The foreclosure mess has now entered a new phase, courtesy of the US Bankruptcy courts. The Trustees are forcing institutions to prove “they even have the right to foreclose at all.”

This is a positive development.

In my various writings on the Fraudclosure debacle, I have not suggested we want to see foreclosures of defaulted mortgagees stopped. To the contrary, Foreclosures (done right) are a necessary part of the RE unwind. My position has been very simple; Banks must follow the law, respect property rights and due process. Oh, and not commit perjury or fraud, and if they did, they must suffer criminal prosecution like any other suspected felon.

Here’s Gretchen Morgenson on the latest twist in this pathetic sage:

“The United States Trustee Program, the unit of the Justice Department charged with overseeing the integrity of the nation’s bankruptcy courts, is taking a different view. The unit is stepping up its scrutiny of the veracity of banks’ claims against borrowers, and its approach is evident in two cases in federal bankruptcy court in Atlanta.

In both cases, Donald F. Walton, the United States trustee for the region, has intervened, filing motions contending that the banks trying to foreclose have not shown they have the right to do so.

The matters involve borrowers operating under Chapter 13 bankruptcy plans overseen by the court in the Northern District of Georgia. In both cases, the banks have filed motions with the bankruptcy court to remove the automatic foreclosure stay that results when a court confirms a debtor’s Chapter 13 repayment plan. If the stay is removed, the banks can foreclose.”

This is progress.

Now if we only can get some criminal indictments for the robo-signer/fraud/perjury lawyers, bankers, and loan servicers, we will be making progress.

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Source:
Don’t Just Tell Us. Show Us That You Can Foreclose.
GRETCHEN MORGENSON
NYT, November 27, 2010  
http://www.nytimes.com/2010/11/28/business/28gret.html

Category: Foreclosures

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

18 Responses to “Bankruptcy Courts: Foreclosing? Prove It . . .”

  1. dead hobo says:

    I’m not a lawyer, but I think this story and the NY Times basis for it misstate the issue.

    The mortgage creates a security interest that has priority in a bankruptcy. If properly perfected, the asset goes directly to the mortgage holder for disposition. Unsecured assets go into a general pool of assets. Unsecured assets are sold and the proceeds are used to pay off unsecured creditors in a rigid order of priority. Employees, taxes, and bankruptcy costs are far higher on the priority list than unsecured creditors of purchased items, credit cards, and the like. These latter unsecured creditors are at the bottom of the list and have to divvy up whatever is left after everyone else get’s their piece.

    I can’t imaging equity in a home, unsecured or otherwise, would be ignored by a bankruptcy judge simply because some doofus bank didn’t properly perfect the security interest. Thus, the house will be disposed of by the bankruptcy court, just not as the bank had wanted. The bank will get pennies on the dollar, if anything.

  2. I am a lawyer, and you are misunderstanding the column.

    This is about the CORRECT holder of the note suing for foreclosure.

    The banks did such a half assed job managing the paperwork, executing the contracts, tracking the Note, that the persons/processors filing the foreclosure action have very often been the wrong party

  3. dead hobo says:

    So, what’s the value of a CDO, when all the underlying debt is unsecured?

    Pardon me for going HA HA HA, but this kind of stupidity will be remembered for ages. Right up there with the tulips.

    Now, who’s to blame? The idiot bankers who decided MERS trumps state law with respect to the perfection of security interests (PS the jury is still out and they might be lucky)? The idiot Fed for allowing banks to do any of this in the first place? The idiot investor who considered liar loans were financial innovation? The idiot investment banks who might have to buy it all back? The idiot DOJ for sticking their collective thumbs up their asses to pass the time rather than investigate and prosecute? The idiot borrower who now feels put out because they have to pay back money they thought they were getting for free?

  4. carleric says:

    My initial reacvtion is if you can’t/won’t pay your bills you have to surrender the asset….a lot of this seems to be people wanting something for nothing but it is tough to generate any sympathy at all for the bankers and idiot investors….if there was any chance folks would just “man-up”, admit their own stupdity, forego all irrational claims perhaps we could get out ot his latest mess….but I doubt it…and now the Feds get involved….little late don’t you think?

  5. Understand — this is NOT about keeping a defaulted mortgagee in their house. This is about making sure that the ACTUAL NOTE HOLDER is the party bringing the foreclosure.

    Random banks cannot throw people out of their homes — only someone with a valid interest in the property via the note can do this.

  6. Julia Chestnut says:

    I’m a lawyer too, and there are two issues here: the first is exactly as BR stated – you have to have the rightful holder go after the secured asset. The note can be enforced by anyone who holds it properly: if you let the wrong person take the security, you have deprived the rightful owner of the security interest of their property, AND you have left the debtor in a position to have to satisfy the note twice. All because a thief was given the property by mistake.

