U.S. Bankruptcy Court Judge Martin Glenn denied Wells Fargo's request for permission to foreclose on Tandala Mims's house in the Bronx for a second time on Thursday because he still wasn't satisfied that Wells -- as opposed to some other bank -- had the right to do so.

In its attempts to prove its legal standing to foreclose so far, Wells Fargo (WFC) has submitted two different versions of Mims's note, certifying each as a true and accurate copy of the original. The bank has also submitted a document assigning the mortgage to it that was problematic, as I explained in an article earlier this week. One issue with the assignment was that the company allegedly doing the assigning is defunct. Another is that -- through the magic of MERS -- a Wells Fargo employee was signing on behalf of the assigner. Essentially, that puts Wells Fargo on both sides of the contract, a conflict of interest.

In its court filing after the judge's first rejection of its standing, Wells Fargo didn't specifically address the problems with the note, and instead focused on the assignment, but without facing the real issue. Wells justified that assignment as "merely to take the subject mortgage out of the MERS system."

It's true that members of MERS -- an electronic mortgage registration and tracking system -- agree to have MERS act as their common agent. However, both versions of the note showed the original lender had transferred the note to Washington Mutual, which eventually became part of JPMorgan Chase (JPM). Presumably, then, it should have been Chase that had the right to assign the mortgage out of the MERS system, since the mortgage follows the note. It doesn't make sense for MERS to act as the agent of a defunct company that no longer has an interest in the asset.

Unfortunately, it's possible that the MERS database didn't reflect the transfer to Chase, and the attorneys just didn't make the effort to reconcile either version of the note with reality, but instead relied on the MERS data. It's precisely this failure to track who really owns what that makes people nervous that MERS will ultimately cloud millions of property titles.

Judge Says He's "Deeply Concerned"


In court Thursday, Wells argued that its papers proved it had the right to foreclose, and that Mims didn't have the right to challenge the assignment. That argument was successfully rebutted by consumer bankruptcy attorney David Shaev: Immediately afterward, the judge ruled against Wells, though he gave the bank permission to try again.

Describing himself as "deeply concerned," Judge Glenn noted that, in looking at the documents, questions kept "popping out," and he made the point that Wells Fargo hadn't answered the questions he had raised in his initial order against it. In one of the hearing's more dramatic moments, the judge asked Wells Fargo who the investor in the note was -- the MERS database doesn't say -- and Wells admitted it didn't know.

Let's think about that: A loan servicer is trying to foreclose on a mortgage for a principal whose identity it doesn't know. If Wells doesn't know who the investor is -- who owns the note -- then, who gave the bank the note? We can only hope that whatever part of Wells collected Mims's mortgage payments knows who the investor is, and has been giving that the party the money.

As Linda Tirelli, Shaev's co-counsel notes: "It doesn't mean they can't find out, won't find out in the future, but as of now they don't know." Wells showed up at its second attempt to foreclose without the note owner's information at its fingertips, and given the centrality of the note's ownership to proving standing, that's shocking.

Will Third Time Be a Charm?

Judge Glenn also granted a motion filed by the U.S. Bankruptcy Court to depose Wells Fargo, noting there were "numerous factual issues that the parties are entitled to inquire about and deal with." I'd love to be a fly on the wall during that deposition.

Due to the current status of the case, it will likely be March before Wells tries for a third time to establish that it has the right to foreclose on Mims. Let's hope the bank gets its story straight by then.


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