BEWARE THE “LOST NOTE” OR “LOST MORTGAGE” (DEED OF TRUST, SECURITY DEED, ETC.) POSITION TAKEN BY FORECLOSING PARTY IN SECURITIZED MORTGAGE FORECLOSURE CASES: NOTHING WAS “LOST”, AND TO SO REPRESENT TO THE COURT IS A SERIOUS MATTER AND MAY PROVIDE BORROWERS WITH A REASON TO REQUEST DISMISSAL OF THE FORECLOSURE CASE.
A recurring pattern in mortgage foreclosure cases involving securitized mortgage transactions is a statement in the lawsuit filed by the party seeking to foreclose that either the Note or the Mortgage (also called, depending your state, a Deed of Trust, Security Deed, or something else) was “lost”, but that copies are attached to the lawsuit. In such a case, it is more likely than not that nothing was “lost” at all, and that the party seeking to foreclose is simply trying to take advantage of state laws which permit the filing of a foreclosure action with a “lost” Note or Mortgage when in fact such a statute may not apply as the Note and/or Mortgage were never “lost”, but were sold, assigned, or transferred more than once to different persons or entities.
A securitized mortgage transaction, as has been previously discussed in other articles, involves a situation where, as part of the creation of a special investment vehicle or security, the original “lender” has sold off the Note and/or Mortgage either as a whole or in pieces to others such as a mortgage aggregator, who then sells these bundles of mortgages to an investment banker who uses these as collateral for a mortgage-backed security. In this sale and assignment process, there are often many links in the chain between the original lender and the ultimate alleged owner of the Note or Mortgage. During the course of sale and assignment, the original Notes and Mortgages have either been destroyed or cannot be located, as the downline sale of what wound up being bundles of hundreds or perhaps thousands of mortgages was accomplished through loan summaries, not a physical transfer of the actual mortgage and loan documents. In several cases we have seen, the original lender has admitted, in writing, that the original loan documents were sold off to an “investor”, but the original lender does not know who this “investor” is or where the original documents are.
Now here comes some bank as Indenture Trustee for the Registered Security Holders of Collateralized Mortgage Obligation Loan Trust Series XYZ-2006 (or some other equally complicated name) seeking to foreclose on your mortgage by filing a lawsuit where they claim that the original Note and/or Mortgage is or was “lost”. This is most likely an absolute falsehood in cases of this type, and for the attorney to represent to the court, in a written lawsuit, that the originals of the Note and/or Mortgage were “lost” is not only fraudulent itself but also constitutes a fraudulent attempt to manufacture a foreclosure case which could not be legally brought in the first instance.
At least one Judge in the State of New York has addressed this problem and cited case law as to the burden of the party seeking to foreclose to demonstrate that they have the legal right to do so, and absent such proof, a foreclosure action may not be brought. The legal premises of the New York cases are common in other states.
The Judge in the matter of Wells Fargo Bank, N.A. as Trustee, etc. v. Farmer cancelled and voided a series of real estate transactions as to property located in Brooklyn, New York including several Assignments of Mortgage, resulting in the termination of the foreclosure. In the decision, the Judge set forth the well-established law that one seeking to foreclose on a mortgage must demonstrate and prove title to and a legal or equitable interest in the mortgage, and must also establish the existence of the mortgage and mortgage note, ownership of the mortgage, and the borrower’s default in payment. The decision rested on case law which provides that foreclosure of a mortgage may not be brought by one who has no title to the mortgage, and absent transfer of the debt that the assignment of the mortgage is a nullity. The decision also set forth the law that a party seeking to foreclose on a mortgage in which he has no legal or equitable interest is a lawsuit without foundation in law or fact.
The cases cited include: Kluge v. Fugazy, 145 AD2d 537, 538 [2d Dept 1988]; Katz v. East-Ville Realty Co., 249 AD2d 243 [1st Dept 1998]; Campaign v. Barba, 23 AD2d 327 [2d Dept 2005]; Household Finance Realty Corp. of New York v. Wynn, 19 AD3d 545 [2d Dept. 2005]; Sears Mortgage Corp. v. Yahhobi, 19 AD3d 402 [2d Dept 2005]; and Ocwen Federal Bank FSB v. Miller, 18 AD3d 527 [2d Dept 2005].
Many states have laws which punish both parties and their lawyers for making statements to the court which they know or should know not to be true when they are made. These laws provide for sanctions such as attorneys’ fees, and some states have legal authority which provides for the dismissal of a lawsuit when it has no basis in law or fact.
As such, when you are faced with a foreclosure lawsuit where the securitized mortgage plaintiff seeking to foreclose makes a statement that either the Note or Mortgage were “lost”, you need to bring to the court’s attention that this statement may not be true based on the securitized nature of the mortgage transaction, and that it may be in fact that nothing was ever “lost”, but was instead sold, assigned, or transferred. Stay tuned to this blog for examples of what is called “formal discovery” to be submitted to the foreclosing party to explore these issues.
Jeff Barnes, Esq.