    Second, this is the automatic stay: even if you have a right to the property, you don’t necessarily get it now. You may have a right to property in security for a debt, but you have to prove that you have that right, correctly perfected. Otherwise, that property goes back into the estate for everyone to share. If there are fewer assets than debts, it would be wrongful as to the unsecured creditors to let someone take the biggest asset in the estate without proof positive that their interest is perfected. And they call it “perfected” for a reason.

    I think it is an absolute GREAT development that the trustee is acting like a trustee and demanding that, saying as there is a lot of fraud in the air, everybody who wants to take an asset out of the bankruptcy estate step up with proof that they are the note holder. Score one for the rule of law! Finally.

  7. Lariat1 says:

    I don’t understand how so many people confuse this with somehow letting people get and keep their houses for nothing. ( Deadbeats) Anyone with a mortgage, should be looking at the big picture of this and how even they or someone they know could be affected by this at some point in the future.

  8. WOT:

    BR,

    have you seen “Expelled: No Intelligence Allowed” ?

    http://www.amazon.com/Expelled-Intelligence-Allowed-Ben-Stein/dp/B001BYLFFS

    personally, I thought it was worth watching.

    also, you may be able to get it via DVR, Showtime has been ‘airing’ it..
    ~~
    to the Post,

    “…I think it is an absolute GREAT development that the trustee is acting like a trustee and demanding that, saying as there is a lot of fraud in the air, everybody who wants to take an asset out of the bankruptcy estate step up with proof that they are the note holder. Score one for the rule of law! Finally.”
    –Julia, above

    x2

    Lariat1,

    good point, w: “…they know could be affected by this at some point in the future.”

    ol’ Frederic would be pleased (: http://www.econlib.org/library/Bastiat/basEss1.html

    now, if, only, more of us could get http://www.econlib.org/library/Bastiat/basEss10.html#Chapter%2010 , we might be getting somewhere~!

  9. dead hobo says:

    Barry Ritholtz Says:
    November 28th, 2010 at 10:14 am

    I am a lawyer, and you are misunderstanding the column.

    This is about the CORRECT holder of the note suing for foreclosure.

    reply:
    ———–
    You may be a lawyer, but you need to look up the proper way to secure a debt. If someone holds a valid note but the debt isn’t properly secured, then in bankruptcy the creditor goes into the unsecured pile and gets whatever is left. If the debt is properly secured, then the lender has a claim on the secured debt and is made whole if the fair value of the asset is greater than the debt. Any claims beyond the asset fair value are unsecured. If the debt is not properly secured, the lender gets leftovers. Having a valid note in your possession is not the same as having a secured debt.This is why lenders record mortgages … to become secured and outside of bankruptcy if one occurs. If MERS is deemed not equal to recording a mortgage, then all CDO debt that went through MERS is essentially unsecured debt.

    Remember back in law school, they talked about perfecting security interests by possession, filing, recording, by purchase money, and the differences among these concepts?

  10. dead hobo says:

    PS,

    BR, an unsecured lender is quite capable of joining in with other creditors and forcing a bankruptcy. Bankruptcy law provides the amounts and number of creditors required to make this happen. The unsecured lenders may get squat for their efforts though, depending on the final value of the estate and the other claims against it.

  11. bdw says:

    Dead Hobo,

    If the mortgage and the note are not publicly recorded and the paperwork was lost, who should be penalized for lack perfected ownership – borrower or lender? As Julia mentioned, perfected ownership should and has required recorded documentation for all to see. What would you propose as a solution for a borrower in default with a lender or servicer unable to produce anything other than a fabricated assignment or lost note affidavit? My take remains that the real clean up is to force lenders to return to the public recording system, pay the nominal fees to recorders around the country, and either cut a deal (with a haircut) or foreclose but only with due process. The criminals need to go where they belong.

  12. Julia Chestnut says:

    Dead Hobo, I gotta tell you — you can make it clean through law school without taking secured transactions OR real estate law. And even though I took those courses, I think that I was one of three people who stayed awake through most of the class.

    But Barry was right – this is absolutely about who is entitled to foreclose, whether they are the right party, and whether anyone has perfected their right. You two are talking past each other on this point. But whether the home owner (or the business – let’s not forget that this is likely to happen in business bankruptcies involving commercial real estate assets if any) keeps the property is ENTIRELY a creature of state law. I only know Texas law, and apparently we’re a serious outlier on this point.

    And remember, they are asking for a lift of the automatic stay. They may just have to wait, and I don’t really think that punishes them. They are, in effect, asking for extraordinary relief, and should be jumping through any hoops the court wants to get it.

  13. dss says:

    @Lariat1,

    Some people chose to ignore the subject of the article because they need to keep beating the dead horse. They “pretend” to misunderstand, when they understand “perfectly” well what Barry is saying.

