No Rubber Stamp for Business Records Exception to Hearsay

To foreclose, you need the original promissory note (Note) with the original endorsement or assignment, if any, and the original recorded deed of trust.[1]  

As a matter of proof the original Note with endorsements or assignments and the original recorded deed of trust is the best evidence.[2]  CRE 1002 requires that the contents of a writing be proven by the original writing.   The original note is authentic and reliable evidence that the debtor owes money[3].  The original deed of trust establishes the authority of the Public Trustee to sell the property securing the notes.  And the original endorsement establishes that the holder, one in possession, is the real person entitled to foreclose on the outstanding debt.      

The Colorado foreclosure statute also allows copies of the Note, its assignment, if any, and recorded deed of trust [4] to commence a foreclosure if accompanied with a certification that the note, assignment and deed of trust are true and correct copies of the original and accompanied by a promise to indemnify the debtor if the original note appears. [5] 

Article 3 of the Uniform Commercial Code offers insight into how a certification as to the accuracy of copies of a Note with proper endorsement and deed of trust allow a foreclosure to proceed with a promise to indemnify.  

C.R.S. § 4-3-309(b)[6] simply says that in order for a person to foreclose without the original note, assignment and deed of trust that person must provide some “adequate protection” to the debtor if the original note and deed of trust somehow appears after enforcement of the note.  The comment to this section states that “adequate protection” is a flexible concept depending on the “degree of certainty about the facts in the case”.[7]

With the complex process of bundling home loans and transferring them into mortgage backed securities (MBS), there is “a degree of uncertainty” whether the person bringing a foreclose action has a right to foreclose.

For instance, the Note and deed of trust may have been misplaced or lost as they are transferred from the original lender through various intermediaries into a mortgage backed security (MBS).  Or there may have been no valid endorsement or endorsements transferring the Note into the MBS as required for the integrity of the MBS.  

Producing the original Note with the proper endorsements and the deed of trust shows ownership and the right to enforce the Note by foreclosure.    Original notes and valid endorsements also insure clear title when the property is subsequently sold.

Copies of promissory notes are not allowed when obtaining a default judgment[8] and should not be allowed in a foreclosure because foreclosure is the same as obtaining a default judgment.[9]

In most Colorado foreclosures, producing the original note and deed of trust satisfies the foreclosure statute C.R.S. § 38-38-101’s definition of “holder of evidence of debt” and courts will allow a foreclosure to continue.  If copies are produced, the foreclosing party can argue enforcement of a lost instrument[10] or prove the copies’ authenticity by arguing their admissibility under the business records exception to the hearsay rule discussed below.[11]

Even with possession of the original Note and deed of trust, if the Note and deed of trust have not been transferred into the MBS before its closing date, the representative of the MBS has no authority or standing to bring a foreclosure. [12]  The endorsement or endorsements trace the transfers and establishes the right of the holder of the Note to enforce it. 

The trust, responsible for holding pools of home loans (notes and deed of trusts) in a particular MBS, require a clear separation from the originators of the home loans through various intermediaries to the MBS.   An endorsement from the originator into the trust creates the separation and establishes the MBS’s ownership of the home loans.         

A complete chain of endorsements from originator into the trust are unlikely because “the rapid growth of mortgage securitization outpaced the ability of the legal and financial system to track mortgage loan ownership.[13]   More common is a blank endorsement on the note or on a separate piece of paper called an allonge.  Possession of a Note with an original blank endorsement satisfies Colorado’s foreclosure statute’s requirement that a “holder of evidence of debt”[14] has a right to foreclose. 

However, possession of the note with a blank endorsement does not necessarily mean the foreclosing party has the right to foreclose when the holder is a trustee or servicer of a MBS.        

As an example, a foreclosing party appears at a Rule 120 hearing with the original Note and Deed of Trust and an “original” rubber stamp endorsement on the Note.  There is no endorsement on the copy of the Note filed with Public Trustee to initiate the foreclosure. The foreclosing party is a national bank acting as Trustee for a MBS.  The court approves the foreclosure sale based on the plain language of the foreclosure statute requiring possession of the original Note with endorsement and original deed of trust.  The court enters its decision despite the fact that the copy of the Note filed with the Public Trustee months earlier did not show the rubber stamped endorsement presented the day of the Rule 120 hearing.

This example illustrates why rubber stamped endorsements requires proof that they are not fabricated.  It is not news that tracking transfers of Notes into a trust has been fraught with uncertainty as highlighted by federal and state investigations into “shoddy paperwork and possible forgeries of legal documents by banks, other lenders or their representatives”.[15] 

Blank, undated, un-notarized endorsements make it difficult to track home loans into a MBS.  And as illustrated above “original” rubber stamp endorsements lack trustworthiness and leave it open for abuses that would not otherwise be available if the substantive law governing the transfer of home loans into securities has more sway than the foreclosure statute. 

Article 3 and Article 9 of the Uniform Commercial Code are the substantive laws relating to who has the right to enforce a negotiable instrument.  The notes of a home loan are negotiable instruments under Article 3.[16][17] The transfer of a home loan into a security is a secured transaction under Article 9.[18][19].  The Colorado foreclosure statute is the adjective law or the process by which security interests are enforced.[20]

Using our example of the “original” rubber stamp blank endorsement, there must be more evidence than simple possession to show the foreclosing party has authority to foreclose when a loan has been transferred into a MBS.  Lack of endorsement on Note would prevent foreclosing party from being “holder” under Colorado law.[21]  

Normally, business records are inadmissible as hearsay[22] because they are out of court statements about when the note and deed of trust were transferred into the MBS.  The “original” rubber stamp blank endorsement is another level of hearsay because it is offered for the truth that the person signing the endorsement did in fact endorse the note.  Statements of outside or third parties included in a business record are not granted the same presumption of accuracy, "because the third party has no business duty to report the information accurately.[23]

However under the business records exception to the hearsay rule, business records may be introduced into evidence if a proper foundation is laid.[24]  This exception is based on a presumption of trustworthiness that business records maintained and communicated on a regular basis as part of that business’ activity are less likely to be fabricated when introduced into evidence.[25]

Under this exception, proof of the transfer or assignment of the home loan into a MBS may be admissible hearsay if there is a record of the transfer made “at or near the time” of the transfer, “by a person with knowledge”, during the course of a “regularly conducted business activity”.[26]   

The person testifying will be a representative of the trustee or servicer bringing the foreclosure action.  “The rule does not require that the person with knowledge testify or that such person even be identified as long as the representative testifies that the method by which the record is produced includes its making by a person with knowledge.”[27]

For example, the foundation for a witness who will testify as to the authenticity of the “original” rubber stamp endorsement should be able to demonstrate that the “original” rubber stamp endorsement was executed by a person with authority acting on behalf of the then current owner of the note at or near the time the Note was to be transferred into the MBS.

