Saturday, November 14, 2009

Debtor Gets Mortgage Claim Denied. Now What?

I am in New York for the Commercial Law League conference, so it is appropriate to blog about a case from the Southern District of New York. While the Southern District of New York is known for its multi-billion dollar cases, a recent case highlights a consumer issue faced by courts nationwide. In (Name Withheld by Request), Case No. 09-22261 (Bankr. S.D. N.Y. 9/29/09), the Debtor's lawyer became frustrated with inconsistent information received from a mortgage servicer and filed an objection to claim. The mortgage servicer's submissions raised more questions, leading to denial of the claim. However, the bigger question is what denial of the claim means for the debtor.

A Proof of Claim Walks Into A Bankruptcy

In this chapter 13 case, PHH Mortgage filed a proof of claim on the debtor’s mortgage. PHH stated that it was the secured creditor. The proof of claim attached the following documents:

(a) a one-page itemization;
(b) pages 9 through 16 of a document identified as New York--Single Family . . . Fannie Mae/Freddie Mac UNIFORM INSTRUMENT MERS;
(c) a 4 page Fixed/Adjustable Rate Rider; and
(d) 16 pages out of a 24 page mortgage showing MERS as mortgage holder and Mortgage World Bankers, Inc. as lender.

In response to an inquiry from the Debtor’s attorney, PHH stated that it was the servicer and that US Bank as trustee for a securitization trust was the actual creditor. This was the first problem. The person who filed the claim was not the holder of the claim, but the agent for an undislosed principal.

The Debtor objected to the claim, arguing that the servicer lacked standing to file the claim and that the proof of claim did not demonstrate a complete chain of title from the originator to the securitization trust.

The Creditor Digs Itself In Deeper

In response to the objection, PHH Mortgage filed an affirmation of counsel, an affidavit and a memorandum of law. These documents created more problems for the purported creditor. The affirmation of counsel attached an Assignment of Mortgage from MERS to US Bank. The document was executed by Tracy Johnson as Assistant Vice-President of MERS. (MERS is Mortgage Electronic Recording Service, which exists to serve as a nominee for mortgage holders and allow mortgages to be transferred without the necessity of a formal assignment. In other words, MERS acts as nominee of whoever holds the mortgage.). It also included a power of attorney authorizing PHH to act on behalf of US Bank. The second affidavit was signed by Tracy Johnson, this time as Assistant Vice-President of PHH.

The Memorandum of Law stated that:

The ownership of the Note and Mortgage were subsequently transferred to US Bank. An Assignment of Mortgage was not executed at the time of the transfer. PHH intends to submit documentation to show that US Bank now has the beneficial interest in the Note and Mortgage by virtue of the pre-existing transfer of this loan. In addition, the documentation will demonstrate that PHH is still authorized to file the Proof of Claim as the loan servicing agent for US Bank.
Memorandum, p. 3.

Unfortunately, PHH did not obtain the documentation. The following exchange took place at the hearing on the claims objection:

THE COURT: . . . what is the evidence of the transfer of the mortgage to US Bank?

MR. ______: All I have is PHH’s representations, Judge.

THE COURT: By the woman who also appears to be working for MERS and who isn’t here.

Transcript, pp. 15-16.

The Ruling

In the end, the Court expunged the claim. The Court’s findings are summarized as follows:

1) The documentation attached to the claim was incomplete and did not identify the holder of the note. Recall that the claim included pages 9 through 16 from one document and 16 pages out of 24 pages of another. The Court this selective attachment of partial documents to be suspicious, since the omitted pages would have identified the holder of the debt. As a result, the Court found that the claim was not entitled to prima facie validity.

2) The Court did not accept the affiant as a custodian of records, apparently due to the fact that the same person claimed to be custodian of records for two different entities and because the affidavit was contradictory.

3) The Note contained a stamp indicating that it was transferred from the securitization trust to the servicer, PHH. As the court stated, "To my knowledge of how these securitized mortgage nonte/trusts are structured, it doesn't make sense and it's not explained anywhere in the affdavit as to how it would make sense that it would be transferred to the servicer of the trust, the note would be transferred to the servicer of the trust. That's an odd thing for me to accept." Transcript, p. 24.

4) There was no evidence of assignment of the mortgage to the purported creditor other than the uncorroborated statement of the servicer.

As a result, the Court stated:

You know what, what I will say is this, the owner of the mortgage as far as I can see and the owner of the note has not filed a proof of claim in the case. That’s what I’ve found. Someone filed a proof of claim who’s not been able to establish that they hold the note and the mortgage.

