishable from “the question whether [the plaintiff] has a better title [than the respondent]“–a matter that “is not to be determined in these
proceedings, but in the actions which the respondents may be ordered to bring” as a result of the try title action. Blanchard v. Lowell, 177 Mass. 501, 504-505 (1901). Given these difficulties, it may be necessary to adopt a unique standard of review in future try title actions.
FN3. As discussed further, infra, the structure of the try title statute is a direct reflection of the limitations inherent in the common-law writ of entry. The try title statute may now be something of an anachronism when it is considered that modern statutes are far more flexible than the common-law writ, see G.L. c. 237; that Massachusetts courts are now vested with equity jurisdiction, see, e.g., G.L. c. 185, § 1 (k ); and that declaratory judgment is now available to litigants in this Commonwealth, see G.L. c. 231A inserted by St.1945, c. 582, § 1.
FN4. One of the amici has appended to its brief a number of deeds referring to the property at 126-128 Summer Street in Haverhill that were recorded between the time Bevilacqua purchased the property and the date on which he filed his petition. Specifically, Bevilacqua recorded a master deed establishing a condominium that consists of four units. Bevilacqua also recorded three deeds transferring units to various third-party purchasers. These deeds and the conveyances they represent are not matters properly before
the court and do not factor into our analysis. Although nonevidentiary, the deeds are nevertheless noteworthy in that they explain why Bevilacqua’s complaint is drafted to imply possession rather than pleading the matter directly, see Connolley, petitioner, 168 Mass. 201, 203 (1897) (“the only question … is whether the petitioner has a record title to the whole estate”), and in that they highlight the concerns addressed, see note 2, supra, regarding the proper standards of review and evidentiary burdens in a try title action.
FN5. In determining that a plaintiff under G.L. c. 240, §§ 1-5, must possess both record title and possession, the motion judge quoted Daley v. Daley, 300 Mass. 17, 21 (1938), to the effect that “[a] petition to remove a cloud from the title to land affected cannot be maintained unless both actual possession and the legal title are united in the petitioner.” The Daley case is inapposite, however, because it involves a bill to quiet title pursuant to G.L. c. 240, §§ 6-10, rather than an action to try title pursuant to G.L. c. 240, §§ 1-5. See generally R.W. Bishop, Prima Facie Case § 48.5, at 601-602 (5th ed.2005) (intermingling discussion of both try title and quiet title cases in section entitled “Actions to Try Title”).
An action to quiet title is an in rem action, G.L. c. 240, § 10, brought under the court’s equity jurisdiction. See G.L. c. 185, § 1 (k ); First
Baptist Church of Sharon v. Harper, 191 Mass. 196, 209 (1906) (“in equity the general doctrine is well settled, that a bill to remove a cloud from the land … [requires that] both actual possession and the legal title are united in the plaintiff”). In contrast, an action to try title is an action at law brought against the respondent as an individual. See G.L. c. 240, § 2 (“the court shall enter a decree that [specified adverse claimants] be forever barred from having or enforcing any such claim adversely to the petitioner”); Clouston v. Shearer, 99 Mass. 209, 211, 212-213 (1868) (at time try title statute was enacted in 1851, Massachusetts courts did not yet possess general equity jurisdiction that would permit actions to remove cloud from title [not until 1852] ).
The distinction is critical because the plaintiff in a try title action may defeat the specified adverse claims through a default or by showing title that is merely superior to that of the respondent. See G.L. c. 240, §§ 2-3; Blanchard v. Lowell, 177 Mass. 501, 504-505 (1901). In contrast, a quiet title action requires the plaintiff “not merely to demonstrate better title to the locus than the defendants possess, but requires the plaintiff to prove sufficient title to succeed in its action.” Sheriff’s Meadow Found., Inc. v. Bay-Courte Edgartown, Inc., 401 Mass. 267, 269 (1987). See U.S. Bank, Nat’l Ass’n v. Ibanez, 458 Mass. 637, 645 (2011); Loring v. Hildreth, 170 Mass. 328 (1898). Precedent applicable to one statute, although potentially
persuasive, does not control cases brought under the other statute.
FN6. Interestingly for purposes of this proceeding, in Arnold v. Reed, 162 Mass. 438 (1894), the court was presented with a try title action where the plaintiff relied on a recorded deed reciting that the grantor possessed good title. Id. at 440. “[T]he recitals [were] not true [however], and this would appear by an examination of the records of the Probate Court.” Id. Accordingly, the mere recording of an instrument with the registry of deeds that purports to transfer ownership was insufficient to create standing under the try title statute. Id. But see Connolley, petitioner, 168 Mass. 201, 203-204 (1897) (petitioner had sufficient record title where his grantor had only 255/264th ownership according to registry records, 246/264th ownership according to wills and registry records, and complete but unrecorded ownership due to adverse possession).
FN7. We refer in Part 3 to Bevilacqua as the owner of the property, using the term “owner” in a colloquial sense, to distinguish this analysis from our later consideration of Bevilacqua’s claim to hold record title as assignee of the mortgage or as a bona fide purchaser without notice.
FN8. One amicus appended to its brief a copy of the foreclosure deed and the
legal notice announcing the foreclosure sale. That foreclosure deed recites that “U.S. Bank National Association [U.S. Bank] as Trustee [is the] holder of a mortgage from Pablo Rodriguez” while the notice, recorded with the foreclosure deed, states that “[U.S. Bank as trustee] is the present holder” of the mortgage. Neither of these documents is in evidence and, whether he relied on such representations or not, Bevilacqua’s petition directly contradicts the accuracy of the quoted statements. We rely on the facts pleaded in the petition for purposes of this appeal. See supra at–.