Based on the above foundational requirements a witness should also be familiar with the procedure of transferring the home loans into the MBS near or at the closing date for transfers into the MBS trust.  Such familiarity gives credibility to testimony about the transfer of home loans into a MBS.  A copy of the mortgage schedule listing all the home loans lodged in a MBS should be offered as additional proof that a particular home loan is properly lodged in the MBS.   

The “original” rubber stamp endorsement would not pass the test for trustworthiness because it appeared after the filing of the foreclosure not “near or at the time” of when it was supposed to be transferred; it was done not in the course “regularly conducted business activity” but for litigation; and the signature on the rubber stamp was not by “by a person with knowledge”. [28]

The lesson to learn is make sure the court sees the original documents, the Note, deed of trust and the endorsement, when a foreclosed loan is in mortgage backed security.

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[1] C.R.S. § 38-38-101. Holder of evidence of debt may elect to foreclose (1) Documents required. (b) The original evidence of debt, including any modifications to the original evidence of debt, together with the original indorsement or assignment thereof, if any, to the holder of the evidence of debt or other proper indorsement or assignment in accordance with subsection (6) of this section …  c) The original recorded deed of trust securing the evidence of debt …”  

[2] CRE Rule 1002. Requirement of Original. To prove the content of a writing, recording, or photograph, the original writing, recording, or photograph is required, except as otherwise provided in these rules or by statute of the State of Colorado or of the United States.

[3] Smith v Weindrop, 833 P.2nd 856, (Colo. App. 1992).  Promissory notes are self authenticating under Rule 902(9).

[4] C.R.S. § 38-38-101 (1)(b)… in lieu of the original, … (II) A copy of the evidence of debt and a certification signed and properly acknowledged by a holder of an evidence of debt …    that the copy of the evidence of debt is true and correct … (c) (II) Copies of the recorded deed of trust … and a certification signed and properly acknowledged by a holder of an evidence of debt… certifying or stating that the copies of the recorded deed of trust …are true and correct… ”

[5] C.R.S. § 38-38-101 (2) Foreclosure by qualified holder without original evidence of debt, original or certified copy of deed of trust, or proper indorsement… shall, by operation of law, be deemed to have agreed to indemnify and defend any person liable for repayment of any portion of the original evidence of debt in the event that the original evidence of debt is presented for payment ..”   

[6] “Enforcement of lost, destroyed, or stolen instrument” b) A person seeking enforcement of an instrument under subsection (a) of this section must prove the terms of the instrument and the person's right to enforce the instrument. If that proof is made, section 4-3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

[7] “Under Section4- 3-309 adequate protection is a flexible concept. For example, there is substantial risk that a holder in due course may make a demand for payment if the instrument was payable to bearer when it was lost or stolen. On the other hand if the instrument was payable to the person who lost the instrument and that person did not indorse the instrument, no other person could be a holder of the instrument. In some cases there is risk of loss only if there is doubt about whether the facts alleged by the person who lost the instrument are true. Thus, the type of adequate protection that is reasonable in the circumstances may depend on the degree of certainty about the facts in the case.”

[8] C.R.C.P. Rule 121 Section 1-14(1) (f) “If the action is on a promissory note, the original note shall be presented to the court in order that the court may make a notation of the judgment on the face of the note. If the note is to be withdrawn, a photocopy shall be substituted.”

[9] See Foothills Holding Corp. v. Tulsa Rig, Reel & Mfg. Co., 155 Colo. 232, 393 P.2d 749, 751 (1964)(suit on a promissory note and an action against particular property may be pursued concurrently or consecutively).

[10] C.R.S. § 4-3-308 Enforcement of lost, destroyed or stolen instruments.

[11] In re Goodwin, 779 P 2d 837 (Colo 1989).

[12] See my April Blog, “Chink in the Armor- A Foreclosure Defense”

[13] “After the Storm, Foreclosure Fraud & Robo-Signing Continues…” Nye Lavalle, Pew Mortgage Institute Citing the “Congressional Oversight  Panel Report of November 16, 2010 titled “Examining the Consequences of Mortgage Irregularities for Financial Stability and Foreclosure Mitigation.”

[14] C.R.S. § 38-38-100.3(10) (c).

[15] “Two States Ask if Paperwork in Mortgage Bundling Was Complete” New York Times, Gretchen Morgenson, June 12. 2011. http://www.nytimes.com/2011/06/13/business/13mortgage.html?

[16] C.R.S. § 4-3-104(a).

[17] Haberl v Bigelow, 855 P.2d 1368 (Colo 1993)

[18] C.R.S. §4-9-109(3).

[19] Columbus Investments v. Lewis, 48 P.3d 1222 (Colo 2002).

[20]Allen v. Bailey, 91 Colo. 260, 14 P.2d 1087 (Colo. 1932). 

[21] C.R.S.  §§ 4–1–201(20). Barclay Receivables Co. v. Mountain Majesty, Ltd., 903 P.2d 37, 39 (Colo.App.1995)

[22] CRE 801“out of court statements offered in court for the truth being asserted.”

[23] Henderson v. Master Klean Janitorial, Inc., 70 P.3d 612 (Colo. App. 2003)

[24] CRE 803(6) Records of Regularly Conducted Activity. A memorandum report, record, or data compilation, in any form, of acts, events, conditions, opinions, or diagnosis, made at or near the time by, or from information transmitted by, a person with knowledge, if kept in the course of a regularly conducted business activity, and if it was the regular practice of that business activity to make the memorandum, report, record, or data compilation, all as shown by the testimony of the custodian or other qualified witness, or by certification that complies with Rule 902(11), Rule 902(12), or a statute permitting certification, unless the source of information or the method or circumstances of preparation indicate lack of trustworthiness. The term "business" as used in this paragraph includes business, institution, association, profession, occupation, and calling of every kind, whether or not conducted for profit.

[25] See Comment to CRE 803(6).

