On March 30, an Alabama judge issued a short, conclusory order that stopped foreclosure on the home of a beleaguered family, and also prevents the same bank in the case from trying to foreclose against that couple, ever again. This may not seem like big news -- but upon review of the underlying documents, the extraordinarily important nature of the decision and the case becomes obvious.

No Securitization, No Foreclosure

The couple involved, the Horaces, took out a predatory mortgage with Encore Credit Corp in November, 2005. Apparently Encore sold their loan to EMC Mortgage Corp, who then tried to securitize it in a Bear Stearns deal. If the securitization had been done properly, in February 2006 the trust created to hold the loans would have acquired the Horace loan. Once the Horaces defaulted, as they did in 2007, the trustee would have been able to foreclose on the Horaces.

And that's why this case is so big: the judge found the securitization of the Horace loan wasn't done properly, so the trustee -- LaSalle National Bank Association, now part of Bank of America (BAC) -- couldn't foreclose. In making that decision, the judge is the first to really address the issue, head-on: If a screwed-up securitization process meant a loan never got securitized, can a bank foreclose under the state versions of the Uniform Commercial Code anyway? This judge says no, finding that since the securitization was busted, the trust didn't have the right to foreclose, period.

Since the judge's order doesn't explain, how should people understand his decision? Luckily, the underlying documents make the judge's decision obvious.

No Endorsements

The key contract creating the securitization is called a "Pooling and Servicing Agreement" (pooling as in creating a pool of mortgages, and servicing as in servicing those mortgages.) The PSA for the deal involving the Horace mortgage is here and has very specific requirements about how the trust can acquire loans. One of the easiest requirements to check is the way the loan's promissory note is supposed to be endorsed -- just look at the note.

According to Section 2.01 of the PSA, the note should have been endorsed from Encore to EMC to a Bear Stearns entity. At that point, Bear could either endorse the note specifically to the trustee, or endorse it "in blank." But the note produced was simply endorsed in blank by Encore. As a result, the trust never got the Horace loan, explained securitization expert Tom Adams in his affidavit.

But wait, argued the bank, it doesn't matter if if the trust owns the loan -- it just has to be a "holder" under the Alabama version of the UCC (Uniform Commercial Code), and the trust is a holder. The problem with that argument is securitization trusts aren't allowed to simply take property willy-nilly. In fact, to preserve their special tax status, they are forbidden from taking property after their cut-off dates, which in this case was February 28, 2006. As a result, if the trust doesn't own the loan according to the PSA it can't receive the proceeds of the foreclosure or the title to the home, even if it's allowed to foreclose as a holder.

Holder Status Can't Solve Standing Problem

Allowing a trust to foreclose based on holder status when it doesn't own the loan would seem to create yet another type of clouded title issue. I mean, it's absurd to say the trust foreclosed and took title as a matter of the UCC, but to also have it be true that the trust can't take title as a matter of its own formational documents. And what would happen to the proceeds of the foreclosure sale? That's why people making this type of argument keep pointing out that the UCC allows people to contract around it and PSAs are properly viewed as such a contracting around agreement.

I'm sure the bank's side will claim the judge was wrong, that he disagreed with another recent Alabama case that's been heavily covered, US Bank vs. Congress. And there is a superficial if flat disagreement: In this case, the judge said the Horaces were beneficiaries of the PSA and so could raise the issue of the loan's ownership; in Congress the judge said the homeowners weren't party to the PSA and so couldn't raise the issue.

But as Adam Levitin explained, the Congress decision was procedurally weird, and as a result the PSA argument wasn't about standing, as it was in Horace and generally would be in foreclosure cases (as opposed to eviction cases, like Congress). And what did happen to the Congress proceeds? How solid is that securitization trust's tax status now anyway?

In short, in the only case I can find that has ruled squarely on the issue, a busted securitization prevents foreclosure by the trust that thinks it owns the loan. Yes, it's just one case, and an Alabama trial level one at that. But it's still significant.

Homeowners Right to Raise Securitization Issue

As far as right-to-raise-the-ownership issue, I think the Horace judge was just being "belt and suspenders" in finding the homeowners were beneficiaries of the PSA. Why do homeowners have to be beneficiaries of the PSA to raise the issue of the trust's ownership of their loans? The homeowners aren't trying to enforce the agreement, they're simply trying to show the foreclosing trust doesn't have standing. Standing is a threshold issue to any litigation and the homeowners axiomatically have the right to raise it.