FN9. In addition, it is difficult, if not impossible, to imagine what kind of action Rodriguez might bring to try his title as mortgagor. Presumably Rodriguez would assert that the purported foreclosure sale was ineffective, that no foreclosure has occurred, and that he thus retains an equity of redemption. Bevilacqua necessarily would agree with these claims, having asserted that he is the mortgage holder, so judgment could enter on the pleadings declaring that Rodriguez enjoys an equity of redemption. Such an action would be nonsensical.
FN10. Bevilacqua asserts that foreclosure is not an adequate remedy in these circumstances because, he argues with emphasis, if he “is required to foreclose on the mortgage … to clean up his title, this will delay his sale or
refinance for a minimum of about seven to nine months.” Foreclosure, however, is the appropriate remedy for a mortgagee seeking to resolve an outstanding equity of redemption. See Negron v. Gordon, 373 Mass. 199, 205 n. 4 (1977) (listing four methods of foreclosing equity of redemption). Nothing contained herein is intended to limit Bevilacqua’s right, if he can show himself to be mortgagee of the property, to pursue foreclosure under the appropriate statutes. The record does not disclose if Bevilacqua presently holds the promissory note secured by Rodriguez’s mortgage. Whether the holder of a mortgage may foreclose the equity of redemption without also holding the note is a question that is not before us.
FN11. Bevilacqua’s chain of title as a bona fide purchaser necessarily begins with his quitclaim deed from U.S. Bank. In some States, “[i]t is well settled … that one who has only a quitclaim deed to land cannot claim protection as a bona fide purchaser without notice.” Polhemus v. Cobb, 653 So.2d 964, 967-968 (Ala.1995), quoting Gordon v. Ward, 221 Ala. 173, 174 (1930). “In this Commonwealth, [however,] such a deed is as effectual to transfer whatever title the grantor has in the premises, as a deed with full covenants of warranty. The conveyance in either form is voidable, and not void, if fraudulent as to creditors; and, until defeated by a creditor, the title of the grantor passes.” Mansfield v. Dyer, 131 Mass. 200, 201
(1881). See Boynton v. Haggart, 120 F. 819, 822-823 (8th Cir.1903) (history and evolution of decisions regarding quitclaim deeds, recording statutes, and bona fide purchasers). If a grantor has voidable title to a Massachusetts property, therefore, that title may pass through a quitclaim deed to a bona fide purchaser in whose hands the title is no longer voidable.
FN12. A registry of deeds may employ several assistant registers who process documents. It is thus possible, although irrelevant for purposes of this decision, that documents presented to different assistant registers at nearly the same time may have book and page numbers that do not reflect the precise order of such overlapping presentations.
This part of the article doesn’t settle well for me:
The hearing in a state traditionally friendly to banks and home to U.S. industry leader Bank of America comes as paperwork problems have gummed up foreclosures nationwide.
RALEIGH, N.C. — North Carolina’s Supreme Court heard arguments today in a case that could decide whether mortgage lenders can foreclose on a home without producing original documents that prove they’re owed the money.
The hearing in a state traditionally friendly to banks and home to U.S. industry leader Bank of America comes as paperwork problems have gummed up foreclosures nationwide.
Those problems include missing documents validating a mortgage transaction and unqualified employees “robo-signing” affidavits improperly swearing to the accuracy of overdue mortgage debts. The problem of suspect documents could create legal trouble for homeowners and mortgage lenders for years.
SUBSTITUTE TRUSTEE SERVICES, INC., Substitute Trustee and WELLS FARGO BANK MINNESOTA, N.A. as Trustee for Equivantage Home Equity Loan Trust, 1996-4, Note Holder, EQUVANTAGE, INC., and AMERICA‘S SERVICING COMPANY,
**************************** PROPOSED BRIEF OF AMICI CURIAE NORTH CAROLINA JUSTICE CENTER, NORTH CAROLINA ADVOCATES FOR JUSTICE, CENTER FOR RESPONSIBLE LENDING, MAINE ATTORNEYS SAVING HOMES, THE FINANCIAL PROTECTION LAW CENTER, AARP, AND THE NATIONAL ASSOCIATION OF CONSUMER ADVOCATES IN SUPPORT OF PLAINTIFF-APPELLANT *****************************
It is important to note that in Ibanez, the SJC was not willing to overturn long standing legal principles simply because of recent “innovation” in the way banks chose to record their security interest in real property (e.g. MERS), or because of the extraordinary liability such a ruling would have on what basically amounted to four years of mostly illegal foreclosure activity in the Commonwealth.
The Ibanez article published last January predated Eaton by some ten months, and since the SJC reviewed Eaton “sua sponte”, there was no way to know at the time, that Eaton would make it all the way to the SJC, so the following comments taken from the article are perhaps prescient:
” It is possible that from the banks perspective an invalid assignment of the note is the more serious concern for the following reasons:
1. Without first having proper ownership of the debt, the bank can not initiate any collection activity, let alone foreclosure.
2. Notes (ownership of the debt asset), may be subject to further contention in bankruptcy proceedings where many creditors have a vested interest in the assets of a defunct mortgage lender, particularly since these notes are often sold in bankruptcy for a fraction of their face value.
3. The trusts that are supposed to contain the validly conveyed notes will in fact, not actually contain them (because they are not bearer paper), thus violating the representations and warranties made to investors who purchase these securities. Therefore, it is unsecured debt, and potentially, no debt at all upon which to collect payments.
6. Even if the notes obtain a valid conveyance, or confirmation of conveyance at a later date, it is still may be impossible to place them into the MBS’s:
a. It will have been longer than 90 days (the typical expiry period to transfer assets into the trust)
b. If it is a foreclosure matter, the loan is in default (the PSA’s do not allow for the addition of defaulted loans)
c. Any effort on the part of the trust to insert old or defaulted loans would jeopardize the trusts favorable REMIC status – thus further harming already impaired returns.”
