CALIFORNIA: NEW BILL SB 1275 May allow homeowners to REVERSE FORECLOSURE SALES due to SERVICER’S ERRORS

Carrie Bay 6/4/2010 DSNEWS

The California Senate approved a new foreclosure bill on Thursday with a 21 to 12 vote and sent it on to the Assembly for review. The legislation lays out two major provisions intended to deter lax behavior on the part of servicers and prevent avoidable foreclosures in the state, which continues to post one of the nation’s highest foreclosure rates.

The bill would provide a means of recourse to homeowners whose homes were lost to foreclosure due to serious servicer errors, and it would prohibit servicers from starting the foreclosure process until a homeowner has received a final decision on their modification.

According to a statement from the Center for Responsible Lending (CRL), confusion and errors that cost Californians their homes, are devastating to the state’s housing market, but are avoidable.

If a borrower’s home is sold in foreclosure due to servicer error, there is currently no means by which to seek recourse. The bill, SB 1275, authored by Sen. Mark Leno (D-San Francisco) and Senate President Pro Tem Darrell Steinberg (D-Sacramento), seeks to change this by providing recourse through what is known as a private right of action.

This would allow eligible homeowners to seek limited damages which are directly related to the severity of the servicer’s errors, or, in some cases, would allow the homeowner to reverse the foreclosure sale.

During earlier committee hearings for SB 1275, servicers acknowledged that confusion and errors are commonplace. According to CRL, Bank of America executive Jack Schackett even admitted during a conference call that they “have not handled [their] customers to the standards Bank of America is accustomed to.”

“It’s unacceptable that when servicers lose faxes and lose payments, some Californians lose their homes,” said Caryn Becker, policy counsel with the CRL California office. “At nearly 1 million foreclosures and counting, we need to prevent every unnecessary foreclosure we can.”

Speaking in support of the bill’s passage, CRL said homeowners who have been wronged deserve the opportunity to make it right, but the organization says the legislation continues to face some opposition from Assembly members who oppose allowing California homeowners to pursue claims against their lenders and servicers.

SB 1275 would also prohibit servicers from foreclosing on homeowners who have requested modifications until a decision has been made, and the homeowner has been notified.

CRL says currently, servicers are initiating the foreclosure process even when borrowers are working to reach a resolution, including when homeowners are following all the rules to seek a loan modification, or are already making payments on a trial modification.

“Simple fairness dictates that no one should lose their home while they are in the middle of trying to save it,” said Paul Leonard, director of the California office of the Center for Responsible Lending. “A foreclosure that starts because a servicer’s left hand doesn’t know what the right hand is doing is the most preventable foreclosure of all.”

SB 1275 will be heard by the Assembly Banking Committee before it goes to the full Assembly for a vote. Assembly members are currently considering a separate bill, AB 1639, that would mandate foreclosure mediation through a new Facilitated Mortgage Workout (FMW) program, which would require lenders to meet with delinquent borrowers to try and devise an alternative plan of action before proceeding with foreclosure.

FULL Mortgage Payoff Rejected, Broken Entry (2), FORECLOSURE JUDGEMENT REVERSED…PRICELESS! Fed. Deposit Ins. Corp., as Receiver of WAMU v. TRAVERSARI, 2010 Ohio 2406 – Ohio: Court of Appeals, 11th Dist., Geauga 2010

2010-Ohio-2406

Federal Deposit Insurance Corporation, as Receiver of Washington Mutual Bank, Plaintiff-Appellee,
v.
Robert Traversari, et al., Defendants-Appellants.

No. 2008-G-2859.

Court of Appeals of Ohio, Eleventh District, Geauga County.

May 28, 2010.

Karen L. Giffen and Kathleen A. Nitschke, Giffen & Kaminski, L.L.C., 1300 East Ninth Street, #1600, Cleveland, OH 44114 and Donald Swartz, Lerner, Sampson & Rothfuss, P.O. Box 580, Cincinnati, OH 45210-5480 (For Plaintiff-Appellee).

Edward T. Brice, Newman & Brice, L.P.A., 214 East Park Street, Chardon, OH 44024 (For Defendants-Appellants).

OPINION

COLLEEN MARY O’TOOLE, J.

{¶1} Appellants, Robert Traversari (“Traversari”) and B & B Partners (“B & B”), appeal from the August 5, 2008 judgment entry of the Geauga County Court of Common Pleas, granting summary judgment in favor of appellee, Washington Mutual Bank, and entitling appellee to a judgment and decree in foreclosure.

{¶2} In 1994, appellant Traversari borrowed $190,000 from Loan America Financial Corporation which was memorialized by a promissory note and further secured by a mortgage on property located at 9050 Lake-in-the-Woods Trail, Bainbridge Township, Geauga County, Ohio. Appellant Traversari obtained the loan individually and/or in his capacity as the sole member and principal of appellant B & B, a real estate based company. The mortgage at issue was subsequently assigned to appellee.

{¶3} On January 8, 2007, appellee filed a complaint in foreclosure against appellants and defendants, JP Morgan Chase Bank, N.A., Charter One Bank, N.A., Jesse Doe, and Geauga County Treasurer. In count one of its complaint, appellee alleges that it is the holder and owner of a note in which appellant Traversari owes $149,919.96 plus interest at the rate of 7.75 percent per year from September 1, 2006, plus costs. In count two of its complaint, appellee alleges that it is the holder of a mortgage, given to secure payment of the note, which constitutes a valid first lien upon the real estate at issue. Appellee maintains that because the conditions of defeasance have been broken, it is entitled to have the mortgage foreclosed. Appellee indicated that appellant B & B may have claimed an interest in the property by virtue of being a current titleholder.

{¶4} Appellants filed an answer and counterclaim on February 16, 2007. In their defense, appellants maintain that appellee failed to comply with Civ.R. 10(D) and is estopped from asserting a foreclosure by its waiver of accepting payment. According to their counterclaim, appellants allege the following: on or about September 25, 2006, appellant Traversari sent a check in the amount of $150,889.96 to appellee for payment in full on the loan, which included the principal of $149.919.96 plus $970 of interest; on or about November 17, 2006, appellee issued a new home loan statement to appellant Traversari indicating the amount due was $5,608.95; appellant Traversari contacted appellee stating that a check had been sent for payment in full; appellee failed to respond; appellant Traversari mailed a check to appellee in the amount of $155,000; no stop payment was issued on the first check; because the house was vacant, appellant Traversari went to check the residence on December 26, 2006, and discovered that it had been broken into; an orange placard was placed on the premises indicating that a representative from appellee would secure the home; appellant Traversari immediately purchased new lock sets, secured the premises, and called and left a message for appellee to inform them to not enter the home; on December 31, 2006, electronic transmission was sent to appellee concerning the break-in and requested appellee to stop breaking into the home as well as to locate the two checks and to send a copy of a letter to a credit bureau; appellee did not respond; appellant Traversari then mailed a check from a separate account in the amount of the last payment demanded by appellee; appellee sent the $155,000 check back with a form letter to the address of the vacant property stating that personal checks were not accepted for payoff; appellee also rejected the $5,674.41 check; appellant Traversari then contacted appellee regarding the rejected checks; on January 11, 2007, appellant Traversari went to the home again, finding the kitchen door open, furnace running, new lock set taken out, garage door openers unplugged, and worse dings in the steel door; and appellant Traversari emailed appellee again, however, appellee indicated it could not give appellants any information because the case had been moved to foreclosure.