As Nick Wooten, the Horaces' attorney, said:
"This is just one example of hundreds I have seen where servicers were trying to force through a foreclosure in the name of a trust that clearly had no interest in the underlying loan according to the terms of the pooling and servicing agreement. This conduct is a fraud on the borrower, a fraud on the investors and a fraud on the court. Thankfully Judge Johnson recognized the utter failure of the securitization transaction and would not overlook the fact that the trust had no interest in this loan."
All that remains for the Horaces, a couple with a special needs child and whose default was triggered not only by the predatory nature of the loan, but also by Mrs. Horace's temporary illness and Mr. Horace's loss of overtime, is to ask a jury to compensate them for the mental anguish caused by the wrongful foreclosure.

Perhaps BofA will just want to cut a check now, rather than wait for that verdict. (As of publication BofA had not returned a request for comment.)

No one is suggesting the Horaces get a free house; they still owe their debt, and whomever they owe it to has the right to foreclose on it. Wooten explained to me that the depositor --in this case, the Bear Stearns entity --i s probably that party. Moreover if the Horaces wanted to sell and move, they'd have to quiet title and would be wise to escrow the mortgage pay off amount, if that amount can be figured out. But for now the Horaces get some real peace, even if a larger mess remains.

Much Bigger Than A Single Foreclosure

The Horaces aren't the only ones affected by the issues in this case.

Homeowners everywhere that are being foreclosed on by securitization trusts -- many, many people -- can start making these arguments. And if their loan's PSA is like the Horaces, they should win. At least, Wooten hopes so:
"Judge Johnson stopped a fraud in progress. I am hopeful that other courts will consider more seriously the very serious issues that are easily obscured in the flood of foreclosures that are overwhelming our Courts and reject the systemic and ongoing fraud that is being perpetrated by the mortgage servicers. Until Courts actively push back against the massive documentary fraud being shoveled at them by mortgage servicers this fraudulent conduct will not end."
The issues stretch past homeowners to investors, too.

Investors in this particular mortgage-backed security, take note: What are the odds that the Horace note is the only one that wasn't properly endorsed? I'd say nil, and not just because evidence in other cases, such as Kemp from New Jersey, suggests the practice was common. This securitization deal was done by Bear Stearns, which other litigation reveals was far from careful with its securitizations. So the original investors in this deal should speed dial their lawyers.

And investors in bubble-vintage mortgage backed securities, the ones that went from AAA gold to junk overnight, might want to call their attorneys too; this deal was in 2006, and in the securitization frenzy that followed processes can only have gotten worse.

Some investors are already suing, but the cases are at very early stages. Nonetheless, as cases like the Horaces' come to light, the odds seem to tilt in investors' favor -- meaning they seem increasingly likely to ultimately succeed in forcing banks to buy back securities or pay damages for securities fraud connected with their sale. And that makes the Bank Bailout II scenario detailed by the Congressional Oversight Panel more possible.

The final, very striking feature of this case is what didn't happen: No piece of paper covered in the proper endorsements --an allonge -- magically appeared at the eleventh hour. The magical appearance of endorsements, whether on notes or on allonges, has been a hallmark of foreclosures done in the robosigning era. And investors, as you pursue your suits based on busted securitizations, that's something to watch out for.

My, but the banks made a mess when they forced the fee-machine of mortgage securitizations into overdrive. The consequences are still unfolding, but one consequence just might be a whole lot of properties that securitization trusts can't foreclose on.

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Reverse mortgages are currently one of the best ways for seniors to get the equity out of their homes without having to move or worry about foreclosures .


June 20 2013 at 4:02 AM Report abuse rate up rate down Reply
Ban KKiller

Excellent article. Also great to see all the comments from the bank fighters! Way to go! The banks FEAR the educated. Do all you can to get the word out about articles like this. We can use the LAW against these criminal banks, "servicers" and "lenders". Fight them ALL!