As pointed out in the Ibanez article, clear title to the property is important. If the assignment of the mortgage is invalid, then there is a “cloud on title”. The banks recognizing this, brought Ibanez before the land court of their own volition in order to clear this “cloud on title”. One of the key mistakes counsel for Eaton made, perhaps in their effort to establish the more serious problem of legitimate possession of the note, was overlooking the validity of the Mortgage assignment, (still incredibly important) which, as with most securitized loans, was so clearly fraudulent (see Amicus brief of Marie McDonnell). Incidentally, this was of particular interest to the court during oral arguments, however, because the issue was never raised by Eaton’s counsel in its complaint, it could not be addressed by the court. Thus the opportunity to cite the authority of Crowley v. Adams 22 Mass. 582 (1917) which concerned the fraudulent conveyance of a mortgage without a note, was lost. Within the context of discussing the assignees knowledge of the fraud, the court held:
“[the assignee] should be held to have known as to each transaction, the possession of the note was essential to an enforceable mortgage, without which neither mortgage could be effectively foreclosed.”Id. at 585.
This was a error on the part of counsel, and eliminated a potential fifth source of authority in Eaton, as we wrote in January:
“1. If there must be a perfected interest in the mortgage (according to MA law) at the time of foreclosure, then how many foreclosures have taken place in Massachusetts with the same profile as Ibanez, and are thus invalid?
2. Clear title is important – In the statement of the case, the banks actually brought the complaint before the land court as independent actions in order to “remove a cloud on the title” – thus the banks recognize that such defects are a problem for future conveyance. All MA homeowners should be worried about the same (discussed further below).
3. To foreclose on a mortgage securing property in the commonwealth, one must be the holder of the mortgage. To be the holder of the mortgage, the bank must:
a. Be the original mortgagee
b. Be an assignee under a valid assignment of the mortgage
c. It is not sufficient to possess the mortgagor’s promissory note (bearer paper). Apparently most if not all securitized mortgages were endorsed in “blank”, in other words to the bearer.
4. The notice requirements set forth in G.L.c. 244, ss 14 unequivocally requires that the foreclosure notice must identify the present holder of the mortgage. This likely was not the case in past foreclosures in MA. For future foreclosure actions the question is can the real mortgage holder be found and will they cooperate in assigning the security interest?
5. Assignees of a mortgage must hold a written statement conveying the mortgage that satisfied the statute of Frauds or even the most basic elements of contractual requirements.
AG Coakley acknowledges that “the securitization regime was required to conform to state law prior to foreclosing, to ensure simply that legal ownership ‘caught up’ in order that the creditor foreclose legally in MA. The lenders, trustees and servicers could have done this, but apparently elected not to, perhaps on a ‘Massive Scale’ ” Saying that they “could have done this” within the context of MA law is one thing, within the context of IRS tax code, or NY trust law, is another.”
Further the article points out that a holder of the mortgage without the note, really only holds the security instrument in trust for the debt holder (thus anticipating Eaton), as pointed out in the following taken from the Ibanez article:
“4. The holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. If the average MBS has 5,000 notes for example, then we have to assume 5000 separate actions would have to be filed in court to ensure they are truly “Mortgage Backed Securities”, and that is only if the REMIC status isn’t jeopardized by such a revelation or action.”
However, the impasse for banks is the fact, that even if the court recognizes the authority of MERS to assign the mortgage to the foreclosing entity (usually the servicer), the following conditions still must be met:
a) The assignment must still be a valid assignment (most are not)
b) There must also be a valid assignment of the note to establish who exactly owns the debt.
The vast majority of these loans were sold into securitization trusts and are merely endorsed “in blank” (if they can even be found in the trust at all). Most schedules attached to the trust documents include little or no information on the details of the particular loans (as was the case in Ibanez), or sometimes include the address of particular properties, but no information on the barrowers, or curiously the loan amounts. Other failures include post-dated or otherwise invalid notarizations, and fraudulent signatures etc., which are all suggestive of fraud.
Given this, to speak of Eaton merely as a question over the validity of MERS and its assignments is incorrect. Even if Eaton is not affirmed by the SJC, the issue of validly conveyed notes, remains of vital importance.
That having been said, we believe the Appellants chances of prevailing are precisely zero, or maybe less. Taken together with Ibanez, this means serious problems for the bond holders in these securitization trusts and their bank administrators. With all the nuance of every day speak we could muster, we think it is put best by saying just; some of the debt-servants might escape. That isn’t to say that all measures won’t be taken to try to prevent this outcome.
On contemporary Pheronic thinking and the Pyramids that debt-servants build
We believe that this situation lends itself to the possibility of violence, as tragic an outcome as that is and would be. On June 3rd, 2011 we published our follow up to the Ibanez article entitled simply “On the ethics of mortgage loan default“. Four days later, the Essex county registrar of deeds John O’Brian, who we quote in the article, stopped recording fraudulent mortgage assignments (which many if not most are). It seems logical that this would be a “wake-up” call to the average homeowner, particularly since other registrars are prepared to follow suit. With the registrar’s decision, it has become a fact that title may no longer be recordable and ownership is in question. As it turns out, the homeowner who faithfully sends in monthly mortgage payments for years or decades (in an effort to “do the right thing”), may have no more clear ownership rights in the related property than a perfect stranger.
As the article “On the ethics of mortgage loan default” spread throughout the Internet with countless links and references, we were surprised to find comments that included (not unlike the allegory of the cave) the desire that the author “be shot“. We were equally surprised when the Hacktivist group “Anonymous” (which was not our target audience either) featured the article prominently in several of their sites.