{¶5} Appellee filed a reply to appellants’ counterclaim on March 19, 2007, and an amended reply on September 6, 2007.

{¶6} According to the deposition of Maritza Torres (“Torres”), an employee of appellee in its senior asset recovery, loss prevention department, she was assigned to appellants’ case. Torres testified that appellee has no record of having received a check in the amount of $150,889.96 from appellant Traversari on September 25, 2006. However, she indicated that appellee received a check from appellant Traversari on September 30, 2006, in the amount of $102,538.74 (“Check #1”), which was returned to him due to appellee’s policy not to accept checks for early payoffs that are not certified funds.

{¶7} According to the deposition of Linda Rae Traversari (“Linda”), appellant Traversari’s wife, she is the handler of the family assets. Following the return of Check #1, appellee forwarded a delinquency letter to appellant Traversari in early November of 2006. Later that month, appellee sent a second default letter to him. Linda testified that on or around November 30, 2006, appellant Traversari sent another personal check for early payoff to appellee in the amount of $155,000 (“Check #2”). Appellee returned Check #2 with a letter explaining that noncertified funds are not accepted for early payoff. Linda stated that on January 2, 2007, appellant Traversari sent a third personal check via certified mail to appellee in the amount of $5,674.41 (“Check #3”). By the time appellee received Check #3, the loan had been referred to foreclosure. Check #3 was returned to appellant Traversari as “insufficient.”

{¶8} On March 14, 2008, appellee filed a motion for summary judgment pursuant to Civ.R. 56(b). Appellants filed a response on April 21, 2008.

{¶9} In its July 3, 2008 order, the trial court found, inter alia, that appellee was within its legal rights to reject the personal checks; appellee had the right to institute and maintain the foreclosure because appellants did not cure their default; and appellee had the right to enter the premises. Thus, the trial court indicated that appellee’s motion for summary judgment would be granted in its favor as to all issues and claims against appellants upon appellee’s presentation of an appropriate entry to be provided to the court.

{¶10} Appellee filed a “Motion For Submission Of Its Entry Granting Motion For Summary Judgment And Decree In Foreclosure” on July 11, 2008, and an amended entry on July 21, 2008. Appellants filed objections to appellee’s proposed amended entry the following day.

{¶11} Pursuant to its August 5, 2008 “Amended Entry Granting Summary Judgment And Decree In Foreclosure,” the trial court granted summary judgment in favor of appellee, entitling appellee to a judgment and decree in foreclosure. The trial court ordered, inter alia, that unless the sums found due to appellee are fully paid within 3 days from the date of the decree, the equity of redemption shall be foreclosed, the property sold, and an order of sale issued to the Sheriff directing him to appraise, advertise, and sell the property. The trial court further ordered that the proceeds of the sale follow the following order of priority: (1) to the Clerk of Courts, the costs of the action, including the fees of appraisers; (2) to the County Treasurer, the taxes and assessments, due and payable as of the date of transfer of the property after Sheriff’s Sale; (3) to appellee, the sum of $149,919.96, with interest at the rate of 7.75 percent per annum from September 1, 2006 to February 29, 2008, and 7.25 percent per annum from March 1, 2008 to present, together with advances for taxes, insurance, and costs; and (4) the balance of the sale proceeds, if any, shall be paid by the Sheriff to the Clerk of Court to await further orders. It is from that judgment that appellants filed the instant appeal, raising the following assignment of error for our review:

{¶12} “THE TRIAL COURT ERRED TO THE PREJUDICE OF DEFENDANTSA-PPELLANTS IN ITS ORDER GRANTING IN PLAINTIFF-APPELLEE’S FAVOR AS TO ALL ISSUES AND CLAIMS AND AGAINST DEFENDANTS, AND ITS AMENDED ENTRY GRANTING SUMMARY JUDGMENT AND DECREE IN FORECLOSURE TO PLAINTIFF-APPELLEE AGAINST DEFENDANTS-APPELLANTS.”

{¶13} In their sole assignment of error, appellants argue that the trial court erred by granting summary judgment in favor of appellee, and entitling appellee to a judgment and decree in foreclosure.

{¶14} “This court reviews de novo a trial court’s order granting summary judgment.” Hudspath v. Cafaro Co., 11th Dist. No. 2004-A-0073, 2005-Ohio-6911, at ¶8, citing Hapgood v. Conrad, 11th Dist. No. 2000-T-0058, 2002-Ohio-3363, at ¶13. “`A reviewing court will apply the same standard a trial court is required to apply, which is to determine whether any genuine issues of material fact exist and whether the moving party is entitled to judgment as a matter of law.'” Id.

{¶15} “Since summary judgment denies the party his or her `day in court’ it is not to be viewed lightly as docket control or as a `little trial.’ The jurisprudence of summary judgment standards has placed burdens on both the moving and the nonmoving party. In Dresher v. Burt [(1996), 75 Ohio St.3d 280, 296,] the Supreme Court of Ohio held that the moving party seeking summary judgment bears the initial burden of informing the trial court of the basis for the motion and identifying those portions of the record before the trial court that demonstrate the absence of a genuine issue of fact on a material element of the nonmoving party’s claim. The evidence must be in the record or the motion cannot succeed. The moving party cannot discharge its initial burden under Civ.R. 56 simply by making a conclusory assertion that the nonmoving party has no evidence to prove its case but must be able to specifically point to some evidence of the type listed in Civ.R. 56(C) that affirmatively demonstrates that the nonmoving party has no evidence to support the nonmoving party’s claims. If the moving party fails to satisfy its initial burden, the motion for summary judgment must be denied. If the moving party has satisfied its initial burden, the nonmoving party has a reciprocal burden outlined in the last sentence of Civ.R. 56(E) to set forth specific facts showing there is a genuine issue for trial. If the nonmoving party fails to do so, summary judgment, if appropriate shall be entered against the nonmoving party based on the principles that have been firmly established in Ohio for quite some time in Mitseff v. Wheeler (1988), 38 Ohio St.3d 112 ***.” Welch v. Ziccarelli, 11th Dist. No. 2006-L-229, 2007-Ohio-4374, at ¶40.

{¶16} “The court in Dresher went on to say that paragraph three of the syllabus in Wing v. Anchor Media, Ltd. of Texas (1991), 59 Ohio St.3d 108 ***, is too broad and fails to account for the burden Civ.R. 56 places upon a moving party. The court, therefore, limited paragraph three of the syllabus in Wing to bring it into conformity with Mitseff. (Emphasis added.)” Id. at ¶41.

{¶17} “The Supreme Court in Dresher went on to hold that when neither the moving nor nonmoving party provides evidentiary materials demonstrating that there are no material facts in dispute, the moving party is not entitled a judgment as a matter of law as the moving party bears the initial responsibility of informing the trial court of the basis for the motion, `and identifying those portions of the record which demonstrate the absence of a genuine issue of fact on a material element of the nonmoving party’s claim.’ Id. at 276. (Emphasis added.)” Id. at ¶42.

{¶18} In the case at bar, the record establishes that appellant Traversari sent personal checks to appellee for payment on the loan at issue. However, appellee returned the checks with letters indicating they would not be accepted as payment because they were not certified, and foreclosure proceedings commenced.

{¶19} There is no genuine issue of material fact that appellants executed and delivered a note and mortgage to appellee. However, a genuine issue of material fact does exist with regard to the fact that appellant Traversari tendered the entire principal payment and appellee rejected it because the payment was made by personal check. See Chase Home Fin., LLC v. Smith, 11th Dist. No. 2007-P-0097, 2008-Ohio-5451, at ¶19. The dates and amounts of the personal checks are conflicting due to the testimony and/or evidence submitted by the parties.