April 29 2012 at 3:45 PM Report abuse rate up rate down Reply

I don't understand why everybody is blaming their neightboors when it is clear that the banks acted with impunity and greed. Yeah, some people took mortgages they probable couldn't afford....they were trusting the "experts" who told them that it was ok because their homes would go up in value.
We put a down payment on our house of 50%. We paid 800,000, at the time for the house. We got a decent fixed interest rate. With the housing bubble and the horrible economy my husbank loss his job. I was able to go back to work part time but the bank didn't want to help us in any way. We could had made lower payments with my husband's unemployment and my salary, but they said my salary didn't count as I was not the principal borrower on the account and they couldn't really consider the unemploymetn. We could had sold the house...To Whom? no one was buying...no one was getting loans. About a month ago, a house just like ours was sold for $470,000....now do you think is fair that the bank would still get their money? The full amount we paid for the house? I don't think that is right...particularly since I and my great grandkids are going to be paying for the bank's bailouts. Now both my husband and I are working, but the bank won't work with us to make arrangements on the back payments and fees. They want alll of that money before they take regular payments. Unrealistic after about 2 years of unemployment. We have keep up with all of our other debt which is not much. We had always tried to live responsibly.
There are some people out there that may want a fee ride (banks)...but they are also people out there who really need the help. It is just like I always saw with the welfare system. People who really needed it....didn't really get or qualified for it.....This situation is, frankly, very sad and frustrating. The politicians who facilitated this mess, the banks, the investors, the crooks. They alll got a free pass...The homeowner...jajajajaja LOSERS!
We got our notice of default. We had tried to work with the bank and get some help since we feel we are slowly getting back on our feet. The bank, BOA, doesn't want to hear it. After a frustrating year of sending documents to different states and calling different numbers and sending the same paper work many many times nothing has happen with the bank. Only their blatant disregard for homeowners. I AM GOING TO FIGHT FOR MY HOUSE AND MY HOME AND MY FAMILY! I AM GOING TO FIGHT TOOTH AND NAIL! IF I AM VICTORIOUS, I AM DETERMINED TO HELP OTHER HOMEOWNERS FIGHT. ENOUGH IS ENOUGH! I JOINED THE U
SA ARMY BECAUSE I LOVE MY ADOPTED COUNTRY AND I LIKE TO HELP PEOPLE (what are our soldiers fighting for anymore?). I WILL NO GIVE UP MY HOME SO EASY.......(yeah...it may sound cheese...so be it)

December 14 2011 at 12:44 AM Report abuse rate up rate down Reply
Sid or Betsy

I think I HAVE a modification but this evning I get a certerfid letter saying thay took to long and now they want me to start all over agin after 13 mo. can any one help help help us with this one any one please? we have contrac and all.

November 01 2011 at 3:59 AM Report abuse rate up rate down Reply
2 replies to Sid or Betsy's comment

check out www.consumerdefenseprograms.com. Download the free e-book. Inform yourself about securization. Fight the bank....Best of luck

December 14 2011 at 12:49 AM Report abuse rate up rate down Reply

Call...1-813-448-2108 ...find out the truth about these banks. Most likely the bank is trying to find your original loan and when that does not happen the Loan Modification binds you, the owner to a new contract, to a new
term and agreement...when apon being breached gives the servicer debt validation aand documentation...most of the time they are just stalling for awhile until the end results will be to foreclose on you. Banks don't want to work
with homeowners. If you miss just one payment they will send you a bill that says to pay but when you try to
pay they will refuse because they make more money with Modifications, and foreclosing then you paying your
mortgage...call that number and learn how to fight back!!!!!

December 26 2011 at 3:47 AM Report abuse rate up rate down Reply
David Lee

People shouldn't be getting loans if they can't afford to pay them off, and banks shouldn't be giving them to people who can't afford it.


October 28 2011 at 6:13 AM Report abuse rate up rate down Reply
1 reply to David Lee's comment

We were able to afford our loan Mr. Righteous Lee. We got hit with the greed of the bankers and the stupidity of the politicians. The housing bubble cause many homeowners to loose equity in their homes. Get off your high horse!

December 14 2011 at 12:47 AM Report abuse rate up rate down Reply

Those of you who haven't yet enjoyed the experience of "falling through the cracks", I hope you remember these conversations when it happens to you, because everyone who ain't Warren Buffett or Bill Gates is going down eventually.

April 20 2011 at 11:44 AM Report abuse rate up rate down Reply
1 reply to Anonymous's comment

I'm not going down. My husband and I own our house free and clear and retired with $0 debt. How? We bought a modest home, not our "dream" home and fixed it up over the years. We bough modest cars and took modest vacations. We both worked hard and never bought anything we couldn't afford. We took pleasure in a lot of the smaller things in life like a garden, taking a walk, friends and family, and reading a good book. Living debt free feels wonderful and with careful planning and a little sacrifice anyone should be able to reach that goal.

September 14 2011 at 8:37 PM Report abuse +1 rate up rate down Reply

Yes, we're all deadbeats when we lose our jobs and give the Skank of America a $115,000 check toward a $181,000 mortgage (that's now worth about 90K), and instead of being willing to apply that money to the arrears and restructure the loan, which we would then be able to afford with our lower-paying jobs. I am so sick of the f**ksticks who can't shut up about "deadbeats". If you lost your job and couldn't afford to pay your mortgage, but you could pay a lower amount, does that make you a deadbeat?

We have actively worked with the bank and kept in constant communication about the situation AND gave them a substantial amount of money to apply toward ALL arrears and there STILL would be money to apply to principal, but the bank would rather whittle that money away from principal and arrears and continue the foreclosure process, sell the house for actual value (about 1/2 the loan value) and then stick us with a judgment for the difference because they are unwilling to declare the TRUE VALUE of the house (and in fact they are now protected from having to do so) and unwilling to apply money to the loan. They would rather have another (of thousands already) empty house sitting in this dying community than have us paying a payment that was less than previous, but still puts money in their greedy, falsified coffers.