It has been said “the rich rules over the poor, and the borrower is servant to the lender”. Perhaps in our Naiveté, we did not understand the sensitivity around the suggestion that a servant might want to be free one day. Nor did we recognize that the powerful human inclination to denial might elicit more than just a passive reaction. Like the prisoner who is freed from the cave and comes to understand that the shadows on the wall do not make up reality at all – later puts their life in danger from those who remain in the cave. Yet, the source of the light is truth and intelligence and those who would act prudently must see it.
These implications give rise to powerful questions in the current context. One such question regards the difference between a debt and a moral obligation? Why do we confuse the two so often in our society? Such that those who seek forgiveness of debt, are made to feel as if they are violating a moral code, or a cultural taboo? Perhaps the explanation lies in a more clear definition of the two. A moral obligation is something that can be forgiven with some flexibility, there is hardly exactness involved.
A monetary debt on the other hand can be calculated with the accuracy and immutability of math and the related science of accounting, and grown with the power of compounded interest, and therefore, in proper monetary debt, exist the possibility of subjugation in perpetuity, or at least for the entire natural life of the debtor.
Oddly, our society adds insult to injury in this failing of human civilization, and as if this dreadful revelation were not enough, adds on top of these accurately calculated and compounded financial obligations, the fallacy of a moral obligation, and in so doing the debt-servant is made to feel guilt regarding his moral character as well as his failure to pay.
When this sleight of hand is wedded to exhaustion (a pre-existing condition of many debt-servants), the odds of one actually fighting back against such a system, corrupt though it may be, are only minute. It must have been a genius who figured out that slavery with chains is inefficient. If a human could be conditioned to believe he is a free man, when he is not, and that already disillusioned he might be convinced that he is also a rich man, when he is not, then chains and their related complications are wholly unnecessary. All that is necessary then is to lower his idea of freedom and wealth substantially, and provide him with cut-rate imitations.
Under these circumstances, the average man would in fact work extraordinary hours, even if his paycheck was essentially diminished to less than zero by his existing debts (thus requiring him to take on new ones), and if by chance he was able to save, those funds too would be safely transferred to the hands of strangers (through “innovations” such as 401K’s, which could be convenient deducted from his paycheck electronically and instantly). These strangers are there to help the debt-servant loose what meager savings might be possible through sub-par investments (like internet stocks) which he never understood, but which is broker was always paid for trading.
Notably, this shell game can never be revealed to a debt-servant, because then he would understand that he is not really a free man, even though the real law is “…not on tablets of stone but on tablets of human hearts”, and yet this inclination of the heart is often resisted, even with violence. Nonetheless, In this law of the heart lies “a desire” which is so great that it over powers all other human constructs, including offensive debts.
In this respect, surely a few folks in Europe must have believed that the entire trade in chained slaves made the United States look like an economically and operationally primitive bunch – for the cost of that variety of servant is actually much higher, and had a far smaller pool of candidates, namely those with a particular tint to their skin. Yet, telling someone that they are inferior based merely on the color of their skin is a hard sell year after year. Conversely, telling someone they are free, when they have never tasted real freedom because they were born into debt, is easier to maintain, because it deals with more subtle issues, and the likelihood of confusion with moral obligation, and exploits the power of human denial.
The earliest evidence regarding market places and trade indicate that if you have something to sell that is of far lesser value than you are indicating, than it is wise to have the greatest physical distance possible between yourself and your counterpart – for in such a trade lies the inherent possibility of a violent reaction to the discovery on the part of the unsuspecting buyer, particularly when accurate accounts of credit and debt are kept and ruthlessly enforced. Some of the oldest recorded documents in history are of this variety; they are surprisingly, accounts of credit and debt. Perhaps human history is really a history of subjugation then. Cultural anthropologists are quite familiar with this idea of credit and debt in (even ancient) market places. It’s an old story. However, Americans are bread as consumers, not as economic or cultural anthropologist, because in that knowledge rests power, and power, by definition must belong to a coterie. For the greater the number of those subdued, the greater the power of the few who would subdue, just as with money, power deals only in transfers.
That is why the average American home owner is not allowed to have the true owner of their mortgage debts revealed – they are the counter party to an impolite deal. In these trades great profits were made, and in the pricing of the assets, great misrepresentations regarding intrinsic value. Wealth destruction therefore is a misleading expression in describing what happened; the accurate term is wealth transfer. During the housing “Pyramid” (this term is far more accurate than “bubble”, because it accurately describes an order) one of the greatest logical errors of all time was sold; that the intrinsic value of a home, which had within it the possibility of calculating (accurately) fair price was tied instead to a hyper speculative measure, that which is inherently impossible to price with any degree of accuracy, and which is immaterial; our notion of an ideal. As one might imagine, no price is too high to live an “ideal” – think of it as a seller’s paradise. After, a difficult stock market collapse, and an even more difficult terrorist attack, why would anyone be interested in mere stocks or bonds? After all the very place where these electronic slips are traded was very nearly destroyed. This new investment was allegedly concrete, and also patriotic. Americans were led to believe they had “…discovered a pearl of great value”, the only security whose price could never go down – it was like a “Dream”, like an “American Dream”.
However, when loan documents were to be signed a new broker suddenly appeared. Without any forewarning, with a name that was not before heard, or with anyone who had actually seen him, or understood how he operated, he made a subtle but powerful arrival on the scene. His name is Mr. MERS, and he instituted even greater secrecy than stock brokers and fund managers. Few have seen his physical appearance, or pulled back the curtain, it’s uninteresting anyways, because Mr. MERS is nothing more than a relational database, which only a very small fraction of the world’s population have access to (even democratically elected bodies, such as county recorders have no such access). He brokers the movements of trillions of dollars in capital. He is a construct of your trading partner, and because of his existence, you can never have a “level playing field”, or hope of a fair trade. In this brave new world, the requisite distance that precedes a bad trade, is no longer a measure of geography, it is a piece of software.