{¶20} “A cause of action exists on behalf of a damaged mortgagor when, in conformity with the terms of his note, he offers to the mortgagee full payment of the balance of the principal and interest, and the mortgagee refuses to present the note and mortgage for payment and cancellation.” Cotofan v. Steiner (1959), 170 Ohio St. 163, paragraph one of the syllabus.

{¶21} Appellant Traversari did not place any conditions on the personal checks tendered to appellee. We note that “[t]he essential characteristics of a tender are an unconditional offer to perform, coupled with ability to carry out the offer and production of the subject matter of the tender.” Walton Commercial Enterprises, Inc. v. Assns. Conventions, Tradeshows, Inc. (June 11, 1992), 10th Dist. No. 91AP-1458, 1992 Ohio App. LEXIS 3081, at 5. (Emphasis sic.)

{¶22} “It is an implied condition of every contract that one party will not prevent or impede performance by the other. If he does prevent or impede performance, whether by his prior breach or other conduct, he may not then insist on performance by the affected party, and he cannot maintain an action for nonperformance if the promises are interdependent.” Fed. Natl. Mtge. Assns. v. Banks (Feb. 20, 1990), 2d Dist. No. 11667, 1990 Ohio App. LEXIS 638, at 8-9, citing 17 American Jurisprudence 2d, Contracts, Sections 425, 426.

{¶23} In the instant matter, paragraph 3 of the Open-End Mortgage provides:

{¶24} “3. Application of Payments. Unless applicable law provides otherwise, all payments received by Lender under paragraphs 1 and 2 shall be applied: first, to any prepayment charges due under the Note; second, to amounts payable under paragraph 2; third; to interest due; fourth, to principal due; and last, to any late charges due under the Note.”

{¶25} Here, there was no new note and mortgage, nor agreement for application of payments, when the mortgage at issue was subsequently assigned from Loan America Financial Corporation to appellee. Rather, it was the policy of appellee to require mortgagors to pay by certified check for any amounts over $5,000. According to appellee’s employee, Torres, she indicated that any amount over $5,000 not paid by certified funds puts the company at risk because it can take anywhere between 7 to 10 days for a personal check to clear. We note, however, that the mortgagee has up to 90 days to verify the sufficiency of the underlying funds before satisfying and releasing its recorded mortgage. R.C. 5301.36(B). In the instant case, it would have been reasonable for appellee to have either waited 7 to 10 days for appellant Traversari’s checks to clear or to have inquired with his bank, see, generally, Hunter Sav. Assn. v. Kasper (Sept. 25, 1979), 10th Dist. No. 78AP-774, 1979 Ohio App. LEXIS 11777, at 13, if there were sufficient funds before returning any of his 3 personal checks and commencing foreclosure proceedings.

{¶26} The lender in this case unilaterally refused the debtor’s payment by check due to itsinternal policy that an amount over $5,000 had to be made by certified check. The terms and conditions of the mortgage, however, do not impose such a requirement. Under paragraph 3 of the Open-End Mortgage, it appears the lender had an obligation to apply the payment tendered, by personal check or otherwise. Its refusal to present the check for clearance and apply the payment on the ground of internal policy appears to have violated the debtor’s rights.

{¶27} Construing the evidence submitted most strongly in favor of appellants, we must conclude that genuine issues of material fact remain. Again, a genuine issue of material fact exists with regard to the fact that appellant Traversari tendered the entire principal payment and appellee rejected it because the payment was made by personal check. Also, the dates and amounts of the personal checks are conflicting due to the testimony and/or evidence submitted by the parties. Thus, the trial court erred by granting appellee’s motion for summary judgment.

{¶28} For the foregoing reasons, appellants’ sole assignment of error is well-taken. The judgment of the Geauga County Court of Common Pleas is reversed and the matter is remanded for further proceedings consistent with this opinion. It is ordered that appellee is assessed costs herein taxed. The court finds there were reasonable grounds for this appeal.

Trapp, P.J., Rice, J., concur.

Defendants are not named parties to the instant appeal.

The matter was stayed. On November 26, 2008, the Federal Deposit Insurance Corporation was substituted for appellee Washington Mutual Bank. This court instructed the Clerk of Courts to correct the docket by removing “Washington Mutual Bank” and substituting “Federal Deposit Insurance Corporation, as Receiver of Washington Mutual Bank” as appellee in this appeal. The stay order automatically dissolved on August 29, 2009.

TRYING TO FORECLOSE on HOMEOWNER MORTGAGE with a “BORROWERS PROTECTION PLAN”: JONES v. BANK OF AMERICA, N.A.

JONES v. BANK OF AMERICA, N.A.

Kevin R. Jones, Plaintiff,

v.

Bank of America, N.A., Defendant.

No. CV-09-2129-PHX-JAT.

United States District Court, D. Arizona.

June 1, 2010.

ORDER

JAMES A. TEILBORG, District Judge.

Pending before the Court is Defendant Bank of America’s Partial Motion to Dismiss (Doc. #39). The Court has reviewed the parties’ filings and now rules on the Motion. For the reasons that follow, the Motion is denied as to Counts Three, Five, and Six, and granted as to Counts Two and Four. Count Four is dismissed without prejudice.

I. Background

Plaintiff alleges the following facts in support of his claims. In June and July 2006, Plaintiff Kevin Jones took out two mortgage loans on his residence located in Phoenix, Arizona. (Doc. #22, ¶¶7-8). At the time Plaintiff entered into the loan agreements with Defendant Bank of America, he also enrolled in the optional “Borrowers Protection Plan” (“the Plan”). (Id. at ¶9). The Plan provided that Defendant would cover Plaintiff’s monthly mortgage payments in the event that Plaintiff became disabled or involuntarily unemployed, in exchange for monthly premiums. (Id. at ¶10). On February 2, 2008, Plaintiff was in a car accident which caused him severe permanent injury and disability. (Id. at ¶13). As a result of his disability, Plaintiff was unable to continue working and making his mortgage payments. (Id. at ¶¶14-16). Plaintiff did, however, continue to make his premium payments and the Plan covered Plaintiff’s mortgage payments until “some point in the latter part of 2008 or in 2009.”1 ] (Id. at ¶¶17, 23). Defendant originally scheduled a Trustee sale for Plaintiff’s residence for November 9, 2009. (Id. at 1).

Plaintiff filed his First Amended Complaint on November 16, 2009, alleging breach of contract and tort claims. (Doc. #22). Defendant filed the instant motion on December 14, 2009, seeking to dismiss the tort claims pursuant to Fed. R. Civ. P. 12(b)(6). (Doc. #39).

II. Legal Standard

To survive a Rule 12(b)(6) motion for failure to state a claim, a complaint must meet the requirements of Fed. R. Civ. P. 8(a)(2). Rule 8(a)(2) requires a “short and plain statement of the claim showing that the pleader is entitled to relief,” so that the defendant has “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). “Without some factual allegation in the complaint, it is hard to see how a claimant could satisfy the requirement of providing not only `fair notice’ of the nature of the claim, but also ‘grounds’ on which the claim rests.” Id. at 556, n.3 (citing 5 C. WRIGHT & A. MILLER, FEDERAL PRACTICE AND PROCEDURE §1202, at 94-95 (3d ed. 2004)).