[26] Teac Corp. v. Bauer, 678 P.2d 3 (Colo.App.1984) (computer-generated statement of account was admissible as business record where it was based in relevant part upon records supplied by original creditor);

[27] 23 COPRAC §803:6

[28] Teac Corp. v. Bauer, 678 P.2d 3 (Colo.App.1984) (computer-generated statement of account was admissible as business record where it was based in relevant part upon records supplied by original creditor);

Who Is The Real Party For A PSA Foreclosure?

To foreclose you need possession of the original note and deed to trust representing the residential home loan.   If the note and deed of trust have been transferred to a trust as part of securitization, the trustee must comply with Pooling and Servicing Agreement (“PSA”) which gives the Trustee power over all the notes and deed of trust in that particular security.[1]

A PSA foreclosure defense is the failure of the note and deed of trust to be transferred into its particular trust or security according to the Pooling and Service Agreement.  An argument that a PSA foreclosure defense does not apply to a foreclosure by a Trustee because the homeowner is not a party to the PSA as a third party beneficiary is a misunderstanding of the PSA foreclosure defense.[2]

A PSA foreclosure defense is not based on the homeowner being a third party beneficiary to the PSA but is based on whether the Trustee has possession of the note and deed of trust, which is a standing issue.

A basic rule of contract law is that “a person not a party to an express contract may bring an action on such contract if the parties to the agreement intended to benefit the non-party, provided that the benefit claim is a direct and not merely an incidental benefit of the contract.” E.B. Roberts Construction Co. v. Concrete Contractors, Inc., 704 P.2d 859, 865 (Colo.1985).  Jefferson County School Dist. No. R-1 v. Shorey, 826 P.2d 830
(Colo., 1992).

A homeowner is not a third party beneficiary to a PSA because the PSA is not intended to directly benefit the homeowners.[3]  The investors in the security which contains a pool of home loans are third party beneficiaries to the PSA because they benefit from the PSA’s requirement that the Trustee oversee the collection of the monthly loan payments and transfer of these funds to the investors. 

If the home loan (the note and deed of trust) is not transferred to the trust according to the explicit requirements of the PSA on the transfer of the home loan into the security, the Trustee does not possess the home loan and is precluded from bringing a foreclosure action.  

In Colorado, a homeowner can challenge the foreclosing party’s right to bring a foreclosure action in a Rule 120 hearing.   Goodwin v. District Court In and For Sixteenth Judicial Dist. 779 P.2d 837, (Colo.1989).   Goodwin allows a court in C.R.C.P. 120 motion to decide whether the moving party is a real party in interest.  

Courts have the authority to whether a party has a right to bring a foreclosure action because of due process.  Due process is a constitutional principle that no person can be deprived of life or liberty or property without adequate legal procedures and safeguards.  C.R.S.A. Const. Art. 2, § 25. Plymouth Capital Co., Inc. v. District Court of Elbert County 955 P.2d 1014 (Colo., 1998)

In Colorado, C.R.C.P. Rule 17(a) provides the necessary mechanism to comply with due process by ensuring the “real party in interest” is bringing the foreclosure action.  C.R.C.P. 17(a) provides that "every action shall be prosecuted in the name of the real party in interest." "The real party in interest is the party who, by virtue of substantive law, has the right to invoke the aid of the court to vindicate the legal interest in question." In re Goodwin, supra.   

Simply, Rule 17(a) ensures the person or entity bringing a foreclosure action has the right to foreclose by asking do they have an "interest," which is material (not incidental) and properly before the court.

With respect to a Trustee bringing a foreclosure action on a home loan within a securitized trust, the question is does the Trustee have an “interest” in the note and deed of trust.    

There is Colorado case law that states a trustee who holds legal title to property is a real party in interest.  Koch v. Story 47 Colo. 335, 107 P. 1093 (Colo. 1910). Elk-Rifle Water Co. v. Templeton, 173 Colo. 438, 484 P.2d 1211 (Colo. 1971).  However, this rule does not apply to a Trustee of a securitized home loan.   Colorado is lien theory state, which provides that the holder of a note and deed of trust does not hold legal title to the property. “Colorado has adopted the lien theory of mortgages under which the mortgage or deed of trust creates a lien against real property but does not convey title. Section 38-35-117, C.R.S.[4]   Hohn v. Morrison, 870 P.2d 513 (Colo. App. 1993).

A Trustee can foreclose on a home loan if it has an “interest” in the home loan according to “substantive law” governing the transfer of notes and deeds of trusts into a security.  

“We mean by substantive law the positive law of duties and rights which gives rise to a cause of action, as distinguished from adjective law, which pertains to practice and procedure, or the legal machinery by which the substantive law is made effective.”  Allen v. Bailey, 91 Colo. 260, 14 P.2d 1087 (Colo. 1932). 

In the context of a Rule 120 hearing, the “substantive law” governing the “rights which give” a trustee an “interest” in the home loan and thus the right to foreclose is Article 3 of the Uniform Commercial Code (“UCC”) (C.R.S. §4-3-101 et seq.).

The Colorado foreclosure statute (C.R.S. § 38-38-101 et seq.) sets forth the procedure for foreclosing on a defaulted home loan and is, as such, “adjective law” and not dispositive on who can bring a foreclosure action.

The “substantive law” of Article 3 applies because when the note and deed of trust travel from the original lender in Colorado into a security managed by a Trustee in New York the note becomes a “negotiable instrument”.[5]  In fact the foreclosure statute references Article 3 when it identifies the person entitled to bring a foreclosure action as the “holder” [6] and defines “holder” in similar terms to Article 3.       

The “substantive law” of Article 3 of the Uniform Commercial Code determines whether or not a foreclosing entity is a “entitled to enforce an evidence of debt”.  C.R.S. § 4-3-301 provides a “Person entitled to enforce” an instrument[7] means (i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 4-3-309 or 4-3-418(d).  A person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument .”

 The right to enforce a note in foreclosure depends on the transfer of the note to a person entitled to enforce the “negotiable instrument”.   “To be a holder one must meet the two conditions in section 4-1-201(b)(20): (1) he or she must have possession (2) of an instrument drawn, issued, or indorsed to him or her. With rare exceptions, those claiming to be holders have physical ownership of the instrument in question.”[8]  

Possession is designed to prevent two or more claimants from qualifying as holders who could take free of the other party's claim of ownership.  

The right to possession of the note depends on the transfer.  Article 3 provides two ways to transfer a note: “negotiation”[9] and “transfer”[10].    A “negotiation” of a note gives the person in possession the rights of “holder”.  A “transfer” gives the person in possession the “right to enforce” the note.