With this surreptitious matrix of relational database fields safely in place, how are all those houses, like so many stone blocks cut by ancient hands, turned into a pyramid? The answer seems self-evident; through a pyramid scheme naturally.
How would a contemporary mass exodus from such bondage look? Just as Fannie Mae and Green Tree divided the essential components of their security, It might look like ordinary debt-servants parting and dividing a sea of concrete, and traversing the depth of high rise buildings in New York, just as “by faith the people passed through the Red Sea as on dry land”.
The people in New York are criticized for their lack of direction, the fact that they appear to be lost in a veritable desert – but they are free, and in their hearts live an almost child-like innocence that we should desire to have. After all, their predecessors spent a good deal more time lost, and through it discovered a greater revelation, one that would lay the foundation to ultimate answers.
The popular accounts promulgated by Adam Smith and the contemporary science of modern economics as we were made to understand them, rely on more than one myth regarding the engineering of debt, and its related instrument – money. These underlying misrepresentations give rise to the possibility of great abuses, for the very nature of trade, and all else which rests upon it is thus misunderstood.
There are many reasons to despair over the future of our fragile state in the US today. However, the Massachusetts Supreme Judicial Court is not one of those reasons. By upholding the rule of law, and observing the incredibly important, and notably democratic foundations of land recording practice in the commonwealth they serve as a beacon for the rest of the country to follow and impart hope. This comes at a time when such hope is in scarce supply. If it is God’s will, than the light of wisdom handed down from prior ages on this point will shine through the darkness that has been created by corrupt forces. We can only hope.
A Road Map for Homeowners: Four Authoritative Guidelines
In Massachusetts law there exists four authoritative guidelines by which property may be foreclosed upon in order to redeem a debt (Five if Crowley v. Adams is included from above). Incidentally division is not a problem for these four authorities, for they stand equally well alone as they do in combination as requirements to validly exercise the power of sale of real property. Both the spirit and the letter of these sources are echoed in laws of other states, and as such can be taken as fundamentally universal. They are as follows:
The Common Law and the problem of Division
In Summary Eaton dealt with the following three realities of long standing Massachusetts law:
1. The assignee of a mortgage with no claim to the underlying debt cannot foreclose.
2. A mortgage separated from the debt it secures has no value in and of itself; it can only be held in trust for the note holder (naked title)
3. The trust relationship implied for the benefit of the note holder does not empower a mortgage assignee to foreclose as a “fiduciary” at any time.
It should be offensive even to the casual observer that in the case of Eaton, as would be the case for most home owners today, a valid promissory note memorializing the debt was and is missing. Who held it at the time of the foreclosure, how they obtained it, and what relationship they had if any to the appellants was and is still unknown.
Although a photo copy of the note was produced with the typical “endorsement in blank” markings, the appellants provided no document or other information indicating when the note was endorsed or who held it either then or now. The required assignments between intermediaries were never produced. Interestingly neither of the defending entities offered any testimony or other evidence in either court action to resolve these all important questions or otherwise identify the holder of the note. However, they did concede, that it was not the foreclosing entity Green Tree, LLC.
Conceivably this is because they do not know, and they do not want to know, and maybe they would even like to forget. Perhaps the note it is evidence.
Not surprisingly counsel for the appellants, despite this revelation, argued that the whereabouts and history of the promissory note was “irrelevant” and that they were entitled to foreclose nonetheless.
After a careful review of the full history of the mortgage foreclosure law in Massachusetts, as well as the related statutes and appellate decisions, The Superior court didn’t exactly see it that way – determining that no decision had ever overturned the established common law rule that a mortgage assignee must hold the note in order to enforce it through foreclosure.
Needless to say, this is of great concern to the banks, as predicted in the Ibanez article (cited above). Given the audacity of their claims, we believe it is reasonable to assume these folks would, if given the opportunity “send an orphan into slavery or sell a friend”. It has been difficult and time consuming to discover that notes were sold multiple times into multiple trust, thus creating a out-and-out pyramid of securities, upon which even more derivatives could be sold. However, something even more simple and obvious has been taking place in broad daylight, something peculiar that has been overlooked – the awkward problem of entire houses being stolen, by folks who have categorically no financial interest or otherwise is the properties.
Since this is the direct opposite of “The American Dream”, possibly the moniker “the American Nightmare” is appropriate.
Taking a step back, it is awful to consider that GreenTree, LLC had no interest in the debt, no interest in holding the property pre or post foreclosure, and had no material interest in the entire affair whatsoever, and yet they were the entity which sought to foreclose (or steal). Does it not appear as Les Trois Perdants with GreenTree, LLC acting as a shill?
For centuries promissory notes and the mortgages securing their repayment were held or assigned together. The separation of these two instruments, until recently was an anomaly and exception. Albeit no longer an anomaly, but rather the general business practice of approximately the last ten years, the SJC reaffirmed in Ibanez, that a trust implied by operation of law gave the note holder the right to sue to obtain an equitable assignment of the mortgage (U.S. Bank v. Ibanez, 458 Mass. 637 (2011) – which implies surprising possibilities (e.g. every note allegedly held in every securitized pool, would have an individual and related suit to perfect it’s claim). Implications aside, the court’s ruling established nonetheless a method by which the note holder (the person to whom the debt is owed) could be empowered to collect payment.
Incidentally, long before the bifurcation of the notes and mortgages was ubiquitous, this operation of law was periodically challenged by mortgage assignees who believed that they, as “mortgagees” could simply foreclose in their own names. However, since the 19th century, and as pointed out above, the SJC has ruled otherwise. In a series of decisions it articulated the rule that a mortgagee who has no interest in the debt underlying the note cannot conduct a foreclosure, insisting instead that that right is reserved for a holder of a valid note along with a valid mortgage.