“In determining the propriety of a Rule 12(b)(6) dismissal, a court may not look beyond the complaint to a plaintiff’s moving papers, such as a memorandum in opposition to a defendant’s motion to dismiss.” Schneider v. Cal. Dept. Of Corrs., 151 F.3d 1194, 1197 n.1 (9th Cir. 1998). “The focus of any Rule 12(b)(6) dismissal—both in the trial court and on appeal—is the complaint.” Id.

In deciding a motion to dismiss under Rule 12(b)(6), the Court must construe the facts alleged in the complaint in the light most favorable to the drafter of the complaint and the Court must accept all well-pleaded factual allegations as true. See Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000). Nonetheless, the Court does not have to accept as true a legal conclusion couched as a factual allegation. Papasan v. Allain, 478 U.S. 265, 286 (1986). Although a complaint attacked for failure to state a claim does not need detailed factual allegations, the pleader’s obligation to provide the grounds for relief requires “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (internal citations omitted). Dismissal is appropriate where the complaint lacks either a cognizable legal theory or facts sufficient to support a cognizable legal theory. See Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1988); Weisbuch v. County of L.A., 119 F.3d 778, 783 n.1 (9th Cir. 1997).

III. Count Two: Negligence

In Plaintiff’s Amended Complaint, Plaintiff alleges that Defendant owed a duty “to ensure that plaintiff’s contractual rights would be protected, and specifically that the Borrowers Protection Plan contractual benefits be honored.” (Doc. #22, ¶29). Plaintiff alleges that Defendant breached this duty and that Plaintiff was emotionally injured when the Defendant breached the Borrowers Protection Plan agreement. (Id. at ¶7). Plaintiff appears to be alleging that Defendant was negligent in breaching the contract. However, Plaintiff does not cite any legal authority indicating that Arizona recognizes a claim for negligent breach of contract, nor is the Court aware of any such authority. Seeing no cognizable legal theory to support this claim, the Motion to Dismiss Count two is granted.2 ] See Balistreri, 901 F.2d at 699; Weisbuch, 119 F.3d at 783 n.1.

IV. Count Three: “Bad Faith/Breach of Contract”

Plaintiff alleges that Defendant breached the duty of good faith and fair dealing (“bad faith”). “Arizona law implies a covenant of good faith and fair dealing in every contract.” Wells Fargo Bank v. Ariz. Laborers, Teamsters and Cement Masons Local No. 395 Pension Trust Fund, 38 P.3d 12, 28 (Ariz. 2020). In the context of insurance contracts, “the insurance company must act in good faith in dealing with its insured on a claim.” Noble v. Nat’l Amer. Life Ins. Co., 624 P.2d 866, 868 (Ariz. 1981). “The tort of bad faith can be alleged only if the facts pleaded would, on the basis of an objective standard, show the absence of a reasonable basis for denying the claim.” Id.

1. Defendant as Insurer

Defendant is an insurer with respect to the Borrowers Protection Plan. “Tort actions for breach of covenants implied in certain types of contractual relationships are most often recognized where the type of contract involved is one in which the plaintiff seeks something more than commercial advantage or profit from the defendant. When dealing with . . . an insurer, the client/customer seeks service, security, peace of mind, protection or some other intangible.” Rawlings v. Apodaca, 726 P.2d 565, 575 (Ariz. 1986).

Defendant argues that it is a lender and not an insurer. (Doc. #39, 6). This is true with respect to the mortgage loan agreements between Plaintiff and Defendant. However, Defendant created an insurer/insured relationship with Plaintiff, when the parties entered into the Borrowers Protection Plan agreements. Plaintiff alleges that in the Plan Defendant agreed, in exchange for premium payments, to indemnify Plaintiff by making his mortgage and interest payments in the event of certain covered events. (Doc. #22, ¶10). Defendant was thus offering precisely the type of protection and peace of mind described in Rawlings.3 ] Therefore, Defendant acted as an insurer and is subject to the duty of good faith and fair dealing imposed on insurers for purposes of the Borrowers Protection Plan.

2. Analysis of the Bad Faith Claim

Plaintiff has presented sufficient facts for his claim of bad faith to survive a Rule 12(b)(6) analysis. To state a claim for bad faith a plaintiff must offer facts to show “the absence of a reasonable basis for denying benefits of the policy and the defendant’s knowledge or reckless disregard of the lack of a reasonable basis for denying the claim.” Noble, 624 P.2d at 868.

In his Complaint, Plaintiff alleges that on or about June 15, 2006 and July 17, 2006, he and Defendant entered into the Borrowers Protection Plan agreements, which required him to pay monthly premiums in exchange for Defendant’s promise to pay his monthly loan and interest payments in the event of involuntary unemployment or disability. (Doc. #22, ¶¶7-11). Plaintiff further alleges that he made his premium payments as required and that he was in a car accident on February 2, 2008, which made him disabled and unable to work. (Id. at ¶11, 13-15). Plaintiff further alleges that Defendant stopped making his mortgage payments “[a]t some point in the latter part of 2008 or in 2009,” and that Defendant “should have used the Plan to pay all of the principal and interest payments from March, 2008 to the present pursuant to the contract.” (Id. at ¶¶17, 22).

Because Plaintiff alleges that he paid his premiums and became disabled while protected under the Plan, Plaintiff has met the requirement that he plead an absence of a reasonable basis for the denial of his benefits. Furthermore, because Plaintiff alleges that he initially received benefits under the Plan, he has shown that Defendant had knowledge of his disability and unemployment. These facts meet the threshold standard of giving the defendant “fair notice of what the . . . claim is and the grounds upon which it rests.”Twombly, 550 U.S. at 555. Therefore, Defendant’s Motion to Dismiss is denied as to Plaintiff’s bad faith claim.

V. Count Four: Wrongful Foreclosure

The Arizona state courts have not addressed whether they recognize the tort of wrongful foreclosure.4 ] Assuming for purposes of this Order that such a claim exists under Arizona law, for the claim to be ripe, a foreclosure sale must have occurred. See Standard Alaska Prod. Co. v. Schaible, 874 F.2d 624, 627 (9th Cir. 1989) (“A claim is fit for decision if the issues raised are primarily legal, do not require further factual development, and the challenged action is final.”). Here, no foreclosure sale has yet taken place. Therefore, this claim is not ripe for adjudication and Plaintiff’s claim for wrongful foreclosure is dismissed. Should the foreclosure sale occur, Plaintiff may move to amend the complaint to re-assert this claim.

VI. Count Five: Negligent Infliction of Mental Anguish

Arizona law recognizes two types of negligent infliction of emotional distress. The first type “requires plaintiff to: (1) witness an injury to a closely related person, (2) suffer mental anguish manifested as physical injury, and (3) be within the zone of danger so as to be subject to an unreasonable risk of bodily harm created by the defendant.” Pierce v. Casas Adobes Baptist Bhurch, 782 P.2d 1162, 1165 (Ariz. 1989) (en banc).

The second type of claim for negligent infliction of emotional distress arises when the distress results from an injury to the claimant themself. See Monaco v. HealthPartners of S. Arizona, 995 P.2d 735, 738-39 ¶¶ 7-8 (Ariz. App.1999) (holding negligent injection of radioactive material into plaintiff was sufficient to support a claim for negligent infliction of emotional distress). To sustain this type of negligent infliction of emotional distress claim, a plaintiff must show:

(a) [the tortfeasor] should have realized that his conduct involved an unreasonable risk of causing the distress . . ., and (b) from facts known to him should have realized that the distress, if it were caused, might result in illness or bodily harm. Restatement (Second) of Torts, §§ 313 (adopted by Ball v. Prentice, 162 Ariz. 150, 781 P.2d 628, 630 (Ariz. Ct. App.1989)).