  14. beaufou says:

    Ooops, I lost the paperwork necessary to foreclose on your house, but it doesn’t matter I’m a banker.
    Well, screw you mister banker, I’m not in foreclosure, I always paid my mortgage and you sliced and sold my mortgage with no regards for the rule of law, so I’m gonna sue your ass for being an arrogant prick.
    How about that one X10 million?
    Honestly, this business of being a mighty money man has to stop.
    This a deep issue I care very much about because if a man is guilty of not paying his mortgage and the man foreclosing on his house is also guilty of disregarding the rule of law we have a problem.
    This isn’t the wild west and corporations and bankers have to understand it.
    Local governments should voice their opinions via local attorney generals, not to screw banks, but to keep them in line and force them to modify loans if the current owner is in a position to do so.

  15. dead hobo says:

    Julia Chestnut Says:
    November 28th, 2010 at 12:03 pm

    I’m a lawyer too, and there are two issues here: the first is exactly as BR stated – you have to have the rightful holder go after the secured asset. The note can be enforced by anyone who holds it properly: if you let the wrong person take the security…

    reply:
    ———-
    Thank you for your reply. But you both miss MY point.

    The NY Times article mentioned bankruptcy and enforcement of the mortgage. MY point was being made in relation to a few other posts BR made on this subject about MERS and the like. If MERS is deemed an inadequate substitute for recording mortgages, which properly perfects a secured mortgage loan, then all MERS related mortgage debt is unsecured debt. In bankruptcy, unsecured debt includes telephone bills and credit card debt. These creditors share what’s left over, as opposed to secured lenders who get first claim on the fair value of the secured asset. My larger point was that if MERS is invalidated then, by reference, so are a mountain of CDOs with respect to their debt being secured. Thus, CDO debt would have the same standing as a telephone bill in bankruptcy court.

    Yes, an unsecured note holder can force a bankruptcy and force the note to be honored, but in bankruptcy, the point of the article, they may only get leftovers since they are unsecured lenders.

    Finally, BR stressed the rights of the note holder, implying to me that he believed simply holding a note made it a secured transaction. It most certainly does not.

  16. dead hobo says:

    bdw Says:
    November 28th, 2010 at 4:29 pm

    Dead Hobo,

    What would you propose as a solution for a borrower in default with a lender or servicer unable to produce anything other than a fabricated assignment or lost note affidavit?

    reply:
    ————
    I haven’t proposed anything. I’ve only provided a very fundamental description of ‘secured transactions,’ which is something creditors do in order to make sure they get paid back or have the legal right to repossess the property securing the loan.

    If a creditor does not properly secure the transaction, then a collection action must be taken, such as a sale of the debt to a collection agency or a lawsuit if the debt goes to default. A properly perfected transaction allows the creditor to repossess or foreclose directly. Simply holding a note is not even close to having a perfected loan, except in some retail transactions. Even bankruptcy courts respect the concept of secured transactions. Secured creditors get first priority on the fair value of secured property in bankruptcy.

    Thus, Hell will rain shitstorms on Wall Street if MERS is invalidated with respect to recording mortgages. MERS related CDO debt is now unsecured debt, like a telephone bill. How does that affect putbacks and the claims in the prospectus?

  17. AHodge says:

    there much good insight in past foreclosure posts here
    for this one not so much..
    INAL but most foreclosures not going through bankruptcy
    INAL but the states vary widely in essential treatment, including
    attempts to modify,
    or allow “cure,”
    and the whole judicial nonjudicial split
    INAL but i believe some (most)? states actually do not allow a general creditor claim forcing bankruptcy for mortgages. meaning cannot go after other assets/ income of the person
    INAL but where the only claim is for the house and we see what a mess that is
    ” secured” is not worth shit.
    better to have made a credit card loan

    http://www.dailyfinance.com/story/real-estate/the-foreclosure-mess-its-even-worse-in-nonjudicial-states/19693086/

  18. Don G says:

    All very interesting. Dead Hobo does not seem clear on the differences between Chapter 7 and Chapter 13. The issue discussed by everyone else is essentially- must the banks/servicers/MERS comply with due process in foreclosing on a property and if they do not what is the effect on the defaulting homeowner? Or, may a party who is not the real party in interest foreclose on a mortgage/note-deed of trust? This is the 64 dollar question today. If you lose $1000 in a poker game to uncle George can his neighbor Guido collect without any proof of his right to do so? Not unless he is breaking your knees. In many cases the banks/servicers today are acting like Guido and the courts do not like it. Another huge issue is whether, where a note and deed of trust are separated (held by different owners) is either enforceable. The courts today are split. Clearly, no matter how this shakes out the Banks have done serious damage to the system for the transfer of interests in real property.