Green Tree, LLC and their Government handlers suggest that the parts of the whole, when taken independently have the properties of the whole. That is to say in this case, that since the mortgage contains the power to foreclose, the mortgage must have with it all the powers of the note – this proposition is patently wrong, and is the fallacy of Division. The instruments may function properly together, but have incomplete authority independently – and that is exactly what long standing statute (as outlined below) has upheld.
In Summary, Ibanez brought to light that banks holding only notes have only an unsecured debt – that is to say one that could be negotiated like any other. Eaton, on the other hand brings to our attention something of far greater importance; namely that a holder of a mortgage alone (even if validly assigned), without proper ownership of the underlying debt, has in fact nothing.
Call us speculators, but if SJC affirms the lower court’s decision we have a funny feeling more than one banks share price might be adversely affected.
In the end, suggesting independent authority of the mortgage, regardless of any concern for the note or the debt is just a bad argument – it’s not only “Division” it is also a great candidate for the “Non Sequitur” argument of the year award.
GreenTree, LLC – Affirming the Consequent
A thorough discussion of Massachusetts foreclosure law can be found in Howe v. Wilder, 77 Mass. 267 (1858). which resolved a foreclosure dispute by holding that a mortgagee, without the note, could not foreclose on the mortgage.
The court goes on to elaborate that because the party who would otherwise seek to foreclose was owed no debt, he cannot recover possession:
“For in pursuing such a suit [the party] has only the rights of a mortgagee, and is limited by the restriction imposed upon him…if nothing is found due to the plaintiff, it follows by necessary implication, from the provisions of the statute, that he can recover no judgment at all; none to have possession at common law, because that is expressly prohibited; and none under the statute, because where there is no condition to be performed, there can be no failure of performance, and no consequences can follow a contingency which in nature of things can never occur.”
Suggesting that by being an assignee of the mortgage, encompasses the right to foreclose is simply “Affirming the Consequent” and is just another logical fallacy.
MGL 244 § 14 and the Straw Man
Bifurcating the note and the mortgage was an extraordinary circumstance when the legislature decided the subject laws. At the time these laws were ameliorated there was no reason to explicitly delineate between the debt and the mortgage instrument securing it. To argue, as Green Tree has, that the term “Mortgagee” as used in MGL 244 § 14 means also “naked mortgagee”, (a mortgage holder not having any interest in the underlying debt) is a “Straw Man“. This suggestion overlooks the historical context in which the law was authored, the rise of the mortgage securitization industry, its related practices and the compulsory changes to recording which has taken place over the last decade. It is to overlook the privatization of land records that (as far as we know), no elected official or law maker had blessed beforehand.
If Green Tree’s argument were accurate, they would not assign the mortgages to third party servicers at all, and rather continue to foreclose in MERS name (more efficient) as had been the practice until several states supreme courts ruled against it, citing the fact that MERS had no economic interest in the mortgage, which is “but an incident to the note” or “a mere technical interest” (Wolcott v. Winchester) – this of course reaffirms the spirit of the law which Henrietta Eaton asserts in her complaint.
In particular the court stated that the assignee of a “naked Mortgage”:
“…must have known that the possession of the debt was essential to an effective mortgage, and that without it he could not maintain an action to foreclose the mortgage.” Wolcott v. Winchester, 81 Mass. 462 (1860)
Despite all of this, the bright idea of the securitization industry was to simply transfer the mortgage instrument to the servicer – a related party, sort of.
If Eaton is not affirmed by the SJC, we might as well make Three Card Monte our national pastime and get rid of baseball altogether. In such a scenario handicapping the future of the US economy and the ability to affectively and profitably speculate in the CDS market will be “duck soup”.
The authority of the UCC codified at G.L.c. 106
Because the common law involves a great deal of common sense, it just so happens to be mirrored in the Uniform Commercial Code. In particular G.L.c. 106. Article 3 of the UCC governs the negotiation and enforcement of negotiable instruments, including promissory notes secured by mortgages. Section 3-301, like the common law, provides that one must hold a (valid) note in order to validly enforce it. This rule serves the purpose of protecting consumers and barrowers against the very real possibility of double liability created when a debt is enforced. As in the current matter, Green Tree, LLC or any other mere mortgagee (even if they could get a valid assignment), would have no power or authority to discharge the actual debt. Thus if the operation of law were in any other capacity than it currently is, the mortgagee could foreclose on a property, while the debtor would still be left with a valid debt outstanding to an entirely unrelated party.
This lends itself to the requirement for transparency. During the oral arguments before the SJC, one justice asked why it mattered if the homeowner knew to whom they owed their debt. The answer is that homeowners have an important role to play in the outcome of the final settlement and discharge of their debt, and are above all the most interested party in ensuring that their payments are in fact reducing the outstanding principle balance as they are made. Otherwise, they may as well be directed to make their payments to any random stranger. It is absurd to suggest that a debtor be required to simply make payments to anybody who asks for it. That is to suggest that he is not only a debtor-servant, but also a mindless sheep – then again, perhaps that is the desired outcome.
In fact the entire matter may only be possible in a non-judicial foreclosure state, for if it were a civil complaint for the collection of an amount due, than would the debt instrument itself not be scrutinized as a first priority in the proceedings? Perhaps small unimportant questions like who actually owns the debt and is bringing the action would be relevant under such circumstances.
The authority of loan contracts
In the end, the entire action by Fannie Mae and Green Tree, violates the very contract which is being disputed. Even if no other statues or laws had operated or ever existed, Eaton’s argument would survive on this one point alone – and Eaton is not unaccompanied – she stands with some 60 million other homeowners in the US with virtually identical contracts.
