The Latest in Foreclosure Defense: Let HSBC Bank v. Buset Guide Your Arguments
Posted on May 25 by attorney Susan Lacava
This decision from a trial court in Miami addresses hot topics in foreclosure defense: assignment of a mortgage by a defunct company; failure to transfer the loan to the depositor during the securitization; the subsequent loan servicer hearsay problem; and the negotiability of the note.
ASSIGNOR OUT OF BUSINESS
The original lender was Freemont Investment and Loan. MERS held the mortgage as nominee of Freemont. In 2012, Ocwen had the mortgage assigned to it in preparation for the foreclosure. Freemont, however, went out of business in 2008. Here is what Judge Butchko had to say about that: The Court takes judicial notice that on July 25, 2008, Freemont Investment and Loan (“Freemont”) entered into a voluntary liquidation and closing which did not result in a new institution. As such, the status of MERS as nominee for Freemont ended when Freemont closed on July 25, 2008, which renders the AOM created in 2012 void ab initio. [ab initio is Latin for from the first act or meaning from the start.] This is straightforward application of the Agency rule that when the principal dies, the agency dies. MERS ceased being Freemont’s agent in 2008, when Freemont went out of business. It had no authority to act on behalf of Freemont in 2012 when the mortgage was assigned from MERS to Ocwen. There are 3 things I want you to notice in this paragraph. First, a new institution was not begun out of Freemont’s ashes. That meant that Freemont was conclusively dead. Other lenders, such as Countrywide, were purchased by other businesses. Whether the agency survived either the merger or the sale of assets is a difficult legal question, which may hinge on the details of the transaction. Second, the court took judicial notice of records kept online by the FDIC. Judicial notice is a rule of evidence that allows the court to accept evidence without a witness. You must look at the evidence code in your state to seek whether a piece of evidence is capable of being admitted by judicial notice. Third, be certain to visit the FDIC database if the original lender in your case went out of business. If, like Freemont, the lender went out of business and another business was not created from the liquidation, you may have a good argument that the lender is without question dead. That lays the groundwork for arguing that MERS stopped being an agent when the original lender went out of business. Here is how the death of the agency played out in court: The transaction described in the AOM never legally occurred. There was never a transaction between MERS and/or Freemont Investment and Loan that sold Defendant’s loan directly to the Trust. Not in 2012, not in 2005, not ever. This is an application of the holding that the assignment was void ab initio. Something that is void ab initio has never existed legally. PSA NOT FOLLOWED The Pooling and Servicing Agreement (PSA), like all PSAs, required the loan to go from the originator to the depositor to the trust. (If you would like some background information, read How Securitization Was Supposed To Work on the website). The note for the loan before the court, however, went from the originator directly to the trust. The AOM [assignment of mortgage] is missing a key party in the chain of ownership, the Depositor, Freemont Mortgage Securities Corporation. 11. Similarly, the undated, specific endorsement affixed to the back of the promissory note reflects the same defective transfer from the originator to the Plaintiff, without reference to the depositor. 12. This endorsement is contrary to the unequivocal terms of the PSA, in evidence over Plaintiff’s objection, which required all intervening endorsements be affixed to the face of the note because there was ample room for endorsements on the face of the note. There is also no evidence the endorsement was affixed before the originator went out of business in 2008. The requirement that the loan go from the originator to the depositor to the trust serves a very important purpose, it puts the trust assets out of the reach of a bankruptcy trustee: The Court accepts the testimony of Defendant’s well qualified expert witness, Kathleen Cully, who explained the securitization model which required the protection of assets from future bankruptcy clawbacks. There could be no direct sale from the originator to the trust directly. If you have read the post on void and voidable transactions, you know that the last sentence — there could be no direct sale from the originator to the trust directly — is very important: it means that the attempt to transfer the loan from the originator directly to the trust is void, not merely voidable. Judge Butchko also held that Ocwen lacked standing because of the failure to transfer the loan to the depositor before transferring it to the trust: 43. Plaintiff, HSBC Bank USAS, National Association, as trustee for Freemont Home Loan Trust 2005-B mortgage Backed Certificates, Series 2005-B, failed to prove it is the proper owner and holder of the Defendant’s loan by virtue of the endorsement on the note or the assignment of mortgage. 44. Both the endorsement and the assignment omit the Depositor, Freemont Mortgage Securities Corporation, from the transaction which constitutes a fatal break in the chain of title. 45. The Defendant presented the testimony of their expert witness, Ms. Cully, who testified that the endorsement on the note is contrary to the instructions in ?2.01 of the PSA that required a complete chain of endorsements, which would include the Depositor, to be placed on the face of the note so long as space allowed. 46. The Court notes there is ample space on the face of the note for endorsements. Therefore, the Court finds that the undated specific endorsement from the originator directly to the trust found on the back of the note is inherently untrustworthy. 47. The Court further questions the validity of the endorsement in that Plaintiff violated the Court’s order to produce the custodian’s records or documents showing when and how the endorsement was affixed to the original note. 48. In addition, the Court accepts Ms. Cully’s testimony that the form of the endorsement and assignment would be grounds for the Trust to reject this loan pursuant to the PSA. There is not a complete chain of endorsements on the face of the note. The PSA required no assignment of mortgage, only that the Trust appear in the MERS system as the loan owner. 49. For these reasons, the Court finds Plaintiff failed to prove its standing to foreclose the note and mortgage in this action.
