Fascinating March 30 legal decision out of Alabama, in the case of Phyllis Horace vs. LaSalle Bank National Association et. el.

The judge issued a summary judgment ruling (original motion is here), tossing out the foreclosure action due to lack of trustee standing:

“The ruling prevents defendant LaSalle Bank – as the trustee holding the plaintiff’s securitized mortgage – from proceeding with a foreclosure because the trust failed to follow its own pooling and servicing agreement, and did not follow applicable New York law when trying to “obtain assignment of Horace’s note and mortgage,” according to the court order.

Without proof the mortgage had been assigned to the trust, in this case a Bear Stearns-related mortgage trust, the trustee lacked standing to foreclose, the court found.”

In other words, if you screw up the process of securitizing mortgages by failing to assign the loan note (and/or physically keep track of it), you lose the right to subsequently foreclose in the event of a default.


Note who the participants to this debacle are:

Bear Stearns Asset Backed Securities I LLC, asset-backed certificates series 2006-EC2.
Mortgage Electronic Registration Systems (MERS),
Encore Credit Corp.,
EMC Mortgage Co.
Bank of America


Alabama judge denies securitization trustee standing to foreclose
Housing Wire, April 1, 2011

Court: Busted Securitization Prevents Foreclosure
Daily Finance 04/01/11

Yves has the original court filing here . . .

Category: Foreclosures, Legal, Real Estate

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.

14 Responses to “Judge: Bad Securitization = No Standing to Foreclose”

  1. Transor Z says:

    The thing I keyed in on as soon as I saw this one on Yves’ site the other day was third-party standing, which is the lynchpin of this decision and what killed the borrower in the Congress case in Alabama a few weeks ago. Third-party beneficiary law is actually a fairly difficult area of contract law. I read the summary judgment brief for the borrower in the Horace case and there is no mention of third-party beneficiary standing, so this issue may have been raised sua sponte by this judge (i.e., on his own initiative). That being the case, the judge provides no clear legal rationale for that conclusion, other than to say that the borrower wouldn’t have gotten a mortgage without the PSA and therefore the borrower is a third-party beneficiary of the PSA. I’m a consumer attorney but I’ve got to say that’s a little thin in my view. I wish he had fleshed that out a bit.

    The judge in the Congress case made a pretty fair argument that the governing law provision of the PSA only applies among parties to the PSA. Since the borrower wasn’t a party and couldn’t assert New York law, Alabama law was used and Alabama law wasn’t favorable to the borrower being ejected in that case.

    A classic third-party beneficiary situation is when you contract a job to a prime contractor who then has to subcontract part of the job to someone else. So Barry hires me to install a pool at his house and I subcontract with a company to level Barry’s backyard and then excavate the hole. Since my subcontract would have stated the address and homeowner’s name (the Ritholtz’s), Barry and the Mrs. would, in all likelihood, have been the “intended beneficiaries” of the subcontract. So if the subcontractor no-shows or does a half-assed job, Barry could probably sue the subcontractor under the subcontract *I* had with him, even though Barry wasn’t a party to the subcontract (i.e., he never signed it himself and wasn’t a named party).

    Like I said, it’s actually pretty technical stuff and you have to connect all the dots as a lawyer. The other important thing is that third-party beneficiary law is different from state to state.

    Fortunately, here in Mass., we just had the Ibanez decision a few weeks ago which was actually very straightforward. The foreclosing party didn’t have their shit together at all and are now embarrassed for all time by a court case destined for the law school text books. Don’t get me wrong. The New York trust law/PSA argument is creative and potentially helpful, but it’s a little more esoteric than you’re going to need in most cases since the paperwork is so bad.

  2. louiswi says:

    Oh you just know that ruling is not going to stand. The “laws” you refer to are not by God or Nature. They are by man and as you know only the rich and powerful “man” ever get any laws on the books. These laws were put on the books by other rich and powerful and these current rich and powerful will get around them or simply have them changed.
    I’d bet a nickle on this except it is probably illegal to do internet gambling on account of the casino guys-(other rich and powerful guys).