In the case of Eaton standard mortgage loan documents were used, and they essentially all look alike. The terms of Eaton’s mortgage contract, as with virtually all others, authorizes only the note holder to exercise the power of sale. The one concession Green Tree, LLC made was that they are not the note holder and have neither argued, nor provided evidentiary support for the claim, that a foreclosure by anyone other than the note holder was necessary (not that it would be possible).
A bitter Fruit: Double Liability
It has been said, “By their fruit you will recognize them. Do people pick grapes from thorn bushes, or figs from thistles?”. No, because “every good tree bears good fruit, but a bad tree bears bad fruit” . Is Green Tree’s lawyer actually advocating that homeowners should just rely on the banks and servicers to be “nice guys” and not go after the debtors twice? It is already known that certain elements in the industry were willing to sell the same note multiple times into multiple pools which given Burnett v. Pratt, 39 Mass. 556 (1839), presents interesting problems for RMBS investors, who were essentially their business partners. If the architects of these systems can sell the same note twice, to their own business partners and customers, why would they not try to also collect twice from their debt-servants, who rank many orders below business partners and real customers?
If the severity of compound interest is not enough, the result may be plan “B” – “doubling up” where needed.
If the fact that being named on a valid mortgage is not sufficient to authorize a foreclosure, than automatically the question becomes who holds the note? The answer to the latter question is a bit more serious, for in the answer lies a good deal more than the banks would like to reveal.
Does greed have rational limits? It does not and it cannot because greed is not rational to begin with. Since nobody knows how the foreclosing mortgagee would actually go about paying the note holder, are homeowners to rely on a system of document management (which usually involves an Iron Mountain truck, and a whole lot of paper shredding) to ensure that debt-servants are set free if they ever pay off their “debts”?
Did barrowers really sign up for that when they signed their mortgage and note? If not, when and where are the limits?
It’s only a matter of time
Homeowners must examine the assignments on their mortgages and notes. If a foreclosure is imminent, a preliminary injunction should be sought in order to have an opportunity to examine the documents thoroughly and also to give time to the SJC to issue its ruling – Jurisprudence matters. When the final Eaton ruling is taken together with Ibanez, there will be a sea change – it’s only a matter of time.
It seems reasonable that in a world where bandwidth intensive videos can be encoded and uploaded over a high speed 4G network from the New York Stock Exchange and on the Internet in 30 sec. using a smartphone with 64 gigs of memory (that can fit on a SanDisk card the size of your fingernail), and join billions of other files that have highly accurate GPS data embedded in their metadata, that finding a note for multiple six or seven figures debt and bringing it to court with you would really be no big deal – but apparently it is.
Foreclosures that took place before Ibanez, likely involve an assignment of the mortgage which is invalid because it would have been assigned post foreclosure (as was the common practice at the time), thus invalidating a huge number of existing foreclosures.
For foreclosures or those facing foreclosure in the post Ibanez era, than it is highly likely that the assignment of the mortgage is both invalid and fraudulent, as Mrs. McDonnell so accurately points out is endemic in most registry of deeds. If it’s the note than that servicers intend to rely on, they may need to dream up a new strategy, because those are all “missing” as we see in Eaton. New strategies it seems are now in short supply.
A few more questions and thoughts
The “pump and dump” is as old as “market places” are. Whether it’s a street vendor in morocco extolling the virtues of his wares he wants to sell, or a the salesmen of shares in Netflix and Linkedin at impossiblele valuations – this “pump and dump” technique often is done with considerable misrepresentations, which result in artificially high prices for a time, and makes true price discovery impossible for buyers.
If you’re on the wrong side of the transfer, as a buyer of such stocks or bonds, you would have claims against the salesman – it’s called securities fraud. Now this ‘old time’ operation has been executed in the real estate market as well, and real estate, although most people don’t think of it this way, is also a security just like any other (it’s really not the American Dream, as has been sold – because as pointed out above, when something goes beyond the parameters of a mere security, to that of a “dream”, no price is too high). Just like stocks, these securities were pumped, and then dumped (but only after the related CDS’s were purchased by the architects).
What’s being described is an activity based on fraudulent misrepresentations, like most other such schemes. The “Pump” part involved a lot of paper shuffling, so that when the “dump” took place, the profiteers could not be easily identified. The same is true today. That is why debt-servants are not allowed to know their lender-masters – because it is the beginning of the paper trail, and as any certified fraud examiner will indicate, it all starts with the paper trail.
By focusing the attention of the court and the people on the intricacies of the letter of the law – even though they are wrong at that as well, the banks are taking attention away from the more obvious question, which is why? Why fight to interpret the law that way? That is the real question: Why. Why not produce the note. Why not reunite the note with the Mortgage?
Why would notes go missing? These are not credit card bills, they are documents outlining typically multi-six figure sums, or seven figure sums in some cases. Isn’t it logical that these documents would be kept in a safe place? And tracked? How could so many notes just disappear?
Why would the SJC and the American people at large not be alarmed by entities who foreclose on a property and yet have no idea who actually holds the debt?
The securitization process, in which so many notes were resold is subtle, but complex and riddled with a taxonomy that makes it as understandable as a foreign language to the casual observer. Yet, more careful scrutiny reveals that there is nothing even vaguely sophisticated about it’s operation.
The business of taking homes without any debt being owed is so obvious and simple so as to lend itself to denial. For example, one member of the SJC panel actually asked the attorney for Eaton why the barrower needed to know who owned the debt that they were paying? We thought maybe it was a joke – sadly it may not have been.
Yet, we know that notes have been sold multiple times into multiple pools and trusts, thus creating multiple creditors.
Any consumer should want to know if there debt is actually going to be discharged, and in order to know this, they would have to know who the actual debt holder is.
These debts are not secured. They are negotiable. This week alone, there was talk of bankruptcy proceedings for Eastman Kodak and American Airlines, Friendly’s, after more than 80 years in business, including operating during the last depression, actually did file. As commercial entities, they will be allowed before, during and after bankruptcy to work with their creditors in a completely transparent way.