UCC Comment 1 to C.R.S. § 4-3-203(a) explains:

“The right to enforce an instrument and ownership of the instrument are two different concepts….A thief who steals a check payable to bearer becomes the holder of the check and a person entitled to enforce it, but does not become the owner of the check….Moreover, a person who has an ownership right in an instrument might not be a person entitled to enforce the instrument…The right to payment is transferred by delivery of possession of the instrument “by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument.” 

Under both the Colorado foreclosure statute and Article 3, a “holder”  is  person in rightful possession of the note:  C.R.S. § 4-1-201(20) “Holder” means: (A) the person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession;  C.R.S. §38-38-100.3(10)(c) “Holder of an evidence of debt” means the person in actual possession of or person entitled to enforce an evidence of debt. §38-38-100.3(10)(c).

The safest way to transfer a note to ensure a right to payments is to deliver possession with an endorsement [11] on the note specifying the name of the party taking ownership of the note.  The second safest way to transfer a note is to deliver possession of the note to a party endorsed in blank or endorsed to bearer[12].  In both instances the person who has possession of the note is deemed a “holder” with a right to payment on the note. 

Endorsement is important because it is the way to know if the person in possession is rightfully in possession.  When notes are transferred into a trust for the purpose of securitization, the requirements for endorsements are all the more important.  For an outline for all the reason why transfer of a home loan into a securitized trust is stricter than that allowed under Article 3 and state foreclosure laws please refer to my prior blog post “A Chink in the Armor- A Foreclosure Defense”.

The UCC allows stricter requirements for transfers of notes by agreement.[13] The PSA requires proof of the transfers of the note or a chain of title from original lender to the deposit of the note into a securitized trust for the trust to own the note.  The reason for a clear chain of title from lender to the trust serves several purposes.  One main reason is to establish the integrity of the trust in order that certificates in the trust can be sold to investors.  Another reason is to obtain favorable tax treatment. 

A sample of the PSA language which requires a clear chain of title of the note into the trust states:

“In  connection  with the above  transfer and  assignment,  the Sponsor  hereby  deposits with the Trustee or the related Custodian, on behalf of the Trustee, with respect to each Mortgage Loan: (i)  the original  Mortgage Note,  endorsed  without recourse (A) in blank or to the order of the  Trustee  or (B) in the case of a Mortgage  Loan  registered  on the MERS  system,  in blank,  and in each case showing an unbroken chain of endorsements.” 

If there is no documented chain of title tracking the delivery of the note into the security, the note is not properly lodged within the   security and the Trustee has no right to foreclosure as the “real party in interest”.

Therefore, an argument that a homeowner has no right to contest a Trustee’s status as a “real party interest” because the homeowner is not a third party beneficiary of the PSA is an opportunity to explain why a Trustee is bound by the PSA.  

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[1] Asset Securitization: Comptroller's Handbook, Office of the Comptroller of the Currency, November1997, http://www.occ.treas.gov/handbook/assetsec.pdf.

[2] “Standing to Invoke PSAs as a Foreclosure Defense”, posted by Adam Levitan, Credit Slips, August 4, 2011.

[3] See my previous Blog, “Chink in the Armor, A Foreclosure defense”  citing an Alabama case, Horace vs. LaSalle Bank National Association, et al., CV-2008-000362.00, (3/30/11) Circuit Court of Russell County Alabama, where Judge found homeowner was third party beneficiary because without the homeowner the security would not be funded.  

[4] § 38-35-117. Mortgages, not a conveyance--lien theory:  Mortgages, trust deeds, or other instruments intended to secure the payment of an obligation affecting title to or an interest in real property shall not be deemed a conveyance, regardless of its terms, so as to enable the owner of the obligation secured to recover possession of real property without foreclosure and sale, but the same shall be deemed a lien.

[5] C.R.S. 4-3-104(a) Except as provided in subsections (c) and (d) of this section, “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 it:(1) Is payable to bearer or to order at the time it is issued or first comes into possession of a holder;(2) Is payable on demand or at a definite time; and(3) 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 (i) an undertaking or power to give, maintain, or protect collateral to secure payment, (ii) an authorization or power to the holder to confess judgment or realize on or dispose of collateral, or (iii) a waiver of the benefit of any law intended for the advantage or protection of an obligor.

[6] C.R.S. § 38-38-101. Holder of evidence of debt may elect to foreclose.  §38-38-100.3(10) “Holder of an evidence of debt” means the person in actual possession of or person entitled to enforce an evidence of debt. §38-38-100.3(10)(c) The person in possession of a negotiable instrument evidencing a debt, which has been duly negotiated to such person or to bearer or indorsed in blank.  Possession of a Note without a proper indorsement to a specific person or “to bearer” is enforceable if the person in possession can “account for possession of the unindorsed instrument by proving the transaction through which the transferee acquired it.” Comment 2,

C.R.S. § 4-3-203, 

[7] “Instrument” means a negotiable instrument.  C.R.S. §4-3-104.

[8] Georg v. Metro Fixtures Contractors, Inc. 178 P.3d 1209 (Colo. 2008). 

[9] “Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder. C.R.S. § 4-3-201(a).

[10] An instrument is transferred when it is delivered by a person other than its issuer for the purpose of giving to the person receiving delivery the right to enforce the instrument. C.R.S. § 4-3-203(a).

[11] “Indorsement” means a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is made on an instrument for the purpose of (i) negotiating the instrument. C.R.S. §4-3-204.

[12] “Bearer” means a person in control of a negotiable electronic document of title or a person in possession of a negotiable instrument, negotiable tangible document of title, or certificated security that is payable to bearer or indorsed in blank. C.R.S. § 4-1-201(5).

[13] Except as otherwise provided in subsection (b) of this section or elsewhere in this title, the effect of provisions of this title may be varied by agreement. C.R.S. § 4-1-302(1).

After Foreclosure: A Housing Surplus

Of the 74.5 million homes in the United States approximately 45 million homeowners borrowed money to buy their homes.   Out of these 45 million, six million homeowners have already lost their homes to foreclosure and another ten million are underwater, which mean their homes are worth less than their mortgages.[1]     Potentially over 16 million homes could be bank owned and on the market as REO properties.

REO stands for “real estate owned” by a lender typically a bank, government agency, or government loan insurer, after a foreclosure.   Once a lender takes possession of the foreclosed property, the lender is responsible for insurance, taxes and maintenance of the property in order to preserve the asset.  These expenses add up if the property does not sell.  These expenses combined with the decreasing value of real estate highlight a conundrum for lenders: foreclose on distressed property or modify loans and preserve as much of the loan as possible.