RECORDS OF PRIOR SERVICER
Servicers incorporate the records of prior servicers in their own records. Servicers sometimes argue that the mere incorporation of the records into its system ought to allow one of its employees to testify about the things that must be proved in order to have the records admitted under the business records exception to the hearsay rule. (if you need some background on hearsay and the business record exception read Hearsay and the Prior Sericer Problem on mywebsite, mortgage-rights.com). There are two problems with the servicer’s argument. First, its employee does not have personal knowledge of the business practices of the prior servicer. Witnesses are not allowed to testify about events for which they have no personal knowledge. You can find this rule in the Rules of Evidence. Second, to be admissible, the current servicer has to examine the records of the prior servicer to determine whether the records are accurate during the “loan boarding” process. Readers of the blog know that a close inspection of Ocwen’s loan boarding process reveals that there is no check for accuracy. See my prior post, ” Ocwen Boarding Process Fails to Check Accuracy of Prior Servicer’s Records.” Here is the testimony that Judge Butchko heard: 31. Ms. Keeley testified the loan boarding process involved two steps. First, Ocwen confirmed that the categories for each column of financial data from the prior servicer matched or corresponded to the same name Ocwen used for that same column of financial data. Second, Ocwen confirmed the figures from the prior servicer transferred over such that the top figure from Litton became the bottom figure for Ocwen. 32. Ms. Keeley admitted there was absolutely no math done to check the accuracy of the prior servicer’s records or numbers. The loan boarding process’ verification to ensure the trustworthiness of the prior servicer’s records is therefore a legal fiction. In this case, Ocwen simply accepted the prior servicer’s numbers as true without any effort to audit or confirm their accuracy. The only confirmation appears to have been the check a carryover of figures from one servicer’s columns to the columns of another. 33. Moreover, Ms. Keeley testified loans with “red flags” would never be allowed to board onto Ocwen’s system until the prior servicer resolved them. However, Ms. Keeley also admitted she has witnessed loans that went through the boarding process that had misapplied payments and substantially incomplete loan payment histories from the prior servicer. 34. The existence of misapplied payments and incomplete payment histories in loans that went through the loan boarding process contradicts any suggestion that the boarding process identifies red flags and/or clears them, such that Courts can trust the reliability of their records. 35. To support the court’s concern regarding the lack of foundation of the so called boarded records in this case, the Court takes Judicial Notice of the Consent Order entered in the matter of Ocwen Financial Corporation, Ocwen Loan Servicing, LLC by the New York State Department of Financial Services dated December 22, 2014. This Consent Order documents Ocwen’s practice of backdating business records that it failed to fully resolve “more than a year after its initial discovery.” 36. Therefore, the Court finds Plaintiff failed to inquire into the accuracy, reliability or trustworthiness of the prior servicer’s payment history. Ocwen’s own payment history merely accepts the prior servicer’s records as accurate without question unless the numbers were challenged at some point after the loan boarding process. That is simply not enough to for this court to accept the prior servicer’s records as trustworthy and admit them into evidence here. A mere reliance by a successor business on records created by others, although an important part of establishing trustworthiness, without more is insufficient. Bank of New York v. Calloway, 157 So.3d 1064, 1071 (Fla. 4th DCA 2015). As such, this Court exercised its discretion to sustain Defendant’s objections to both payment histories as inadmissible hearsay. Therefore Plaintiff lacked evidence of an essential element of proof, damages, warranting an involuntary dismissal. “Involuntary Dismissal,” by the way, means Ocwen lost the foreclosure case… big time. Judge Butchko may sanction the Trust and/or its attorneys for fraud on the court. I would like to add another point: we may be able to use Judge Butchko’s decision to prevent Ocwen from arguing that its boarding process checks the accuracy of the prior servicer’s records. The legal term of this is “issue preclusion.” Various states may have different rules, so you need to research the issue preclusion rule in your state. In Wisconsin, parties cannot litigate issues that pass these tests: (1) whether issue preclusion can, as a matter of law, be applied, and if so, (2) whether the application of issue preclusion would be fundamentally fair. In re Estate Rille ex rel. Rille, 728 N.W.2d 693, 2007 WI 36, par. 36, 300 Wis.2d 1 (Wis., 2007). Issue preclusion can be applied as a matter of law if (1) the issue or fact was actually litigated and determined in the prior proceeding by a valid judgment in a previous action and (2) whether the determination was essential to the judgment. Judge Butchko’s opinion clearly satisfies the first requirement. She heard evidence at a trial and found that the Ocwen boarding process does not verify the accuracy of the prior servicer’s records.