Carboun v. City of Chandler, 2005 WL 2408294 at 12.

Moreover, “the Arizona cases and Restatement § 436A make clear that a physical injury, as well as a long-term physical illness or mental disturbance, constitutes sufficient bodily harm to support a claim of negligent infliction of emotional distress.” Monaco, 995 P.2d at 739.

Plaintiff has not alleged the first type of negligent infliction of emotional distress because he has not alleged that he witnessed the injury of another person. However, Plaintiff does allege that he “has been in a state of emotional panic for over one-half year” as a result of Defendant’s threats to foreclose on [his] home loan. (Doc. #22 at ¶41). Plaintiff further alleges facts that show Defendant knew of Plaintiff’s physical disability5 ] and was indifferent to Plaintiff’s “rights and peace of mind” (Id. at ¶50). Construing the facts pleaded in Plaintiff’s Amended Complaint liberally, this claim is sufficiently pleaded to survive a Rule 12(b)(6) motion to dismiss. Defendant’s Motion is thus denied as to Plaintiff’s claim of negligent infliction of emotional distress (labeled “mental anguish”).

VII. Count Six: Intentional Infliction of Mental Anguish

To prove a claim of intentional infliction of emotional distress under Arizona law, Plaintiff must show that: 1) Defendant engaged in extreme and outrageous conduct; 2) Defendant either intended to cause emotional distress or recklessly disregarded the near certainty that emotional distress would result from the conduct; and 3) Plaintiff actually suffered emotional distress because of Defendant’s conduct. Nelson v. Phoenix Resort Corp., 888 P.2d 1375, 1386 (Ariz. Ct. App. 1994).

Plaintiff has alleged that Defendant attempted to foreclose on his home after failing to honor its obligations under the Borrowers Protection Plan. (Doc. #22, ¶¶46-47). Plaintiff also claims that Defendant continued to contact Plaintiff through threatening letters and phone calls after Plaintiff’s counsel asked Defendant to direct communications to him instead. (Doc. #22, ¶¶41-42). Plaintiff asserts that these actions were in “conscious disregard of [his] rights and . . . peace of mind.” (Doc. #22, ¶50). Plaintiff further alleges that Defendant’s conduct has caused him to be “in a state of emotional panic for over one-half year.” (Doc. #22, ¶48). Since Plaintiff is only required to provide a “short and plain statement of the claim,” and need not provide detailed factual allegations, these facts are sufficient to give Defendant “fair notice of what the . . . claim is and the grounds upon which it rests.” See Twombly, 550 U.S. 544, 555 (2007). Defendant’s Motion to Dismiss is thus denied as to Plaintiff’s claim of intentional infliction of emotional distress (labeled “mental anguish”).

Accordingly,

IT IS ORDERED that Defendant’s Motion to Dismiss (Doc. #39) is GRANTED as to Counts Two and Four of the Complaint, and that Count Four is dismissed without prejudice.

IT IS FURTHER ORDERED that Defendant’s Motion to Dismiss (Doc. #39) is DENIED as to Counts Three, Five, and Six of the Complaint.

This copy provided by Leagle, Inc.

Foreclosure has oft-unforeseen risk: Lawsuits from Lenders

FORT LAUDERDALE, Fla. – June 3, 2010 – Before Larry Thomas unloaded his Pompano Beach, Fla., home last fall for a fraction of what he paid, he cut a deal that will keep him from worrying about a huge debt hanging over his head.

Thomas insisted that his lender, American Home Mortgage Servicing, agree not to come after him for the estimated $174,000 he still owed on his two mortgages. “I feel incredible relief,” the 32-year-old restaurant manager said last week. DinSFLA: (Note) The name of the “LENDER”… is actually the “SERVICER”. This is not good as they are NOT the “OWNER or the HOLDER” of this loan!!

Others may not be as fortunate.

Lenders will file a tidal wave of lawsuits against homeowners in the next few years as a way to recoup losses when home sales or foreclosure auctions don’t result in enough money to pay the mortgages in full, real estate and legal analysts say.

“It will be a dramatic problem because the borrowers will not know it’s coming,” said Frank Alexander, a law professor at Emory University in Atlanta.

Laws vary from state to state. In Florida, banks have five years from the date of the sale to file for so-called deficiency judgments and up to 20 years to collect. Lenders can garnish wages or make claims on borrowers’ assets.

Before the housing meltdown, few lenders filed these lawsuits. Foreclosures and short sales – selling for less than the mortgage amount – were relatively rare at the time, and many of the homeowners didn’t have sufficient assets to make it worth the banks’ time and expense.

But following the heady days of the housing boom that spawned millionaire investors seemingly overnight, it’s not uncommon for borrowers to default on mortgages while still holding lucrative investments.

As the next wave of the housing crisis plays out, those most in danger of getting slapped with lawsuits include angry homeowners who ransack properties they’re losing in foreclosure and borrowers who walk away from “underwater” mortgages. In both cases, analysts say, banks will want to discourage other people from such behavior.

More than four in 10 homeowners said they would consider abandoning properties that are underwater, or worth less than the mortgages, according to a national online survey released last week by real estate firms Trulia and RealtyTrac.

Mortgage companies typically won’t sue homeowners who negotiate in good faith or those who default on their loans because of job losses or other unforeseen circumstances, said Anthony Manno, an executive with Steelbridge Real Estate Services. The Miami-based company works with lenders on the resale of foreclosed homes.

Still, borrowers shouldn’t rely on a lender’s verbal commitment, Manno said. “Get something in writing.”

Critics insist that spite will play a role in some of these lawsuits. Lenders deny it.

“We certainly would not do that,” said Russell Greene, president of Grand Bank & Trust of Florida in West Palm Beach. “It’s a business decision – not an emotional decision. It’s very time-consuming to take someone to court.”

Even if lenders don’t pursue the judgments, they could sell mortgage debt to collection agencies at deep discounts. And it will be those debt collectors that will hound borrowers, said Shari Olefson, a Fort Lauderdale real estate lawyer.

“They paid money to be able to hassle you,” she said.

Thomas, the former Pompano Beach homeowner, said he didn’t have money for a downpayment but was approved for 100 percent financing on two loans in spring 2006. He bought a three-bedroom home for $245,000.

Thomas said he soon became responsible for the entire mortgage after his roommate lost his job. That became even more difficult after Thomas took a pay cut.

So he attempted a short sale, eventually finding plenty of prospective buyers interested in a property that had plummeted nearly 70 percent in value. He and American Home Mortgage accepted one offer for $80,000. After closing costs, the lender netted about $71,000, said his Fort Lauderdale lawyer, Joe Kohn.

But before the sale closed, Kohn had American Home Mortgage waive its right to collect on the remaining mortgage debt.

Christine Sullivan, a spokeswoman for the lender, wrote in an e-mail that she can’t discuss Thomas’ case because of privacy issues. But when homeowners seeking short sales demonstrate legitimate hardship, “we provide a full release of liability, and we do not pursue deficiency judgments.”

Some banks say they won’t file a lawsuit, though they aren’t willing to put that in writing, Kohn said.

“I have no choice but to accept that,” he said. “Even when you play by the rules, banks don’t always do what we’d like.”