As it stands now, real estate values have fallen around 30% since 2006. [2]   Admittedly the reduced value reflects just how over heated the real estate market became when securitizing residential mortgages generated more money than the loans themselves.  However, unloading more inventory will only add to the downward pressure on real estate values with a commensurate dampening effect on the overall economy.

The dampening effect works something like this:  Federal banking regulations[3] require lenders to maintain a certain amount of cash to cover a percentage of the difference between the amount of loan and the value of the asset securing the loan.   The longer a lender holds the property the more cash they have to hold to cover its loss on the loan.   And with its money tied up as collateral for its bad loans, lenders are unable lend to potential buyers.   With banks unable to make loans because of this reserve requirements and new stricter lending guidelines, sales of residential property are stalled.   The result is a vicious downward spiral.  Residential property values continue to slide and banks have their money tied up. 

Another effect of this downward spiral in property values is the strain on American communities.  Local governments lose income generated from property taxes and are unable to pay for public services.   Sprawling neighborhoods of foreclosed properties become waste lands of crime and deterioration without adequate police and fire protection.   Schools close down and the higher number of students per classroom in the remaining schools reduces the effectiveness our educational system.   Unemployment remains high because manufacturing, construction and service related industries follow the real estate development.

Within this grim landscape, it is as wonder that lenders have not figured out that entering into a new agreement with existing homeowners to stay in their homes by either reducing the interest rate, the amount owed or extending the time to pay holds more hope than foreclosing on distressed real estate.   Why not modify loans with people who want to stay in their homes rather than selling these homes after foreclosure for half of what lenders can expect from loan modifications? 

A lender’s decision to foreclose is in fact a modification albeit controlled by bank accounting rules called “troubled debt restructuring”.[4]     And even these rules countenance against wholesale foreclosures in favor of more workouts with current homeowners because the more lenders foreclose and sell their REO inventory, the lower the price of REO properties.

Modifying loans to reflect the 30% decline in real estate values is better than selling the properties after foreclosure with a return of 60% to 65% of the loan amount.[5]   Saving 30% to 35% on loans makes good sense and combined with the banks’ tacit acknowledgement that they are partially responsible for the housing bubble, may help communities move forward together.    

So, why are lenders stuck on foreclosure rather than modification?  

One concern is there will be a rush of homeowners, who are able to pay on their loans, to modify loans in order to lower interest rates and/or reduce the principle amount.   Considering the downward pressure on the real estate market, anyone who asks for a modification are most likely candidates for foreclosure in the future and dealing with it now may help stem a further decline.       

Another answer may lie in the fact that lenders do not understand the full extent of the financial crises.  Or they might understand the financial crisis and are waiting for the government to bail them out as they did during the Savings and Loan scandal in the 1980’s or as they did in 2008 with TARP.   Maybe lenders are unsure on the direction of the economy and are stalling by blaming tougher loan guidelines and high unemployment as their reason for not lending money.  

There are signs that lenders may want to reconsider blaming the borrowing public or government regulations.  Lenders are coming under increased government scrutiny for mortgage fraud[6]  and title companies are becoming leery of insuring title to REO properties because of the uncertainty of the chain of title problems recently highlighted in mortgage backed securities.   Another consideration is the talk of “right to rent” legislations which would allow homeowners to stay in their foreclosed homes and pay rent.  This legislation would only cover government backed mortgages held by Fannie Mae and Freddie Mac which make up half of the foreclosures.[7]  Consequently, Lenders will have a harder time selling their REO properties if the government is leasing their REO stock.

Hopefully, lenders will see their way to working with distressed homeowners rather than against them.

Unfortunately, the corporate face of banking does not bode well for individuals facing tough economic times.  Lenders, who were in a better position to prevent the housing bubble than the individual home buyers, are avoiding responsibility at all cost because they know the tax payer will eventually bail them out.   

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[1] American’s equity in their homes near a record low, Christopher S. Rugaber, Associated Press June 10, 2011.

[2] S.&P./Case-Shiller index, tracks the value of residential real estate in 20 metropolitan regions across the United States.

[3] 12 U.S.C. 29, 84 and C.F.R. 34.82

[4] Accounting Standards Codified (ASC) 310—40.

[5] The Next Crisis in Residential Mortgages-New Data Emerges, by Dan Alpert of Westwood Capital, The Big Picture, June 20, 2011.

[6] Office of the Comptroller of the Currency, Press Release April 13, 2011.  See:  http://www.occ.treas.gov/news-issuances/news-releases/2011/nr-occ-2011-47.html

[7] Right to Rent: Will Obama Administration Finally Fix Housing? Dean Baker, Truthout   June 27, 2011.

Modifying Your Mortgage is not Worth the Effort

Why Modify a Mortgage?

There are approximately 46.7 million mortgages in the United States. [1] About 60 percent of all outstanding residential mortgages by dollar amount are securitized. Over 90 percent ofmortgages originated in recent years have been securitized. [2]

Securitized means the loans are pooled and transferred into a security called mortgaged backed securities (MBS). The security pays the stream of income from pooled loan payments to investors who buy the securities. The securities are controlled by a trust for the benefit of the investors but the actual collection of the loan payments and decisions on whether to modify or foreclose a loan upon a default falls on the servicer. Servicers are the connection between the investors who expect their steady stream of income and the home buyers who make the payments. Servicers are often the banks originating the loans but not always. Servicers are paid a steady pay check when homeowners make their monthly payments. A problem arises when homeowners stop making payments: Servicers look after themselves because there is no incentive to preserve the assets of the investors or help out homeowners who have fallen on hard times. [3] [4]

There have been approximately 5 million foreclosures and 14 million mortgages that are in default according to Mark Zani, Moody’s Analytics chief economist in article “No end in sight to foreclosure quagmire”. [5] Foreclosures will continue at an alarming rate. “Lenders filed a record 3.8 million foreclosures in 2010, up 2% from 2009 and an increase of 23% from 2008, according to RealtyTrac.” [6]

Drawbacks and Traps of Modification

Modifying mortgages is seen as a way to stem the tide of foreclosures. In 2009 legislation was enacted to encourage but not require loan servicers to reduce mortgage payments by lowering the interest rate and extending the loan term. The legislation known as the Home Affordable Modification Program or HAMP has had little success because it was confusing and was only voluntary which means servicers were not interested in modifying loans. [9] The trial modifications under HAMP, where homeowners agree to pay a lesser amount to prove they can meet the terms of the modification, may have even facilitated foreclosure because the lower payments constituted a default under the original mortgage.  See “No end in sight to foreclosure quagmire” above.