THE NOTE IS NOT NEGOTIABLE
The homeowner presented a terrific expert witness at trial, who demolished Ocwen’s contention that the note is a negotiable instrument governed by Article 3 of the Uniform Commercial Code (UCC). Before you decide to use this argument in your foreclsoure case, please look at the caution in section Questioning the Negotiability of the Note on my website, mortgage-rights.com. The problems that the Negotiable Instruments law inflicts on homeowners is covered in Botched Securitization and Dernier: Lost or Stolen Notes on my website, mortgage-rights.com. . 50. The Court gives great weight as the trier of fact to the testimony of Defendant’s expert witness, Kathleen Cully. Ms. Cully is a Yale Law School graduate that worked her entire career in structured finance transactions since 1985. She was extremely well versed in the Uniform Commercial Code. Among many other tasks and accomplishments, Ms. Cully testified that she led the Citigroup team that created the first pooling and servicing agreement ever. She led Citigroup’s Global Securitization strategy. The Court finds Ms. Cully eminently qualified as an expert witness in the area of securitized transactions and their interplay with the Model Uniform Commercial Code. 51. Ms. Cully gave extensive testimony explaining that the negotiability of a promissory note is not a consideration in the securitization model. Securitization sells pools of thousands of mortgages with ever having an intention to sell each loan by individual negotiation. 52. Moreover, securitization routinely involves the sale of non-negotiable instruments such as car loans, rent receivables, even David Bowie’s intellectual property rights. Judge Butchko’s holding that the note was non-negotiable is based on section 3-104(1) of the UCC. Here is the statute in Wisconsin: 403.104 Negotiable instrument. (1) Except as provided in subs. (3) and (4), “negotiable instrument” means an unconditional promise or order to pay a fixed amount of money, with or without interest or other charges described in the promise or order, if all of the following apply: … (c) It does not state any other undertaking or instruction by the person promising or ordering payment to do any act in addition to the payment of money, but the promise or order may contain any of the following: 1. An undertaking or power to give, maintain or protect collateral to secure payment. Judge Botchko analyzed whether the promise in the mortgage note was unconditional. Article 3 defines “unconditional” as: 403.106 Unconditional promise or order 1)(a) Except as otherwise provided in this section, for the purposes of s. 403.104 (1), a promise or order is unconditional unless it states any of the following: 1. An express condition to payment. 2. That the promise or order is subject to or governed by another writing. 3. That rights or obligations with respect to the promise or order are stated in another writing. … (b) A reference to another writing does not of itself make the promise or order conditional. Judge Butchko found that the note was governed by the mortgage, which rendered the note non-negotiable and that the note was not for a fixed amount. . Her analysis is set out below. I suggest you read her work with a copy of your mortgage in hand. Since notes and mortgages are fairly uniform, you may find that you have the same provisions in your mortgage, giving you a good argument that your note is non-negotiable. 58. This Court does not address the provision [of the note] described in the Nunez opinion, instead grounding this decision on a myriad of other provisions of the Mortgage establishing the Note is subject to and governed by the Mortgage, rendering the note a non-negotiable instrument. 59. Among other things, the additional protections routinely change the “fixed amount of money” due under the promissory note and require additional undertakings and instructions for the borrower beyond the mere repayment of money. 60. First, at page 2 of the mortgage, sub-section (G) expressly provides that “‘Loan’ means the debt evidenced by the Note, plus interest, any prepayment charges and late charges due under the note, and all sums due under this Security Instrument, plus interest.” (emphasis added). 61. Paragraph 3 of the Mortgage provides for the payment of taxes and interest on the property. These payments are not described in the Note, which requires payment only of principal, interest, late fees and costs and expenses of enforcement. 62. The Court finds the amounts due under the Mortgage are “other charges” that are not “described in” the Note, as required by ?673.1041(1), Florida Statutes. That alone destroys negotiability. 