Under new government guidelines for short sales that took effect this spring, lenders aren’t supposed to hold homeowners responsible for any remaining mortgage debt. But not all short sales fall under the guidelines, while some lenders choose not to implement them, Kohn said.

A forgiven mortgage balance through 2012 is not considered taxable income on a primary residence as long as the debt was used to buy or improve the house. But borrowers who walk away from investment properties risk having to pay federal income taxes on the forgiven amount.

Homeowners who hand their properties back to the bank through so-called deeds in lieu of foreclosure also should make sure they won’t be on the hook for any mortgage debt.

With friends facing deficiency judgments, Thomas said he’s grateful he sought legal advice on how to avoid a lawsuit. He now rents a home west of Boca Raton, but he just found out the owner is in foreclosure.

“I’ve escaped my own problem, only to inherit someone else’s,” Thomas said. “But this is nothing. It’s just a matter of picking up the pieces and moving on to the next rental.”

© 2010 Sun Sentinel, Paul Owers. Distributed by McClatchy-Tribune News Service.

DEPOSITION of A “REAL” VICE PRESIDENT of MERS WILLIAM “BILL” HULTMAN

From: b.daviesmd6605

Bill joined MERS in February, 1998. He brings more than 14 years of broad experience in finance and treasury. Before joining MERS, he served as Director of Asset Liability Management for Barnett Banks, Inc., Asset Liability Manager at Marine Midland Bank and Treasurer of Empire of America FSB. As a conservator for the FDIC, he managed insolvent institutions for the Resolution Trust Corporation.
Prior to his experience in the financial services industry, Bill was a partner in the law firm of Moot and Sprague, as well as an attorney at Forest Oil Corporation, specializing in the areas of securities and corporate law.

Tapped Out: When Water Bills Force Foreclosure

Some may recall the post I did about DISTURBING BEHAVIOR in FLORIDA: The $67K Water Lien! Revoked Homestead!

I guess this isn’t that rare. Take a look what a $3,000 unpaid water bill can do if you DO NOT HAVE ANY MORTGAGE.

One raw day in early February, Vicki Valentine stood by helplessly as real estate investors snatched her West Baltimore home over what began with an unpaid city water bill of $362. Valentine lost the property after the city sold her debt to investors through a contentious and byzantine legal process called a tax sale. This little-known type of foreclosure can enrich investors as growing numbers of property owners struggle to pay their bills.

Fidelity National Takeover Talks Fail: WSJ

MAY 17, 2010, 10:55 P.M. ET

BY PETER LATTMAN: The Wall Street Journal

The pending takeover of Fidelity National Information Services Inc. collapsed late Monday, with a Blackstone Group-led consortium dropping its plan to acquire the financial-data processor, according to a person familiar with the situation.

Fidelity National’s board had asked for a “substantial increase” above the $32-per-share bid the private-equity firms had proposed, said a person familiar with the deal talks. The two sides couldn’t reach an agreement on price, this person said, and the investor group backed out of the deal.

Late Monday, Fidelity National shares dropped nearly 10% in after-hours trading, to roughly $26 each. (Fidelity National is unrelated to

Continue reading HERE

RELATED STORY: Reports say buyout firms looking to acquire Fidelity National Information Services Inc. (FIS)

INSIDE EDITION INVESTIGATES A STOLEN HOME

HELLO?? Isn’t this EXACTLY what is happening with these Illegal Foreclosures??

5/10/2010

Imagine leaving your home for a while and coming back to find the locks have been changed, all your stuff is gone and there is a stranger in your house, living there. That’s just what happened to one couple. Matt Meagher has INSIDE EDITION’s investigation.

When Tom Decker and his wife Maria tried to open the door of their weekend home in Northern California, they were horrified to find the locks had been changed, and most surprising of all, a total stranger living inside.

“I was in shock. I was in total shock, ” said Maria MacArther.

It was as if they had stepped into a nightmare. Their home, which they owned for three years, was apparently no longer theirs.

So who was the stranger in their house? It was Daniel Judd.

Tom Decker told INSIDE EDITION, “He said, ‘I live here, what are you doing here?’ and we said ‘we own this house.’ He said, ‘I bought this house, this is my house.’ ”

The first thing Tom and Maria did was call the sheriffs office. But when a deputy arrived, Judd produced a deed with his name on it.

Believe it or not, it was Tom and Maria who were ordered to leave.

Santa Cruz Assistant District Attorney Kelly Walker said, “The people come back from vacation and find someone living in their house, can you imagine what you would feel like if that happened?”

The next day, when Judd left the house, the Deckers broke back into their own home. What they found was disturbing. Their clothing, furniture and appliances packed away in the garage.

They also said they discovered anti-government literature, guns and hundreds of rounds of ammunition.

Tom pointed out some of the bullets and said, “These are 45 caliber bullets and you can see that they are hollow point.”

Meagher asked Judd, “Did you steal this person’s home?”

“Absolutely not,” said Judd.

On the surface, Judd seemed to have a case for ownership. He had a deed, with his name on it, which had been filed in the county recorder’s office. He said he paid $14,000 for the Deckers’ home. Yet the house, tucked inside the woods, is worth $500,000.

So who had Judd bought it from? It sure wasn’t the Deckers. It was from 38-year-old Ray Tate, a real estate speculator. Turns out Tate and Judd had been acquaintances and concocted a scheme to grab the Decker’s home out from under them.

So how could someone possibly think they could get away with selling a house that clearly didn’t belong to them?

INSIDE EDITION tried to talk to Tate about the shady deal.

Meagher asked Tate, “How did you think you could take somebody’s home, a home that didn’t belong to you and turn around and sell it?”

He didn’t want to talk, saying, “I have no comment.”

Prosecutor Kelly Walker found that the deed had been forged. Tate and Judd had targeted the Deckers’ home because they thought it had been abandoned. They were busted on conspiracy charges and filing a false deed.

“They’re just manipulating legal documents to try to gain something that they don’t own. It’s stealing something, plain and simple,” said Walker.

The Deckers are now back in possession of their home. But they are still trying to sort out the mess the con-men caused.

Tom said, “The property is still not in our name, it is still owned by Mr. Judd, at least on paper. Everyone knows it’s a fraudelent transaction.”

Daniel Judd, the man who was living in the house, pled guilty and could face a year in jail. Ray Tate, the man who fraudulently sold the house, was found guilty, he faces up to four years behind bars.

According to the AARP, the best way to safeguard from losing your home in a scam like this is to check with the recorder’s office from time to time to make sure that the deed’s still in your name and that all signatures look legitamite. And if something does look a little fishy, it’s important to contact the district attorney’s office immediately.

Goldman: More CDO Litigation And Investigations Likely Coming

Is the most in-fraudential firm finally going down?

Joe Weisenthal | May. 10, 2010, 7:17 AM BuisnessInsider.com

Goldman’s latest 10-Q is out, and as Bloomberg first noted, the firm is expecting more CDO-related litigation and investigations.

Here’s the key line:lloyd blankfein goldman sachs protestor

We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced, against us with respect to offerings of CDOs.

The full passage is below.

———–

 On April 16, 2010, the SEC brought an action (SEC Action) under the U.S. federal securities laws in the U.S. District Court for the Southern District of New York against GS&Co. and one of its employees in connection with a CDO offering made in early 2007 (2007 CDO Transaction), alleging that the defendants made materially false and misleading statements to investors and seeking, among other things, unspecified monetary penalties. Notices of investigation subsequently have been received by GS&Co. from FINRA and by GSI from the U.K. Financial Services Authority, and Group Inc. and certain of its affiliates have received requests for information from other regulators regarding CDO offerings, including the 2007 CDO Transaction, and related matters.
 
