Rich Vetstein
August 23, 2011

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Massachusetts Real Estate Law,Mortgage Crisis,Mortgages,Title Defects

Post image for Breaking News: Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

by Rich Vetstein on August 23, 2011 · 9 comments

in Foreclosure,Massachusetts Real Estate Law,Mortgage Crisis,Mortgages,Title Defects

Post image for Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too

“The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.”

–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011

Coming off a ruling (In re. Marron) that the MERS mortgage registration system does not run afoul of Massachusetts law, the same jurist, Bankruptcy Court Judge Melvin Hoffman, on Monday issued a ruling voiding a MERS-held mortgage which fell victim to sloppy paperwork. As Banker & Tradesman reports, the case is potentially troubling for any MERS held mortgage in default. The case is In Re. Schwartz and is embedded below.

Debtor Challenges Foreclosure Of Securitized Mortgage

During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process.

The “lender” on her original mortgage was Mortgage Electronic Registration System (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice presidents of MERS, and an alleged “robo-signer” for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.

There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.

Judge: Lenders Can’t Have Their MERS Cake And Eat It Too

Critically, as the judge noted, the PSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.

Impact: Are Foreclosures Of MERS Mortgages Now Open To Challenge?

I’m not sure what’s going to happen with Ms. Schwartz’s home. She’s been living in it since 2006 probably mortgage/rent free! Certainly, MERS could (and should have) started a second foreclosure and done it the right way. I’m perplexed why Deutsche and MERS kept fighting this case in court. As for the broader implications, it’s still unclear as to the effect on past and current foreclosures. One this is for certain, the ruling is yet another example of the legal fallout from the deficiencies in the MERS system.

Lastly, while I don’t claim to be a mortgage securitization expert, if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security investor somewhere who THINKS he owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they may not be able to for legal and tax reasons. Now multiply by a million. So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?

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Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.


In Re Schwartz

Category: Credit, Legal, Real Estate, Think Tank

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.

13 Responses to “Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage”

  1. Geithner saved the banks from their deserved bankruptcy fate.

    This ruling may kill them anyway First the foreclosure is nullified. Next, the forclosee sues the bank for damages.

  2. royrogers says:

    Good to have a judge that is not corrupted.

  3. rktbrkr says:

    The TBTF need to crank up their lobbying machine, these property laws are sooo 90′s. They need blanket immunity from outdated paperwork requirements. The law is a systemic risk to them, their profitability and most importantly their management bonuses. Retroactively changing the notary requirements was a step in the right direction but they need to think bigger and go with blanket immunity for all paperwork irregularities.

  4. mathman says:

    @rktbrkr: Like the telecoms!

    Maybe President Obummer will decree such blanket immunity and make a pretty speech!

  5. rktbrkr says:

    But O’B vetoed the Notary law that congress tried to ram thru

  6. rktbrkr says:

    There seems to be nonstop chatter about banks esp BAC, maybe it’s time for Barry to start drafting Bailout Nation II, The Banksters That Would Not Die

  7. bishophicks says:

    Something else to consider: if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security somewhere that THINKS it owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they can’t for legal and tax reasons. Now multiply by a million.

    So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?

  8. ZackAttack says:

    > So how many mortgage backed securities are missing how many mortgages?

    And, do you suppose that if we start taking a look at some of those securities, we might find one or more duplicates of the same mortgage?

  9. kathyharlow says:

    But everyone agrees MERS doesn’t own the note. So how could it foreclose?

  10. Senka says:

    The results of Wall Street’s fraud are numerous FRAUDclosuers, topped with the ignorance that works well for those who committed the biggest financial crime in the history of the world. Nothing will change until the responsible for this scam are prosecuted! We must do that, we should not rest until the truth is out and all those responsible are prosecuted.
    Is your Attorney General on the list? If not, why don’t you write to them? Who is saying NO to “too big to fail” and who is fighting for WE, THE PEOPLE – http://tinyurl.com/3h5kfy9

  11. [...] of the verdict (In Re. Schwartz) on the Massachusetts Real Estate Law Blog.  The same post was re-published on Barry Ritholtz’ The Big Lead today.  I highly suggest reading it because it goes further into [...]

  12. theexpertisin says:

    It is cool to root for the folks winning the suit.

    My take is that something stinks on BOTH sides of this case.

  13. i agree with what rktbrkr had to say “There seems to be nonstop chatter about banks esp BAC, maybe it’s time for Barry to start drafting Bailout Nation II, The Banksters That Would Not Die”