Long standing readers of this site will recall the hard-fought battles during the foreclosure crisis and robosigning scandal over the use of dubious and often clearly fabricated documents in foreclosures. There were several reasons behind this new development, all stemming from mortgage securitization. One was a big change in behavior by lenders. In any type of loan of reasonable size (as in where the negotiation costs aren’t disproportionate), lenders will try to cut a deal with a borrower that gets in trouble if the borrower has enough income to look viable and the borrower seems to be operating in good faith. And when banks owned loans, it was standard practice to try to restructure the mortgage; foreclosure was the last option.
But servicing changed those incentives. Servicers are run as factories, with highly standardized operation. Loan modifications are high touch, require a completely different skill set, procedures, and much higher caliber staff. And most important, securtizations paid servicers to foreclose but did not pay them to do modifications, even though a successful modification would be a vastly better outcome for investors.
So the only way to bring servicers to the table was to fight them in court, which was a second major change. foreclosure defense attorneys found a weapon in pervasive defects with how most securitizations had been handled. To make a very long story short, a series of transfers of all the loans in the pool were supposed to have been completed no later than 90 days after the deal closed. This was stipulated in the governing contracts, the pooling and servicing agreements, which provided that notes, which were the borrowers’ IOU, had to be signed (“endorsed”) by each party in the conveyance chain. New York law, which governs the overwhelming majority of securitization trusts, requires that the last endorsement be made in the name of the trust, but many foreclosure defense attorneys don’t make that argument (among other reasons, it requires bringing in New York trust law experts, and a lot of lower court judges don’t have much tolerance for complex legal analyses). So many foreclosure defense attorneys look to see if the note was properly endorsed through all the required parties, and an endorsement from the next to last party in the chain in blank is considered permissible by many courts.
But what often happens is that the servicer starts the foreclosure with documents that are defective. And if the servicer can’t establish that the bank or the securitzation trust is the proper party to be making the foreclosure (in lawyer-speak, “has standing”), they can’t proceed. Standing is a threshold legal requirement.
So when borrower attorneys challenge these dubious documents that were presented as originals (and there is only one original borrower note), way way too often the servicer’s attorney presents different “original” records that miraculously remedy the problem. As we wrote in 2012:
We’ve written from time to time that the train wreck in foreclosure-related procedures is the direct result of widespread, possibly pervasive failure to convey borrower IOUs (notes) to securitization trusts as stipulated in the governing documents (the pooling & servicing agreement). Because key actions had to be taken by dates long past, and the contracts that governed these deals are rigid, there isn’t a permissible way to get notes that weren’t conveyed properly to trusts on time there now. So the fix has been document fabrication and forgeries. We thought we’d provide a specific example for reader edification.
One thing that foreclosure defense attorneys have seen as a huge red flag of servicer chicanery is the use of allonges. An allonge is a separate piece of paper used for endorsements that is required by the Uniform Commercial Code to be “affixed” to the note and used for endorsements when there is no more space left on the note for signatures. Allonges were pretty much never seen until the robosigning scandal, since all the space on a note (meaning the back and the margins) can be used for endorsements. But they have a funny way of showing up out of nowhere and solving all the problems with a particular foreclosure. Of course, if an allonge really was “affixed,” it shouldn’t be possible for it to materialize out of nowhere.
Now it is admittedly late in the game, but more and more courts are taking a dim view of clearly inadequate documents. We’ve embedded a gratifying, short appellate court decision that reverses a lower court ruling in favor of a trustee, US Bank. Here, the amusing but depressingly common issue was not only did US Bank submit new documents (in this case, the usual “ta dah” allonge) but they didn’t do it correctly, as in the doctored documents were undated and thus failed to establish that US Bank had the right to foreclose when it started foreclosure proceedings against the borrowers, the LaFrances. Of course, it might well be that faking the documents correctly would clearly be a fraud on the court, and it would likely be possible to establish that via forensics. In other words, the foreclosure attorneys may have been incompetent, or they may have been willing to go only so far in how much sanctions risk they were willing to take.
Now this ruling does not mean the LaFrances win, since the case has been sent back to lower court. But US Bank has painted itself in a real corner by twice having presented documents that failed to establish its right to foreclose. If they try submitting new “originals” again, that would almost certainly open the case up for appeal, and this appeals court seems to be on to bank tricks.