Wow, judges now nixing lenders’ foreclosure claims entirely in court

Submitted by Edward harrison of Credit Writedowns

Yves covered this in an earlier post overnight. Here’s my take. This is probably my fourth post on the tangled web woven by securitization, which puts a considerable distance between home owners and mortgagees which own a mortgage.  The issue is causing huge problems in bankruptcy and foreclosure in courts around the U.S. 

Update: I now see Barry Ritholtz has a piece out on this as well.

This morning, Gretchen Morgenson has another good piece out describing how a judge nixed all claims by mortgagee which refused to modify a home owner’s mortgage.

The debtors’ revolt is on.

For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.

On top of that, courts rubber-stamped the array of foreclosure charges that lenders heaped onto borrowers and took banks at their word when the lenders said they owned the mortgage notes underlying troubled properties.

In other words, with lenders in the driver’s seat, borrowers were run over, more often than not…

But some judges are starting to scrutinize the rules-don’t-matter methods used by lenders and their lawyers in the recent foreclosure wave. On occasion, lenders are even getting slapped around a bit.

One surprising smackdown occurred on Oct. 9 in federal bankruptcy court in the Southern District of New York. Ruling that a lender, PHH Mortgage, hadn’t proved its claim to a delinquent borrower’s home in White Plains, Judge Robert D. Drain wiped out a $461,263 mortgage debt on the property. That’s right: the mortgage debt disappeared, via a court order.

I see this as a watershed case in jurisprudence surrounding mortgage-related bankruptcies and foreclosures.  The reason this is huge is that it echoes the case in Kansas I have written about in two previous posts:

At issue is the question of what legal rights do lenders or their agents have in foreclosure in the new byzantine world of securitized mortgages.  In the New York case the judge nixed the entire claim as the mortgagee could not prove it had legal claim to the mortgage note. With the mortgagee unable to show ownership, the homeowner might even be able to stay in his home mortgage-free, Morgenson attests. That’s huge – and we should definitely expect an appeal.

In the Kansas case, MERS, a mortgage registrar, and a second-mortgage mortgagee were not informed of the homeowners bankruptcy and disposition of assets and claims before judgment was made. Nevertheless, the district court, the appeals court AND the Kansas supreme court all upheld the original summary judgment arguing that MERS was not contingently necessary.  While I would expect this case to be appealed because of the precedent it could set, I don’t see how it can be overturned after affirmation in every court – that is except through a politicization of the verdict.

Notice how PHH and MERS, the two lender agents in each cases, are not the actual owners of the mortgages. They are the agents of the mortgagees. This is why these cases have a lot to do with securitization

See also: How much money is Wells Fargo really making? for how some of this affects earnings at money center banks.

Morgenson had another article of merit on this topic last week. See her piece The Mortgage Machine Backfires.  This could get interesting.

Oh, and in an unrelated case, but also involving bank customers successfuly contesting big finance, Citibank Belgium is being held liable by state prosecutors for duping its savers into taking safe money out of their savings account and investing it in Lehman Brothers. When Lehman went bust, 128 million euros of their savings money went poof. See my story here. Agence France Press has covered it, but don’t expect it to get huge coverage in the U.S. Mish thinks Citigroup is in “serious trouble” globally. So do I. Let the backlash against reckless finance begin.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Terry

    Aside from the good things these judgments do for the borrower and bad things they do for the lender…

    …think what it means for the mortgage-backed securities. If, in fact, the RMBS holder really doesn’t have a mortgage backing the derivative, what of value does the holder have?

    Could be nothing.

    1. Edward Harrison Post author

      That is a big problem here. These cases are potentially precedent-setting, and even if they aren’t, they could be used as legal cover for untold numbers facing foreclosure until a legislative or judicial solution is brought to bear.

      I don’t see how this doesn’t cause losses on mortgage-servicing rights revenue for the big banks not to mention the asset-backed securities issue you’re describing Terry.

      Here’s what I said in the comments at Credit Writedowns:

      While I applaud the opportunity for a leveling of the playing field for the David v. Goliath battle that foreclosure generally is, I have to question whether a whole cloth abrogation of a claim to a mortgage is the right legal decision. I have yet to get a look at the fine details or see the actual opinion. But, from what I know, the NY judgment seems dubious to me.

