On October 31, 2007, Judge Boyko of the United States District Court for the Northern District of Ohio issued an opinion and order that should serve as notice to mortgage holders and assignees alike that the letter of the law should be followed in foreclosing on mortgaged properties. The order dismissed without prejudice several foreclosure cases on the basis that the plaintiff trustees had not met their burden of demonstrating that they had standing to sue at the time the complaints were filed. The Judge’s decision may embolden borrowers’ attorneys across the country to raise similar defenses to foreclosure, which could increase losses suffered by securitization investors if trustees and servicers are not cautious.
In the cases, the plaintiffs were trustees for investors holding mortgage-backed securities. The plaintiffs, through their servicer representatives, filed foreclosure actions on behalf of the investors against several mortgagors who were in default on their mortgage loans. Judge Boyko required the plaintiffs to demonstrate that they had the standing to sue in Federal court under the requirements of Article III of the Constitution, through affidavits identifying plaintiffs either as the original mortgage holders, or as assignees, trustees or successors-in-interest. Unconvinced by the affidavits, which reportedly failed to comply with his order, Judge Boyko required plaintiffs to submit copies of the original mortgage notes endorsed to the plaintiff and executed assignments of the mortgages indicating that they were the respective holders and owners of the notes and mortgages as of the dates the complaints were filed.
In response, plaintiffs produced assignments that, according to Judge Boyko, “express[ed] a present intent to convey all rights, title and interest in the Mortgage and the accompanying note to the Plaintiff…upon receipt of sufficient consideration on the date the Assignment was signed and notarized.” Judge Boyko found that the assignments produced by plaintiff trustees in fourteen cases did not show that plaintiff trustees were the owners of the rights, title and interest under the mortgages at issue as of the filing date of the foreclosure complaints. The assignments were unrecorded, and thus, under Ohio law, not valid to show that the holders had an interest in the property at the time of the filing of the Complaint.
Without a valid interest in the property, the plaintiffs lacked standing to assert their claims in Federal court. Despite the assertions of the plaintiffs that their paperwork complied with longstanding industry practice, Judge Boyko dismissed the complaints without prejudice.
What is the impact of Judge Boyko’s decision? Practically speaking, trustees and servicers always should ensure that their paperwork complies with the law of the state where the mortgaged property is situated. Foreclosures in Federal court are rare, but Judge Boyko’s ruling is clear: regardless of industry practice, the party bringing an action must have right, title and interest in the mortgage and the accompanying note. Similar standing requirements apply in state courts. Attention to the intricacies of state note endorsement and mortgage recordation statutes is important. Presumably because the cases were dismissed without prejudice, plaintiffs will record the assignments of mortgage and file new foreclosure actions. Accordingly, the result is delay and increased costs rather than a complete loss on the mortgage loans.
Of more concern are the comments contained in the court’s footnotes, which include statements such as this:
“There is no doubt every decision made by a financial institution in the foreclosure process is driven by money. And the legal work which flows from winning the financial institution’s favor is highly lucrative. There is nothing wrong with financial institutions or law firms making a profit—to the contrary, they should be rewarded for sound business and legal practices. However, unchallenged by underfinanced opponents, the institutions worry less about jurisdictional requirements and more about maximizing returns.
… ‘Fluidity of the market’—‘X’ dollars, ‘contractual arrangements between institutions and counsel’—‘X’ dollars, ‘purchasing mortgages in bulk and securitizing’—‘ X’ dollars, ‘rush to file, slow to record after judgment’—‘X’ dollars, ‘the jurisidictional integrity of United States District Court’—‘Priceless.’ ”
Faced with sentiments such as these, it is more important than ever for trustees and servicers to be sure they have complied fully with the law of the states in which they operate. Trustees and servicers should determine the real property law requirements of the state whose law will govern the foreclosure action and satisfy those requirements prior to initiating foreclosure. Such due diligence on the front end can save a client the embarrassment and uncertainty inflicted by the court in this case plus can avoid a default or liability to investors under any applicable trust or servicing agreement.