Since April 22, 2010, a number of putative shareholder derivative actions have been filed in New York Supreme Court, New York County, and the United States District Court for the Southern District of New York against Group Inc., the Board and certain officers and employees of Group Inc. and its affiliates in connection with CDO offerings made between 2004 and 2007, including the 2007 CDO Transaction. These derivative complaints generally include allegations of breach of fiduciary duty, corporate waste, abuse of control, mismanagement, unjust enrichment, misappropriation of information and insider trading, and challenge the accuracy and adequacy of Group Inc.’s disclosure. These derivative complaints seek, among other things, declaratory relief, unspecified compensatory damages, restitution and certain corporate governance reforms. In addition, plaintiffs in the Delaware Court of Chancery actions described in the “Compensation-Related Litigation” section above have amended their complaint to assert, among other things, allegations similar to those in the derivative claims referred to above.
 
Since April 23, 2010, the Board has received letters from shareholders demanding that the Board take action to address alleged misconduct by GS&Co., the Board and certain officers and employees of Group Inc. and its affiliates. The demands generally allege misconduct in connection with the 2007 CDO Transaction, the alleged failure by Group Inc. to adequately disclose the SEC investigation that led to the SEC Action, and Group Inc.’s 2009 compensation practices. The demands include a letter from a Group Inc. shareholder, which previously made a demand that the Board investigate and take action in connection with auction products matters, and has now expanded its demand to address the foregoing matters.
 
In addition, beginning April 26, 2010, a number of purported securities law class actions have been filed in the United States District Court for the Southern District of New York challenging the adequacy of Group Inc.’s public disclosure of, among other things, the firm’s activities in the CDO market and the SEC investigation that led to the SEC Action. The purported class action complaints, which name as defendants Group Inc. and certain officers and employees of Group Inc. and its affiliates, generally allege violations of Sections 10(b) and 20(a) of the Exchange Act and seek unspecified damages.
 
We anticipate that additional putative shareholder derivative actions and other litigation may be filed, and regulatory and other investigations and actions commenced, against us with respect to offerings of CDOs.

Securitization – A Primer “FORENSIC LOAN AUDIT”

The Broken Chain

May 10th, 2010 •  ImplodeMeterBlog

Most people have heard the term “securitization” in media reports about the Housing Crisis. Some even know that securitization involved the selling of mortgage loans to Wall Street. But beyond that, most people have no clue as to what Securitization really is.

Securitization is the process whereby loans were sold to Wall Street and then sold to investors as bonds. It is a process that is complicated, and filled with legal issues. This article will attempt to simplify the understanding of this process. It is outside the scope of the writing to describe Securitization in complex detail, the “ins and outs”, and the myriad details involved. It would only serve to confuse the layman, and to create misunderstandings. Those who understand the process, please keep this in mind. I only want this to serve as a basic Primer.

History

Securitization has been involved in mortgage loans for decades. It started in rudimentary form in 1938 with the creation of Fannie Mae, to help with the Housing Crisis in the Depression and to stimulate home purchasing. At that time, government funds were used, and Fannie Mae was kept on the government “balance sheet”.

By 1968, Fannie Mae was becoming a large budgetary item. The Johnson Administration took Fannie Mae and turned it into a “shareholder-owned” company, which removed it from the Federal Budget. Freddie Mac was created at this same time to be competitive with Fannie Mae.

By the 1980’s, Fannie and Freddie had become major players in the mortgage industry. Other entities had taken notice and in 1990, Long Beach Savings introduced the first “privately securitized” deal for $70 million, executed through Greenwich Capital. It was so successful that other lenders took immediate interest.

In 1993, Fannie Mae, Freddie Mac, Bank of America and numerous other lenders “commissioned” a study to determine if private securitization could be effectively accomplished and the best methods to pursue for effectiveness. In 1995, the study was completed, which laid out the road map, and at the same time, identified a method for controlling costs associated with recordings and assignments and for identifying ownership of the loans. Thus was born MERS, the Mortgage Electronic Registration Systems. By the end of 1996, MERS was fully up and running, but not in systemic use.

In 1997, Long Beach Savings “split” apart and the key players went off in different directions. Ameriquest/Argent was the direct result of this split. Later, other entities like New Century and Option One were born from the former Long Beach Savings personnel.

By 1998, Private Securitization was beginning to gain popularity, but the collapse of Long Term Capital in Sep 2008 saw the securitization effort delayed, due to a “mini-financing” crisis. However, the repeal of Glass Steagall in 1999 restarted the efforts. (Glass Steagall prevented Commercial Banks and Investment Banks from conducting the same types of business. The repeal allowed commercial banks to also conduct investment banking and vice versa.)

Countrywide, Indymac and other commercial banks began to create investment operations for the purpose of Securitization, while the Wall Street investment banks undertook actions in reverse. This led to the” Securitization Boom” starting in 2000 and peaking in 2005-2006.

In 2000, the “Dot Com Bubble” burst as well. The people who made money from this boom had already taken their money out and had it sitting in banks and mutual fund investments. When 9-11 occurred, the Fed started dropping interest rates, directly affecting these assets. Wall Street came to the “rescue” offering Mortgage Backed Securities with what was promoted to be great “Return on Investments” with little risk This led the way to the current crisis. (There is much more to this part of the story, but for the sake of simplicity, I shall not cover that in this article.)

The Process

The actual process of securitizing a loan involved the following steps. To keep it simple, we shall assume that a Warehouse Line of Credit provided by a Wall Street firm was used to fund the loan.

• The Wall Street entity “pre-sold” the loans. This meant that parties were found who would buy the loans, and usually fronted the money to the Wall Street firm, though often, the firm would use their “own” money.

• Wall Street would then contract lenders to find the loans and fund them through a Warehouse Line of Credit.

• The borrower needed a loan and went to a broker. The broker did the paperwork and took the loan to the lender who approved the loan.

• The lender funded that loan and many others, through the Warehouse Line of Credit. Other lenders with Warehouse Lines would do the same.

• A “Sponsor” was named for the securitization transaction. The Sponsor would “collect” all the necessary loans and “bundle” them together in one large pool of loans. The loans would then be “sold” to the “Depositor”.

• The purpose of the Depositor was to “deposit” the loans into the “Issuing Entity” or “Trust”, after “segmenting” the loans into various “tranches” or slices of loans, which would make up the different parts of the pool. During this period of time, the loan tranches would be “rated” for quality, and ratings such as AAA were assigned each tranche.

• Once the “Issuing Entity” or “Trust” took possession of the loans which were now segmented into the tranches, the loans were ready to “sell” to the different entities that had already spoken for them. The loans were sold as “Certificates” or “Bonds” known as Mortgage Backed Securities. These were then resold to Investors.

• Incredibly, these Certificates and Bonds were often again “broken up” and resold in smaller portions in values. These were known as Credit Default Obligations. Sometimes, these were broken up again and sold in smaller amounts.

The purpose of the Sponsor and the Depositor was to comply with REMIC and other Tax Code provisions. To achieve certain Tax Benefits, there had to be at least “Two True Sales” of each loan to another entity before the Notes were sold as Certificates. The “True Sales” were supposed to be to the Sponsor, and then the Depositor. Arguably, the Sponsor and Depositor corporations were nothing more than “sham” corporations, to assist in “sham” sales.