63. Furthermore, Plaintiff’s complaint seeks damages for all sums due under the Note and “such other expenses as may be permitted by the mortgage.” Standard mortgage servicing industry practice treats all sums due under the note and mortgage as the “loan” payoff amount or the total amount needed to liquidate in full all monetary obligations arising under both the Note and the Mortgage–the Loan, as defined in the Mortgage–not just the Note. 64. Not only does that payoff amount include charges not described in the Note, it is much more than a mere “reference” to the Mortgage “for a statement of rights with respect to collateral, prepayment or acceleration”–it means that the Note is effectively “subject to or governed by” the Mortgage, which in turn means that it is not unconditional. See Fla. Stat. ?673.1061. That also destroys negotiability of the Note. 65. This Court finds that the Note is non-negotiable as the amounts payable under the Complaint include amounts not described in the Note and as the Note does not contain an unconditional promise to pay. 66. The promise is not unconditional because the Note is subject to and/or governed by another writing, namely the Mortgage. Moreover, rights or obligations with respect to the Note itself–as opposed to the collateral, prepayment or acceleration–are stated in another writing, namely the Mortgage. 67. Moreover, the UCC definition of “holder” would necessarily include a thief that takes by forcible transfer. However, a thief would never be entitled to the equitable relief of foreclosure. Defendant correctly cites to ?1 of the promissory note that expressly provides a different definition of “Note holder” from the definition of holder under Fla. Stat. ?673.3011. 68. The promissory note defines the term “Note Holder” at ?1 as “anyone who takes this Note by [lawful] transfer and who is entitled to receive payments under this Note.” 69. By its terms, ?1 requires that any subsequent party attempting to enforce the note prove they came into possession of the note by lawful transfer and have the right to receive payments under the Note. This provision establishes the parties’ intention to contract out of the UCC definition of holder, so as to limit the right to enforce only to those who proved ownership. 70. The Court finds the amounts due under the mortgage are “additional protections” from possible losses that protect the Note Holder pursuant to the Uniform Secured Note provision. The protections necessarily affect the fixed amount of money due under the note. 71. The Court further notes Plaintiff’s complaint seeks all sums due under the note and mortgage. Standard mortgage servicing industry practice treats all sums due under the note and mortgage as the “loan” payoff amount or the total amount needed to liquidate in full all monetary obligations arising under both the Note and the Mortgage. 72. At page 4 of the mortgage, Uniform Covenant 2 entitled “Application of Payments or Proceeds” provides that “payments be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note; and (c) amounts due under Section 3 [of this Security Instrument]. Any remaining amounts shall be applied first to late charges, second to any other amounts due under this security Instrument, and then to reduce the principal balance of the Note.” (emphasis added). 73. As payments are applied to amounts due under both the note and mortgage, this Court finds the Uniform Covenant 2 in the mortgage must be read as an integrated agreement with the promissory note that will necessarily change the fixed amount of money due thereunder. 74. At the first paragraph of page 7, the mortgage provides: “Any amounts disbursed by lender under this Section 5 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.” 75. Therefore, pursuant to the Uniform Secured Note Provision of the note and Section 5 of the mortgage, forced placed insurance premiums become additional debt secured by the mortgage bearing interest at the note rate which changes the “fixed amount of money” due. 76. At page 8 of the mortgage are two provisions which involve rights or obligations with respect to the promise or order stated in another writing and constitute instructions and undertakings of the borrower to do acts in addition to the payment of money. 77. At ?6 of the mortgage the borrower is obligated to occupy the property as a principal residence within 60 days after signing the mortgage and must continue to occupy the property as Borrower’s principal residence for a least one year. 78. At ?7, Borrower is obligated to maintain the property and permit lender to conduct inspections, including interior inspections, upon notice stating cause for the inspection. 79. At ?8 of the mortgage, “Borrower shall be in default if” borrower gave materially false or misleading information during the loan application process or concerning Borrowers occupancy of the property as Borrower’s principal residence. 80. At ?9 of the mortgage entitled, “Protection of Lender’s Interest in the Property and Rights Under this Security Instrument” the mortgage states “any amounts disbursed by Lender under this Section 9 shall become additional debt of Borrower secured by this Security Instrument. These amounts shall bear interest at the Note rate from the date of disbursement and shall be payable, with such interest, upon notice from Lender to Borrower requesting payment.” 81. At ?14 of the mortgage entitled “Loan Charges” provides for refunds of such charges and states: “the Lender may choose to make this refund by reducing the principal owed under the Note or by making a direct payment to Borrower.” Again these additional protections for the Note Holder provided in the Uniform Secured Note provision in the note necessarily affect the “fixed amount of money” due under the note.