The Trap

A word of caution on modifying your home loan outside of HAMP and through the private sector:The servicers, who have been facing a rising tide of litigation relating to chain of title issues including robo signing and filing false affidavits, have resurrected a practice of asking homeowners not to contest a foreclosure or otherwise sue the servicer. These “waiver” provisions are not allowed under HAMP. Even if states have enacted similar prohibitions on waiver provisions in modification agreements, servicers are circumventing the law by including waiver provisions in temporary agreements sometimes referred to as “forbearance agreements”. [12]

Why Would a Servicer Give a Homeowner a Break?

There are two more reasons why discussing modification of your loan with the servicer is not worth your time or effort. First, mortgage servicers make money foreclosing on loans not in modifying the loans. Secondly, the servicer may not have the ability to modify a loan according to the structure of a MBS and the contractual relationships of the parties in a MBS.

Servicers Look After Themselves

A servicer’s pay check comes from a percentage of the total unpaid principal balance of the loan pool. Reducing the amount of the loan equates to less money for the servicer and therefore a good reason a servicer has no interest in helping homeowners reduce their payments or loan amount through modification. Servicers also benefit from delinquent accounts because the late fees and interest adds to the overall loan balance and thereby increases the servicers’ income.When deciding to modify a loan or allowing it to go through foreclosure, the servicer’s own self interest will lead to foreclosure because the servicer recover late fees and interest in foreclosures. These fees will most likely be forgiven in a modification. In addition, performing large numbers of loan modifications would cost servicers upfront money in fixed overhead costs, including staffing and physical infrastructure, plus out-of-pocket expenses such as property valuation and credit reports as well as financing costs. “This business model, of creaming funds from collections before investors are paid has been extremely profitable.” [13]

Frankenstein Contracts

The securitization of mortgages creates barriers to modification. The Pooling and Service Agreement (PSA) which controls all parties in a security limit the ability of a servicer to modify a loan. [14] The PSA sets strict parameters for servicers who are handling money that belongs to the investors. These parameters are strict because it is one way that investors retain some control over their money.

Examples of ways to limit servicers include outright prohibition, limited to type, number or circumstance, sometimes third-party consent is required and the most effective is requiringservicers to purchase any loans they renegotiate at the face value outstanding or at a premium. [15]

Contracts that do not allow modification is based on a policy originally thought to encourage homeownership by reducing the risk banks undertook in making home loans. The principle underling this policy was the idea that homeowners would be less likely to default on their loans if there was no way to change their terms. This very same principle also helped sell the securities.  

Investors, not wanting to shoulder the risk of default of mortgages shifted from the banks to the investors in the securitization process were somehow mollified by the fact that the contracts generating the cash flow they bought could not be changed.

“Contracts that cannot be modified are more likely to perform according to their original terms. This is the idea behind the quest for immutability as a method of managing risks from securitization.”   [Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities @1087]

Banks Do Not Want to End Up With All the Losses

In addition to this formal rigidity to modifying loan, there is a structural aspect of MBS that discourages modification.

“Most PSAs restrict mortgage renegotiation to loans that are in default or where default is imminent or reasonably foreseeable in order to protect the SPV’s (Trusts) pass-through tax and off–balance sheet accounting status. Allowing modifications under less dire conditions may indicate that the servicer is actively managing the SPV’s assets. Active management would in turn trigger a new layer of taxation on the SPV’s income, in addition to the tax investors pay on their income from the RMBS. Moreover, because the originator is often the servicer, overly active management of the securitized loans could suggest that it did not truly sell the risk. In response, regulators could require the servicer/originator to bring the loans back onto its balance sheet, defeating the point of securitization.”  [Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities @1096]

If investors in the MBS do not want an independent party fooling around with their funding sources and if passive management is required to maintain the favorable tax status of the MSB, the question begging to be asked is why do servicers even entertain the idea of modifying loans?

Considering most loans being foreclosed on are not owned by a local bank, the chances of a homeowner successfully obtaining a modification of their loan seems remote. Securitization has effectively transferred the risk of the housing bubble on to unsuspecting investors of the MBS and the homeowners whose dream of homeownership has been shattered.

James Knowlton is a lawyer in Basalt, Colorado.

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[1] http://www.census.gov/compendia/statab/2011/tables/11s0993.pdf

[2] Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities, Anna Gelpern, Adam J. Levitin, Southern California Law Review, Vol. 82:1075

[3] Mortgage Servicing”, Adam J. Levitin & Tara Twomey, Georgetown Public Law and Legal Theory Research Paper No. 11-09,http://scholarship.law.georgetown.edu/facpub/498.

[4] “Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior” by Diane E. Thompson Of Counsel, National Consumer Law Center, October 2009

[5] http://www.11alive.com/news/article/190391/40/No-end-in-sight-to-foreclosure-quagmire

[6] Jon Prior, HousingWire.com, Wednesday, January 12th, 2011

[7] Adjustable Rate Mortgages (ARMS) provide initial low interest only mortgage payments with increases in payments several years later. Most homeowners cannot afford the increased monthly payment and return to the bank to refinance. However, as ARM payments begin to balloon in this economic downturn, homeowners are unable to qualify for refinancing under the stricter loan requirements and end up losing their homes to foreclosure. 

[8] “Are Foreclosures Contagious?” FDIC Center for Financial Research Working Paper 2011-4.

[9] The House of Representatives recently voted to end HAMP”. The Senate needs to vote to make it final which is not expected.

[10] Obama Anti-Foreclosure Efforts Still Falling Short” Alan Zibel, WSJ, May 6, 2011.

[11] “Private Mortgage Modification Reaches 1.5 Million”, by Kerry Curry, HousingWire.com, December 12, 2010

[12] “Borrowing Trouble- Some lenders are modifying mortgages only after homeowners waive their right to sue”. Pro Plublica at Slate, Paul Kiel, May 9, 2011.