Transcript, pp. 24-25.

What Does This Mean?

Consider what this means. There is someone somewhere who holds a mortgage upon the debtor’s home. That person is not the person who filed the claim. As a result, the true creditor is somewhere outside of the bankruptcy case. A secured creditor can choose to remain outside of the bankruptcy process, in which case the lien will ride through unaffected. The real creditor may appear at some point and ask to lift the stay. If not, at the end of the case, the debtor will receive a discharge from her personal liability but will still be subject to the lien. Of course, if the creditor is never able to prove up its paperwork, then at some point, the lien would be barred by limitations.

Ignoring What We Know To Be True

This leads to the second important point. Complete, consistent documentation matters. The claim was expunged based on incomplete documentation which failed to identify the holder of the note and the mortgage. The affidavits submitted compounded the problem because the same person claimed to be custodian of records for two different entities. The lawyer for PHH forthrightly acknowledged the problem when he stated:

I agree with you, Judge. I think that the reality is that . . . we’re ignoring what we know to be true because we can’t get our hands on the documents.

Transcript,pp. 16-17.

That is a powerful admission. If the creditor’s lawyer cannot get his hands on the documents, where are they? This case started with an originator who advanced actual money which allowed the debtor to purchase a home. For years prior to bankruptcy, the debtor made payments to a servicer. These payments were accepted. The debtor received statements of account. There was never a question raised as to whether the right person was being paid. It was only when the bankruptcy case was filed that questions were raised about proper paperwork.

This raises an interesting question. Was the right person being paid prior to bankruptcy? One possibility is that PHH’s lawyer is correct and that “we’re ignoring what we know to be true because we can’t get our hands on the documents.” The other possibility is that somewhere along the line, there has been a disconnect between the party entitled to payment and the party receiving payment. In this instance, the aggrieved party would be the true holder of the note and mortgage. If the phantom real holder doesn’t complain that its funds are being diverted, what is the debtor’s right to complain? If the debtor’s loan has been lost somewhere in a securitization black hole, does that mean that the debtor gets a free house? This case points out a difficult tension between acknowledging “what we know to be true” and putting the creditor to its proof.


David B. Shaev said...

Interesting article. As the attorney for the debtor in this action, I can tell you that the case is far from over. At this stage, the alleged creditor has filed an appeal and we are waiting for a scheduling order for briefing.
David B. Shaev

4closureFraud said...

The issues here are much larger than
this particular case.

During the housing boom, lenders passed around mortgages as if they were whiskey bottles at a frat party. Appraisals were overinflated, notes were lost, destroyed, shredded, sold into multiple pools. Mortgages were not recorded and exorbitant fees were collected by the big firms on Wall Street.

Now that the bubble has burst, these “lenders” are trying to collect on loans they do not own, in most cases never lent a dime on the transaction, have no right to, or were paid 30 times over in bailouts, insurance, credit default swaps, etc.

In almost EVERY case these "pretender lenders" do not and did not have any "skin in the game". Almost all loans during the boom were securitized and it was investors that put up the money, not the banks.

Now these "pretender lenders", the "servicers", along with MERS, Mortgage Electronic Registration Systems, are unrightfully taking peoples homes by filing fraudulent mortgage assignments to process foreclosures.

Do the research. See for yourself...

It is all in the public records...


Pedro said...

I´ve enjoy reading your Blog

Cheers from Portugal :)

Patches said...

Good job David. We will be looking at your case for precedent.

James McGuire said...

Fascinating. We need more folks willing to take on these practices. David, great job. I look forward to seeing how this case turns out.

Anonymous said...

I'm an attorney in Northern California that deals with similar issues. I've found that bankruptcy court is a much better venue than state court to deal with standing. To be honest, most state court judges have no idea how to handle complex debt claims such as mortgages, especially if they believe the debtor is simply trying to get the house "free and clear" (rarely if ever the case, of course).

As another commenter mentioned, many of these mortgages have been PAID to certain degrees through God-knows-what means. Challenging the amount of the claim and/or the amount of the arrears may therefore be even more useful than simply challenging standing in bk court. The problem is discovering how much has been paid; the numbers in the credit report, notice of default, etc., are most likely incorrect.

Every single bankruptcy attorney should run securitization audits on their clients' properties before filing the bk case. They're pricey, up to $700, but they are invaluable in discovering details about mortgage loans you'd never know otherwise.