      The Kansas judgment looks more interesting and likely to get a hearing more quickly since it has moved through the state courts already.

      And the point Mark makes about how to apply the NY case to neighbour A and b in a fair unbiased way is a good one. This is a huge can of worms that will get a legislative “fix” as you suggest, Lavrenti.

      Personally, I imagine the Supreme Court could overturn Kansas on appeal and that all hell would break loose when people see this as a politicized judgment. This is what I am waiting to see.

      I will look to post something on the debtor revolts in Iowa and elsewhere that took place in the Great Depression because the comparison could be revealing.

      1. koshem bos

        The NY judge in effect seems to say, since the of owner of mortgage registered at the country registrar has sold the mortgage and no one is identified as the owner of the note, then the resident of the property owes nothing to any entity identifiable in court. Thus, the resident is the rightful owner by sheer logical inference.

        What am I missing?

    1. Edward Harrison Post author

      I suspect there may be some non-transparent things happening with Citi behind the scenes i.e. forced deleveraging and pullback from international assets. I intend to write something up on this. The question is whether Citi management is doing this on their own or whether they are being pushed behind the scenes into these moves.

  2. Lavrenti Beria

    The legal precedents set here are truly the first positive development coming out of this whole affair. The judges involved must have forgotten that they live in a dictatorship. By the time that the legal system has gotten through with these rulings we’ll have statutes nullifying their effect. The Congress hasn’t exactly proven itself unresponsive to the interests of lenders, now, has it? It may take a few weeks but someone will be introducing new legislation that will “fix” the whole issue of nominees, agents and the like so that the status quo of plaintiffs simply making an assertion about documentation will be tantamount to there being an affirmative finding. Don’t think, so? I see.

    1. koshem bos

      As an independent law, it’ll be kind of difficult to digest but as amendment to, for instance, health care, you are probably right. It’ll be called reform of health care for sick bottom lines of a criminal entity known better as banks.

      By the way, my late father would have asked how is the NKVD, his cager for a while, doing?

      1. Lavrenti Beria

        “By the way, my late father would have asked how is the NKVD, his cager for a while, doing?”

        Most that make the identification overlook the empathetic, sensitive part of my personality, koshem bos. Completely overlooked are the touching photos of me with Svetlana at Comrade Stalin’s dacha, for example:

        It is best that one keep foremost in mind Comrade Stalin’s 1935 assessment of the character of life we have all come to enjoy in this, our socialist motherland, that or else, I might add. So here for your edification is that assessment:

        “Life has improved, comrades. Life has become more joyous.”

        And as to the NKVD, what NKVD, koshem bos?

      2. Francois T

        Should the legislature in DC try to “fix” the problem for the banksters, many congresspeople and senators would lose their seats in 2010. There is no way in hell or on earth that this could pass without rivers of blood in the streets.

  3. sangellone

    As this issue is not limited to homes undergoing foreclosure proceedings but a majority of the entire US housing stock I don’t see how this so called defect in title could be allowed.

    Why would anyone continue to pay a mortgage that had been so processed? How could one sell such a property? How could a local government tax it? Our communities would be nothing more
    than Latin American or African style squatters shanty towns.

  4. Fresno dan

    “For decades, when troubled homeowners and banks battled over delinquent mortgages, it wasn’t a contest. Homes went into foreclosure, and lenders took control of the property.”

    Yup. That was because Mortgages were comprehensible, the economy was stable, and if you fell behind while the vast majority were able to make payments, it indicated that you were irresponsible.
    Now, we are in a situation that you have to argue that a substantial number, if not majority, of “home borrowers” were irresponsible. Many were naive in believing anything a realtor, mortgage broker, or assessor would say, but that is way different than being irresponsible.

    1. john

      Right! Borrowers were wholly irresponsible. The duped an entire industry populated by Ivy League liberal arts majors and, in the process, brought the world economy to its knees!

  5. MutantCapitalism

    You write re: Landmark National Bank v. Boyd A. Kessler that MERS is a mortgage servicer.

    MERS is NOT a mortgage servicer which is made very clear in the decision.

    “MERS did not even act as the servicing agent to receive the payments and remit them to the lender.”