[13] “Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior” by Diane E. Thompson of Counsel, National Consumer Law Center, October 2009

[14] Three kinds of agreements form the core of a securitization transaction: a pooling agreement, in which the SPV purchases a pool of assets from the originator or an intermediary; a servicing agreement between the servicer and the SPV that sets forth the duties and compensation of the servicer; and an indenture, which sets forth the rights of the investors in the SPV’s securities and the duties of the trustee that oversees the securities and the SPV. Typically, these three agreements are combined into a single document (the PSA). “Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities” @ 1088

[15] “Rewriting Frankenstein Contracts: Workout Prohibitions in Residential Mortgage Backed Securities” @1090

[16] Resolving The Foreclosure Crisis: Modification of Mortgages in Bankruptcy”, by Adam J. Levitin, Wisconsin Law Review, 2009. Electronic copy available at: http://ssrn.com/abstract=1071931.

Chink in the Armor: A Foreclosure Defense

The securitization of home loans may provide a new way to contest foreclosures.   An Alabama court recently ruled that a trustee of a pool of home mortgages had no standing to bring a foreclosure action on one of the home mortgages allegedly in the pool despite having possession of the original Promissory Note because the transfer of the Note did not follow the express terms of the Pooling and Service Agreement governing the pooled mortgages.[1] 

WHAT IS SECURITIZATION?

Securitization[2] of home loans is the pooling and selling of the cash flow from thousands of mortgages. Mortgages are pooled into an entity, often referred to as a special purpose vehicle, in order to separate them from the banks who originally lent the money.  Real Estate Mortgage Investment Conduits (REMICs) are a type of special purpose vehicle used for the pooling ofmortgage loans.[3]    I use REMIC in this post to identify these special purpose vehicles or trusts because the name reflects their real function as conduits.

REMIC purchases the home loans by selling interests in the REMIC in the form of a security which may be called a bond, a pass-through security or collateralized mortgage obligation (CMO).  Investors[4] in a REMIC buy these securities in order to receive a fairly secure and steady stream of cash from the home owners making their mortgage payments.  Consequently, the mortgages, themselves become the collateral for these securities.  How the money from the collateral is distributed depends on the quality of the underlying collateral and is subject to rules too complicated for this post. Suffice it to say, that the home loans are rated by their risk of non-payment and based on their rating, a price is set for different classes, or tranches, of home loans.  An investor pays more for a higher rated class of home loans and less for a lower rated class of home loans.   

Banks  usually structure asset-backed securities using trusts.[5]  In choosing a trust structure, banks seek to ensure that the transaction insulates the assets from the reach of the issuer’s creditors or are “bankruptcy remote” and that the issuer, securitization vehicle, and investors receive “flow-through” treatment that minimizes the tax consequences.[6]  Simply, the trust is the legal owner of the pool of mortgages. 

The trustee is a third party retained for a fee to administer the trust that holds the underlying assets supporting an asset-backed security.  The trustee is primarily concerned with preserving the rights of the investor.  Generally, the trustee oversees the disbursement of cash flows as prescribed by the indenture or pooling and servicing agreement, and monitors compliance with appropriate covenants by other parties to the agreement.  The trustee also is responsible for declaring an event of default.[7]   

The structure of a transaction is governed by the terms of the pooling and servicing agreement. The pooling and servicing agreement is the primary contractual document between all parties involving the transfer of specific home loans from the originator, servicer and ultimately to the specific trust. The pooling and servicing agreement documents the responsibilities of the trustee.[8]    

BREACH OF TRUST DEFENSE

Now that you understand how your home loan became collateral in a security sold to the auto workers pension fund, we can dive into how the Alabama court in Horace vs. LaSalle Bank, decided that LaSalle Bank, the trustee of the security allegedly holding Ms Horace’s home loan, could, not now or ever, foreclose on Ms Horace’s home.   Judge Albert L. Johnson made two conclusions in his order: 

“First, the Court is surprised to the point of astonishment that defendant trust (LaSalle Bank National Association) did not comply with the terms of the its own Pooling and Servicing Agreement and further did not comply with New York Law in attempting to obtain assignment of Plaintiff Horace’s note and mortgage. 

Second, plaintiff Horace is a third party beneficiary of the Pooling and Servicing Agreement created by the defendant trust (LaSalle Bank National Association).  Indeed without such Pooling and Servicing Agreements, plaintiff Horace and other mortgagors similarly situated would never have been able to obtain financing.” 

In drawing his conclusion, Judge Johnson accepted Plaintiff’s argument that: 

 “According to the terms of the PSA, all promissory notes transferred to the Trust are required to have a complete chain of endorsements from the original payee thereof to either “Blank” or to the Trustee for the specific Trust.” [9]

The Pooling and Service Agreement stated the following regarding an “unbroken chain of endorsements”: 

“In connection with such sale, the Depositor has delivered to, and deposited with, the Trustee or the Custodian, as its agent, the following documents or instruments with respect to each Mortgage Loan so assigned: (i) the original Mortgage Note, including any riders thereto, endorsed without recourse (A) in blank or to the order of “LaSalle Bank National Association, as Trustee for Certificate holders of Bear Stearns Asset Backed Securities I LLC, Asset-Backed Certificates, Series 2006-EC2,”or (B) in the case of a loan registered on the MERS system, in blank, and in each case showing an unbroken chain of endorsements from the original payee thereof to the Person endorsing it to the Trustee” (Emphasis added.) 

And Judge Johnson rejected LaSalle Bank’s  Commercial Code, Article 3, “Negotiable Instruments”[10] argument that: 

“It is black letter law that the holder of a negotiable instrument is entitled to enforce the terms of the instrument (cite omitted).  It is clear that the Note is a negotiable instrument as defined under Alabama law….. Additionally, the Note is endorsed in blank without recourse and is therefore payable to bearer. (Cite omitted).  Therefore, any person in possession of the Note is entitled to enforce its provisions.”[11] 

In declining to follow Alabama law on “negotiable instruments” in favor of New York Trust law as it applies to this particular mortgage backed securities, Judge Johnson understandably found the following argument in the “Memorandum of Law in Support of Plaintiff’s Motion for Summary Judgment and In Response t Defendants’ Motion for Summary Judgment”[12]  (Memo) persuasive.  

1.  The trustee is not an ordinary trustee.  The trustee is a corporate trustee who must adhere to the Pooling and Servicing Agreement. (Page 12, Memo) 

“[t]he corporate trustee has very little in common with the ordinary trustee . . . . The trustee under a corporate indenture . . . has his [or her] rights and duties defined, not by the fiduciary relationship, but exclusively by the terms of the agreement. His [or her] status is more that of a stakeholder than one of a trustee.” (Cite omitted). 