Why is the average American expressly forbidden this simple aspect of business dealing? Though they entered into such obligations at far greater disadvantage than their corporate cousins?
It is clear that by introducing multiple parties that there are conflicting incentives and interests. It was surprising that the SJC brought up inadvertently during the oral arguments that the lender may have contractually sold their rights to have any say whatsoever in negotiations with the debt holder.
The following question regarding Green Tree, MERS and the Eaton case are worth asking:
- Why would they go to such great lengths to keep the “lender” or holder of the debt in “secret”? What is there to gain? Would it not be much more expeditious to just reunite the note with the mortgage and then foreclose?
- Foreclosing with just a mortgage used to be an anomaly? But now it is the rule – what changed? Why would lenders take such an extraordinary risk with trillions of dollars?
- Does the claim that the notes are “lost”, or “missing” seem credible in light of the extraordinary technological world we live in?
- Is the imbalance in power between the home buyer (as signer) and the lawyer (as author) of the contract important? 99% of home buyers had no clue what they were signing – their attorney’s didn’t understand the assignee aspect of MERS or how it functioned either.
- Why would the servicer hide the debt holder? Why go through all of this trouble? Is it because it is really the US government by proxy of Fannie and Freddie?
- Were the notes used in a pyramid scheme? Were they sold multiple times intentionally in order to accommodate increasing degrees of leverage that the derivatives market required to sustain itself?
In the Commonwealth of Massachusetts servicers in possession of mortgages only (which is basically all of those who represent securitized notes) are barred by common law rule, by statute, by the Uniform Commercial Code, and by the terms of the mortgages themselves from conducting foreclosures. If they have already done so, those foreclosures are void. We believe these principles do and will extend beyond the commonwealth eventually to all of the US.
The reason the banks are fighting this is because there exists a very real fear that homeowners stuck with inflated debts, which are the equivalent to indentured servents, might actually gain some negotiating power to settle these debts, at prices which not only reflect the prudent risk management which should have taken place in prior years, but also the related and more realistic asset prices which should have prevailed at the time of the original transactions.
From a purely business point of view, the asset prices were inflated, and the average home buyer with a home loan vintage 2002-2007 had little or no choice in the setting of those prices. However, there is another group who did, and they were writing “loans” and selling them as fast as the CPU and the RAMM on MERS’ servers would allow them (thankfully cloud computing, with its superior ability to process data, and elastic memory and bandwidth wasn’t yet widely used).
Yet the securitization industry and their very elite and very wealthy captains are not having any of that – because it is a reverse transfer. To be a debt-servant is to be the servant of another man by force. Humans are not designed or built for that – that is a construct of an unfortunate human condition, which we should want to change.
How a mortgage payment can be made with fidelity every month into a authentic black hole, and the attendant psychology which enables this behavior is beyond the scope of this article. The Common Law, the MGL and UCC and even the contracts themselves make it clear though, if a mortgagor expects a discharge of the debt, they need to know who exactly they are paying.
Taking a step forward requires some courage, but less than those who have taken to the streets in NY, Boston or other cities – they are doing really hard and courageous work. Not paying a mortgage in light of the a priori evidence cannot even qualify as an act of civil disobedience. The average homeowner and mortgagor is not called to such a high calling in this instance – they are merely called to follow the mundane laws of the land which have been set down for over 150 years. It is just simple prudence. It is the lack of denial, and a willingness to recognize the truth, no matter how unpleasant. Participation in the system as it is, while concurrently declining to examine the issues intelligently is not defensible.
Paradoxically the hand of the strong which moved to Divide (the notes) and Affirm (title interest) – when taken in God’s hands, has destroyed (the notes) and preserved (the legitimate ownership).
About Gregory M. Lemelson
Author – Amvona.com blog. Entrepreneur. Find joy in teaching and writing. Founded companies in retail, real estate and Internet technology.
RESIDENTIAL FUNDING CO., L.L.C., f/k/a RESIDENTIAL FUNDING CORPORATION, Plaintiff-Appellant, v. GERALD SAURMAN, Defendant-Appellee. BANK OF NEW YORK TRUST COMPANY, Plaintiff-Appellant, v. COREY MESSNER, Defendant-Appellee.
Robert P. Young, Jr., Chief Justice, Michael F. Cavanagh, Marilyn Kelly, Stephen J. Markman, Diane M. Hathaway, Mary Beth Kelly, Brian K. Zahra, Justices.
On order of the Court, the motion for expedited consideration of the application for leave to appeal is GRANTED. The application for leave to appeal the April 21, 2011 judgment of the Court of Appeals is considered, and we direct the Clerk to schedule oral argument, during the November 2011 session, on whether to grant the application or take other action. MCR 7.302(H)(1). At oral argument, the parties shall address whether Mortgage Electronic Registration Systems, Inc. (MERS) as the mortgagee and nominee of the note holder is an “owner … of an interest in the indebtedness secured by the mortgage” within the meaning of MCL 600.3204(1)(d), such that it was permitted to foreclose by advertisement. The parties may file supplemental briefs no later than October 21, 2011. They should not submit mere restatements of their application papers.
The motions of the Michigan Association of Realtors, Legal Services Association of Michigan/Michigan Poverty Law Program/State Bar of Michigan Consumer Law Section Council/National Consumer Law Center, State Bar of Michigan Real Property Law Section, Mortgage Electronic Registration Systems, Inc./Mortgage Bankers Association, Michigan Bankers Association/Michigan Mortgage Lenders Association, and the American Land Title Association for leave to file brief amicus curiae are GRANTED. Other persons or groups interested in the determination of the issues presented in this case may move the Court for permission to file briefs amicus curiae, to be filed no later than October 21, 2011.