For a “true sale”, there must be an offer and acceptance, with the transfer of the Deed and Note and consideration. When the Notes are sold, first to the Sponsor, and next to the Depositor, there is no evidence of any actual money changing hands. Nor were the Note and Deed transferred between these parties by recordings or any other method. One could reasonably argue that these were “sham sales”.

(Note: This is a VERY simplified version of the process, but it gives the general idea. Depending upon the originating lender, it could change to some degree. The purpose of such a convoluted process was so that the entities selling the bonds could become a “bankruptcy remote” vehicle, protecting lenders and Wall Street from harm, and also creating a “Tax Favorable” investment entity known as an REIMC. An explanation of this process would be cumbersome at this time.)

MERS

As described, each Securitized Loan has purportedly been transferred two to three times at a minimum. However, no Assignment of Beneficiary was ever recorded when the transfers took place. That was the purpose of MERS.

The Deeds would be kept in the name of MERS as “Nominee for the Beneficiary”. This allowed MERS to “pretend” to be the Beneficiary and avoid the expenses of recording Assignments at each transfer, usually about $30 per recording. MERS “hid” these transactions behind a “steel curtain” that would have made the 70’s Pittsburg Steelers proud. Even today, it is virtually impossible for most people to find out who the “Issuing Entity” is for a Note and loan that was purportedly placed into a Trust.

Prior to MERS, any transfer of a Note and Deed needed to be recorded in the County of the property as a public record. This was to allow notice of true ownership and to establish a “priority of liens”. MERS circumvented this procedure and obscured the ability of anyone to determine the legal owner of a property.

MERS records are confidential and limited to viewing only by “members” of MERS. To further worsen the situation, MERS “restricts” membership to only “approved parties”. A person or firm can only become a member after a lengthy application, and an “interview”. Unless you are a lender, servicer, or other party that MERS will accept, your application will be turned down because MERS does not want you to have access to this information for litigation purposes.

Pooling and Servicing Agreement and Document Delivery

The Pooling and Servicing Agreement and other related documents for securitization cover all aspects of the transaction. It identifies the parties involved, how the loans are obtained, payment distributions, credit enhancements and other issues. For our purposes, we shall just review the issues regarding the delivery of the documents. The following is from a Goldman Sachs Agreement for GSAMP Trust 2007-NC1. This was a group of New Century loans that were securitized through Goldman Sachs.

From the Agreement:

Delivery of Mortgage Loan Documents

In connection with the sale, transfer and assignment of each mortgage loan to the issuing entity, the depositor will cause to be delivered to the custodian, on or before the closing date, the following documents with respect to each mortgage loan, which documents constitute the mortgage file:

(a) the original mortgage note, endorsed without recourse in blank by the last endorsee, including all intervening endorsements showing a complete chain of endorsement from the originator to the last endorsee (except for no more than 1.00% of the mortgage loans for which there is a lost note affidavit and a copy of the mortgage note);

(d) the originals of any intervening mortgage assignment(s), showing a complete chain of assignment from the originator of the related mortgage loan to the last endorsee or, in certain limited circumstances, (i) a copy of the intervening mortgage assignment together with an officer’s certificate of the responsible party (or certified by the title company, escrow agent or closing attorney) stating that of such intervening mortgage assignment has been dispatched for recordation and the original intervening mortgage assignment or a copy of such intervening mortgage assignment certified by the appropriate public recording office will be promptly delivered upon receipt by responsible party, or (ii) a copy of the intervening mortgage assignment certified by the appropriate public recording office to be a true and complete copy of the recorded original;

(e) the original mortgage assignment in recordable form, which, if acceptable for recording in the relevant jurisdiction, may be included in a blanket assignment or assignments, of each mortgage from the last endorsee in blank;

The Problem

If one reviews sections (a), (d) and (e) with care, an important issue stands out. The Agreement calls for a complete “Chain of Assignment” of the Deed, and a complete “Chain of Endorsement” of the Note. Furthermore, section (e) suggests that there might be mortgage assignments that have not been recorded. This is a problem that litigators are beginning to address so as to argue “Legal Standing”.

There is no recorded and perfected Chain of Assignments, nor is there a Chain of Endorsements in any Securitized Loan, no assignment history that goes from the lender, to the Sponsor, to the Depositor, and lastly, to the Trust, as required by the PSA. Any Assignment of the Deed to the Trust will almost always occur after a Notice of Default is filed and the Assignment is made from the lender or MERS to the Trust. This is done to “establish” Beneficiary Rights in the mind of the Trust. It also tries to unite the Note and the Deed for Legal Standing to foreclosure.

Since the Assignment has occurred AFTER the Notice of Default, and the Assignment is from the originating lender or MERS, there is an unperfected Chain of Assignment. Can this make the Notice of Default lawful? Some attorneys in California are arguing that it is not lawful, and the results of such arguments are mixed, dependent upon the Court and the judge’s perspective. Most often, the Court will rule that since the Non-Judicial Foreclosure Statutes are “exhaustive”, the assignment issues are immaterial. Some Bankruptcy Court judges are beginning to consider this a ‘defect” in legal standing and are reacting accordingly.

The Note has been endorsed in blank, usually with only one endorsement on the Note, or an Allonge, and there is no Chain of Endorsement representing the different entities involved. This turns the Note into a “Bearer Note”. Anyone in possession is arguably entitled to payment under Commercial Code. But if the Deed is not perfected, can the Note Holder foreclose without turning to Judicial Foreclosure methods? This will be the next area that Courts in California will have to consider. Likely, it will occur in the Bankruptcy Courts, and then slowly come into the Trial Courts, after appeals are heard.

The Allonge could present another issue. Under different Statutes and case law, an Allonge must be permanently attached to the Note. This usually means that the Allonge is stapled to the Note, or affixed in some other manner. If the Allonge is not permanently affixed, it poses issues regarding Legal Standing and the ability to foreclose as well.

When preparing to argue Allonge and Note endorsement issues, you are not likely to have access to originals of either document. Courts have tended to rule that the originals are not necessary to prove Legal Standing, especially in California. However, a copy of the Note, especially if it shows only one endorsement when there should be two or more endorsements may offer some Legal Standing questions. An Allonge that is not attached could offer the same. This has been shown, at least to the satisfaction of one Bankruptcy Court, by the copies provided showing no evidence of staple marks in the copy.

Summary

Hopefully, this article has served to explain in relatively simply detail the history of Securitization, the process, and how it was instrumental in events leading up to the Mortgage Crisis. It has also tried to present in limited detail some issues regarding Legal Standing so that the non-attorney can begin to understand the legal issues that may be present with regards to Securitization.

There is much more to Securitization than what I have presented. Much is immaterial to the layman attempting to understand the process. Some aspects, as the payment streams to the different buyers of the Certificates and Bonds are so complex that years from now, people will still be trying to make sense of it.

The Underwriters of the Tranches, I have deliberately avoided writing about. It was not necessary to present for an understanding of how the loans were securitized. Underwriting would be more applicable to the understanding of how the Certificates and Bonds were presented to Investors for purchase. These topics would likely not be of use in present homeowner litigation, but will attain importance in Investor lawsuits.

My next writing will pertain to the Pooling and Servicing Agreement and other related documents, and will reveal why this document needs to be presented in litigation, beyond just proving legal standing. The PSA will tie the complete loan transaction, from origination to funding to Securitization, into a concise understanding of why these loans were doomed to fail, and the Housing Crisis becoming inevitable.