2.  A Trust acquires ownership and control over an asset only when there has been an   effective delivery.  An effective transfer has the name of the trust on the Note as the intended holder. (Page 11, Memo) 

“In the context of mortgage-backed securitization, it is clear that registration of the notes and mortgages in the name of the trustee for the trust is necessary for effective transfer to the trust. Within the Statutes of New York governing Trusts, Estates Powers and Trusts Law (EPTL) section 7-2.1(c) authorizes investment trusts to acquire real or personal property “in the name of the trust as such name is designated in the instrument creating said trust.” (Emphasis added) 

3.  Without the registration of the asset with a specific trust, how does anyone know who is to receive the cash flow from the asset. (Page 13, Memo) 

“Trust property cannot be, as the Defendant argues, held with incomplete endorsements and assignments that do not indicate that the property is held in trust by a trustee for a specific beneficiary trust. In fact, it is clear in the law of New York that an attempt to transfer to a trust which fails to specify both a trustee and a beneficiary is ineffective as a conveyance to the Trust. “The failure to name a beneficiary for the Trustee renders the assignment without merit.”(Cite Omitted) 

4.   New York law expressly requires that for property to be validly delivered to a trust, the property must pass completely out of the control of the donor (and its agents). (Page 13, Memo) 

“It is the consummation of the donor’s intent to give that completes the transaction.  Intention alone, no matter how fully established, is of no avail without the consummated act of delivery. How could one logically argue that delivering a promissory note endorsed in blank (making it bearer paper) into a trustee’s vault is “delivery beyond the authority and control of the donor” when the vault is managed by the agent of the donor? If the donor were to claim that the promissory note were its property, not the trustee’s, there would be no evidentiary basis for the trustee to claim ownership.” (Cite Omitted) 

5.  Trustees are usually large banks who have responsibilities for multiple trusts and therefore it is difficult to know what asset goes into what security without a specific delivery or registration with a specific trust. (Page 14, Memo)

“Trustees for securitizations often occupy many roles simultaneously and conflictingly both as document custodians and trustees for myriad thousands of securitizations as well as for various parties who are active in the securitization process including originators, servicers, sponsors and depositors. Accordingly, it is inconceivable that anything other than registration into “the name of the trust as such name is designated in the instrument creating said trust property” could ever qualify as delivery to any particular securitization trust. Absent such registration, there would be nothing that would indicate which of thousands of trusts in the care of a trustee a particular promissory note might belong to or if it were the personal property of the trustee itself. Absent such registration, a promissory note would simply be bearer paper, and thus the property of anyone who obtained possession of it.” 

6.  The Pooling and Servicing Agreement which set up the trust cannot be altered. (Page 11, Memo) 

“Because the method of transfer is set forth in the Trust instrument, it is not subject to any variance or exception. (Cite omitted) The Trust documents require that the promissory notes and mortgages be transferred to the Trustee, which under New York trust law requires valid delivery.” 

7.  The whole securitization process depends on a complete, fully documented transfer of the home loan mortgages from the bank to the trust in order to comply with the legal objective of being “bankruptcy remote”. (Page 8, Memo) 

“First, all notes sold to the Trust were required to have an unbroken chain of endorsements from the original payee to the person endorsing it to the Trustee.  This requirement stems from the particular business concern in securitization, namely to evidence that there was in fact a “true sale” of the securitized assets and that they are in no way still property of the originator, sponsor, or depositor, and thus not subject to the claims of creditors of the originator, sponsor or depositor.” [13]

Summary

Possession of the Note is not enough to give a trustee standing to foreclose according to this case thereby undermining industry arguments relying on the commercial code’s “negotiable instruments” provisions.  Instead, a complete chain of title may be necessary to prove the one foreclosing has standing.     The ramifications for the banking industry would be substantial if this argument gains traction.  The effect may be larger as expressed by Nick Wooten, the Plaintiff’s attorney:  ”My only wish after being in this fight for the three and a half years is that we will get an honest evaluation of what is really wrong, so we can as a country get back on our feet.  If we don’t get control of servicing, they will drive us into a depression that will take 20 years to get out of.”  Housing Wire, Alabama judge denies securtization trustee standing to foreclose, Kerri Panchuk, April 1, 2011.  

As for Judge Johnson’s second conclusion of law – whether a home owner is a third party beneficiary of a Pooling and Service Agreement governing the security holding the home owner’s loan – is subject to conflicting decisions in Alabama.    There are two other Alabama cases that say that a home owner is not a third party beneficiary. They are U.S. v Congress and Wells Fargo Bank v Edward J. Thomas.   This subject will have to wait for another post.  

James Knowlton is a lawyer in Basalt, Colorado.

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[1] Horace vs. LaSalle Bank National Association, et al., CV-2008-000362.00, (3/30/11) Circuit Court of Russell County Alabama. 

[2] Asset Securitization: Comptroller’s Handbook, Office of the Comptroller of the Currency, November1997,  http://www.occ.treas.gov/handbook/assetsec.pdf .  Last viewed 04/6/2011.

[3] Also know as a Collateralized Mortgage Obligation or CMO.

[4] The largest purchasers of securitized assets are typically pension funds, insurance companies, fund managers, and, to a lesser degree, commercial banks. The most compelling reason for investing in asset-backed securities has been their high rate of return relative to other assets of comparable credit risk.  Asset Securitization: Comptroller’s Handbook, Office of the Comptroller of the Currency, November1997,   

[5] The securitization process redistributes risk by breaking up the traditional role of a bank into a number of specialized roles: originator, servicer, credit enhancer, underwriter, trustee, and investor. Banks may be involved in several of the roles and often specialize in a particular role or roles to take advantage of expertise or economies of scale. The types and levels of risk to which a particular bank is exposed will depend on the organization’s role in the securitization process. Id.

[6]  Id.

[7] Id.

[8] Id.

[9]  “Plaintiff Phyllis Horace’s Motion for Summary Judgement pursuant to Rule 56 of the Alabama Rules of Civil Procedure and Response to Defendant’s Motions for Summary Judgment”, Page 20.  

[10] See my previous post on “MERS and the Evolution of Foreclosure” for an explanation of UCC Article 3, “Negotiable Instruments”.

[11]  Horace vs. LaSalle Bank, Defendants’ Motion for Summary Judgment, page 10.

[12] Horace vs. LaSalle Bank,  “Memorandum of Law in Support of Plaintiff’s Motion for Summary Judgment and In Response to Defendants’ Motion for Summary Judgment”.  

[13]  Id.