    MERS attempts to act “solely as nominee for Lender” however its authority to act as lender agent is flawed, which the decision also points out. Opinions/opinions/ctapp/2008/20080912/98489.htm

    MERS functions as a cover-up, shielding lenders from predatory claims and thwarting consumer claims of mortgage servicing fraud. By design, MERS was conceived to expedite time line running from servicer fabricated defaults to foreclosure. It is a source of constant astonishment that so many can write so much on this subject while entirely missing that Mortgage Servicing Fraud is a main ingredient to this toxic stew and they continue to do so despite countless, well publicized class action lawsuits against servicers as well as documented FTC and OTS actions on servicing fraud.

    EMC Mortgage Corp. –
    Select Portfolio Servicing –
    Ocwen Federal Bank –

  6. eh

    The debtors’ revolt is on.

    Just a typo I guess — you probably meant to write ‘deadbeat’s revolt’.

    That’s right: the mortgage debt disappeared, via a court order.

    Sickening. At least I hope the people don’t get to keep title to the house.

    1. Anonymous Jones

      Real estate owners always have the potential to receive windfalls (and, of course, the opposite as well), from fortuitous zoning decisions they never requested to nearby transit development for which they bear a small burden to judicial decisions based on the despicable action of the other side. It’s going to be a long, tiring road to remain sickened about every instance of random “unfairness” in the world, especially if it starts over this particular minor windfall.

      1. eh


        That’s some kind of joke, right? — “owners”.

        And yeah, as a renter and a responsible saver, I do get pissed off when I hear crap like this coming from some asinine activist judge. I can understand a moratorium on the foreclosure, even a long one, say 6 months, to allow the paperwork to be put together properly, and the people to make their arrangements (even to sell the house if they can, and the mortgage holder would be well advised to allow a short sale). But to just cancel the debt, in effect giving these people a free house (wtf?), albeit I do not know the specifics of this case, is phucking absurd, and an insult.

        It’s going to be a long, tiring road to remain sickened…

        Don’t worry about it.

        1. john


          Phucking relax. Two things:

          – The judge is merely pointing out that anyone could assert ownership without proof. Is that what you want?
          – Don’t worry about it. The death of securitization is net positive for people like you. It’s not coming back anytime soon. Demand lowered, price falls.

          1. eh

            I ain’t “worrying” about it.

            pointing out

            That’s an unusual definition of “pointing out” you have there — I wish people would ‘point things out’ to me more often. Oh wait, I guess (you think) you just did. But there’s no more money in my wallet than there was before, and I still have to pay my rent in a few of days. Oh well.

            Is that what you want?

            I assume you mean the undocumented assertion of ownership part. Uhh, no I don’t want that. But neither do I want asshole judges ‘pointing things out’ — i.e. nulling out mortgage debt because of a temporary paperwork snafu.

          2. john

            Your “temporary paperwork snafu” is another party’s breach of contract. Please. I’m a renter and a saver. I’m not concerned.

          3. john

            Sorry, man. Your hurt feelings about being a sucker for living responsibly falls well behind of the scale of robbery perpetrated over past five years. You’re still better off for not having participated.

          4. eh

            Hey buddy, who the fuck do you think you are calling me a “sucker”? Yeah, I guess I’m a sucker because I didn’t take out a mortgage, stop paying, and then wait for a judge to nullify the debt. Stupid me.

            You KNOW NO DETAILS about the case, so how do you know there was any “breach of contract”? And how about the “breach of contract” by the people who borrowed all that money and then stopped paying it back?? I guess some ‘breaches of contract’ are more equal than others.

            And I don’t give a damn whether you’re “concerned” or not. Your ‘concern’, or lack of it, is totally irrelevant to the point that nullifying the debt is not a proper resolution here.

            Your whole point seems to be summarized by ‘So what’. Thanks for that contribution.


          5. john

            What more do you need to know?

            The judge asked for proof of ownership. The plaintiff could not do so. The judge threw out the case. Done… *with*this*case*. This “temporary delay” in filing the paperwork can be easily remedied. We won’t hear whether they do so, but my guess is they don’t. And there they will leave it…because at that point the plaintiff in the case will accept that is how the game is played.

            And…dagummit..they will own the house out right. It just ain’t fair.

          6. john

            Here’s an idea for you:

            Pick one of your neighbor’s houses and go file for foreclosure on it. Maybe you’ll luck out and the judge won’t ask for proof.