  3. bdw says:

    transor z:

    wouldn’t requiring recording the various assignments in the local land records office force better securitization? Do PSAs require recording assignments in recorder’s offices?

  4. Transor Z says:


    In your first question, by “better securitization” I take it you mean forcing the elimination of a lot of the previously ignored risk that’s been coming to light. And of course you’re right because it requires assignees to follow the basic freakin’ principles of title/mortgage recordation that have been around for centuries.

    For your second question, which gets into deeper waters, I will defer to Adam Levitin’s extensive posting on this subject. I’ve been reading his stuff religiously and pretty much all of my thinking on this subject is based on his ideas and leads I’ve gotten from reading him:


    Remember that in the Ibanez case here in Massachusetts the dopes couldn’t even find the PSA! That’s what I meant earlier when I said the paperwork is so f*cked you don’t need to get into esoteric legal issues to at least get the mortgage holder to the bargaining table right now. I haven’t had to in my practice so I haven’t.

  5. Sechel says:

    The banks dug themselves into a hole. They know the process is flawed and wish to hell they could do a “jimmy”. Clearly the promised money saved from using MERS was illusory, but they made a faustian bargain and now have to present false claims in court and pretend they have the right to foreclose.

    Talk to any banker and they will point out(correctly so) that the borrowers are not paying, and in many cases have their lawyers drag out the system promising to pay at the last second, etc. Reasonable people will not claim that people who don’t pay their mortgages should be gifted a home. But in my opinion this issue is a red herring. The real issue is “rule of law”, only the right parties should be allowed to foreclose and after following due process.

    What concerns me is that monies owed on these loans are ultimately intended for the investors in the trust. The bankers took the short cuts and ignored the PSA not the investors. In many cases these bonds are owned by municipalities, insurance companies, pensions, etc.

    It’s also concerning that parties representing home owners are arguing or massive principal reductions for what seems to be no other reason than under-water home owners, arguing that being under water is very correlated to borrower default, but just like high cholesterol is correlated to heart disease it does no mean that all people with high cholesterol will get a heart attack.

    As a society we seem to be encouraging people to stop paying their mortgages, letting the banks off at every turn(even bailing them out) and punishing investors at every turn. This is no recipe for a healthy financial system.

  6. DeDude says:

    Sechel; Yes ultimately it will hurt the investors and they are the least guilty of all in this process. The big winners will be the people who harvested fat bonuses and where absolutely right that “IBGYBG”. That is why we need more regulation to ensure that these things don’t happen in the first place.

  7. Unsympathetic says:


    Also, the decision was a permanent enjoinder.. as in, the bank can NEVER foreclose again on that property.

  8. Marc399 says:

    “Also, the decision was a permanent enjoinder.. as in, the bank can NEVER foreclose again on that property.”

    Somebody owns the note, so how can this be permanently enjoined? Is it a case of having to get the prior note holder to foreclose or transfer (properly) the note?

    Investors can get screwed though but ultimately there is a property, a note on the property and a default.

  9. BobCarver says:

    @Marc399: According to the judge, there was a strict time limit when conveying the note. Miss that deadline and there is no recourse.

  10. rustum says:

    Is it a free home for buyer.

  11. [...] Keep in mind this a whole new body of case-law so each lawsuit provides additional ammunition to be used against the banks as each attorney pokes at the many, many holes that have been created in the chain of title in the past decade.  Last week, LaSalle Bank lost a case in which their right to… [...]

  12. [...] at the many, many holes that have been created in the chain of title in the past decade. Last week, LaSalle Bank lost a case in which their right to foreclose was denied for simply failing to provide …. If we use that as a benchmark, approximately 25% of the 75 Million mortgages in this country [...]

  13. [...] the many, many holes that have been created in the chain of title in the past decade.  Last week, LaSalle Bank lost a case in which their right to foreclose was denied for simply failing to provide ….  If we use that as a benchmark, approximately 25% of the 75 Million mortgages in this country [...]