And yet, I keep my accounting according to reality. But I am called a deadbeat and the banks are free and clear to run false accounting, file false documents and make things as generally complex as possible.

So I just hope all the brainwashed people who keep calling "deadbeat" (because they keep hearing it on the news, and after all, parrots do repeat what they hear), find themselves in a situation that many of us who previously had very good income and a comfortable way of life are now finding ourselves in. These worthless paper-pushing jobs ain't gonna last forever, so maybe you'll be there sooner than you realize.

April 20 2011 at 11:33 AM Report abuse +1 rate up rate down Reply
1 reply to Anonymous's comment

Did you make a large down payment.? Did you base your monthy mortage payment on one income or two?. Too many people make the mistake of buying too much house with little or no money down and get trapped into depending on two incomes. Then when someone loses a job, gets too sick to work, dies, or they get divorced - SURPRISE - they can't afford the mortage anymore. We crunched the numbers to figure out how much we could pay on only one income (just in case) and put 20% down. We bought a smaller house then we would have liked, but one we could continue to keep no matter what. We now own it free and clear. It's not worth a lot - but it's all ours.

September 14 2011 at 8:50 PM Report abuse rate up rate down Reply

Anyone heard of MERS? http://www.mersinc.org/ This judge needs to read up on it.

April 05 2011 at 12:26 PM Report abuse rate up rate down Reply

I think the bigger issue that the media and authors such as Ms. Field fail to address is that the "homeowners" stopped paying on their mortgage. It doesn't matter who owns your loan so long as you pay your bills. Also, I find it interesting that the arguement that "XXXXXX" doesn't own my loan only comes up when "XXXXXX" begins foreclosure. Why wouldn't the "homeowner" ask the trust to prove they are the holder of the debt before making payments to them.

April 05 2011 at 12:02 PM Report abuse rate up rate down Reply
2 replies to hhsballer's comment

What???? It doesn't matter who owns your loan so long as you pay your bills. What are you saying? Don't you think you should know who owns your Note? No one can tell me who owns my Note. I would say loan but I don't have a lender either? Nothing is Recorded and the Original Paper Work can not be found. Banksteers of America keep telling me they own my loan and I keep correcting them. They DON'T own my Loan. I have no contract with them and nothing is Recorded. Just because they bought out Countrywide and they have a copy of my payment history ... does not mean they own my loan. Hell, if I knew what I know now .. I wouldn't have paid Countrywide either. I will not sign for a modification because I believe it is a scam and total fraud. How is it a Bank such as Bank of America offer me a Modification from a contract they don't own in the first place? How many people have they done this too only to foreclose on they stating they own the home because they had the homeowner sign a modification, which is a contract, from a contract they don't have in the first place. This is a scam. Let me tell you ... I have sent Bank of America 2 QWR's and by RESPA law they were to fill in the answers to the Questions I was asking. Who is my lender, Who owns my Note, Show me proof that you are qualified to be my Servicer .... NoT one answer was given. Screw them and the Paper they flew in on .... I have not paid them one copper cent in over 2 years and I don't plan on it. I am so pissed that my house could not get clear and clean title with out taking it to the Supreme Court. This is not how it was supposed to work. So hhsballer ... where do you stand? If your in favor of the Banks ... Send me your payment and I will put it in a special account and maybe I could find out who owns your note. So send me your payments ... I have not contract with you. Hell this is fun .. I am just like the Banksters.

April 05 2011 at 3:06 PM Report abuse -1 rate up rate down Reply

I can understand your anger about this. I pay my mortgage and don't think that it's fair if my neighbor defaults and gets to keep the home. As a law student, however, I am deeply concerned about systemic risk that may continue to exist in the "system" because banks ignored the very important task of establishing their legal interests through diligent paperwork. It may seem insignificant, but I assure you that my Commercial Law professor thinks that jumping through these legal hoops is critical for healthy commerce--think housing recovery. To me, the issue isn't helping out "deadbeat" borrowers. The issue is sorting out the toxic stench in the securitization process. Unfortunately, there will be winners and losers in this fight. Many people will still lose their homes, and the banks will also probably take a hit in the end as well. How should we, as a society, apportion these massive losses? As equitably as possible I hope.

April 11 2011 at 7:38 PM Report abuse -1 rate up rate down Reply
1 reply to Zach's comment

...and so...the foreclosure crisis is not lonly a few million personal tragedies. It is a few million CRIME SCENES! You think about some people who will lose their homes and some will not...how about putting
some in jail who made this mess....lets put all the robo signers in jail too...that was fraud!

December 26 2011 at 4:10 AM Report abuse rate up rate down

This what happens when de-regulation takes place and there is
no one watching over the robber barons.

April 05 2011 at 7:39 AM Report abuse +1 rate up rate down Reply