        2. Jeff65

          The plaintiff can take as long as necessary to get the paperwork together BEFORE beginning the foreclosure action.

          1. Vinny G.

            Wow, Edward!

            These boys are heating up here. I really enjoy seeing spirits boiling over like this. Should I infer that rumors of the death of the American Spirit have been greatly exaggerated?

            Great post! Thank you. We need more like it.

            Vinny G.

          2. eh

            That’s right, they could have. And should have. Notice I have not defended the stupidity, incompetence, whatever of the plaintiffs here.

            But — again — I don’t think nullifying the debt of non-payers is a proper response/resolution. In fact, it’s total bullshit.

            What is so difficult to understand about that?

    2. Vinny G.

      I hope they keep title to the house, and sell it in due time at a huge profit, to be promptly spent on a cruise around the world, a new BMW, art, toga parties, and many, many enjoyable dinners at fancy restaurants around town, sampling 17th century wines and the meat of various endangered species of animals.

      Why should only criminals like Ken Lewis enjoy such amenities in life? I say working people deserve this too.

      Vinny G.

    3. rd

      I suspect that part of what is going on in the judge’s head is an evaluation of disparate bargaining power.

      The mortgage companies have (or should have) a little army of experienced lawyers and clerks whose sole jobs is dealing with the paperwork on all of these cases. On the otehr hand the homeowner is just a homeowner who will typically only deal with a handful of mortgages in their entire life.

      So why should a corporate organization whose sole purpose is to work with these types of issues be given all of the breaks while a homeowner with little background in it get none? Since the issue is proof that the mortgage exists, it is essentially an all or nothing situation.

      My understanding is that the ruling is being appealed but I also understand that appeals cannot introduce new data so it is unlikely that the mortgage holder will get a do-over with their screwed up paperwork.

      1. eh

        What does a lot of gobbledygook about “disparate bargaining power” have to do with people borrowing money to buy a house, not paying that money back, and then having some idiot judge say they don’t have to?

        I don’t get it.

  7. emca

    What I’m reading is the possibility that no one has legal right to foreclose, not MERS, not the original lender, not the holder of securities based on those mortgages.

    This could indeed be a big deal and banks previously shielded by MERS would be caught in a tangled web of foreclosures on one hand and on the other, legal accusations of fraud by investors.

  8. Tony Foresta

    Since our politicians including Obama, have abandoned us, and exhibited naked favoritism toward the predatorclass and the theives, swindlers, PONZI operators, and criminals in the finance sector, – it is hopefull that at least foreign courts are supporting the peoples best interests and the rule of law.

    1. Vinny G.

      Which is why I no longer own any property in this country. Sure, now that prices have fallen so much I was tempted to buy a retirement home in Miami so I don’t have to deal with these freakin’ 6-month winters here, but I quickly came to my senses and have revised my plans to retire in Greece.

      Sorry, America, I ain’t investing another penny in you.

      Vinny G.

  9. Tony Foresta

    Oh!!!, and of the course, it is also hopefull to see “the federal bankruptcy court in the Southern District of New York” challenging the PONZI operations of the thieves and swindlers in the finance sector.

  10. Vinny G.

    Vinny here. And I plan to maintain my reputation as a contrarian and negativist. As such, I offer this explanation as to why such judges may occasionally rule in this manner. They are simply sending the mortgage companies and the banks this message: “Yo mascalzoni, it ain’t right you got all that TARP dough as bonuses and I ain’t got nothing. You wanna my legal protection, you gotta show me more dough. More mula! More bribes and kickbacks for me. Capiche?! And you gotta kiss my hand from now on too, or I’ll send ya a dead fish in the mail. Sheriff Tony, show these bastardi their way out, and break their legs too, will ya! Grazie!”

    Yeah, American justice alright… LOL

    Vinny G.
    PS – I apologize for the poor grammar, but that was a literal quote from the New York Times… really… :)

  11. carping demon

    IF PHH could not prove their ownership of the property, AND that is because the mortgage became a small part of some MBS, (or several MBSs,) what reason is there to think that ownership of any of the other properties whose mortgages are part of that (those) MBS(s)can be proven by any other company? Beyond somebody’s assertion, what shows that any MBS has any value any longer?

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