Entries in Foreclosure (2)

Wednesday
Sep282011

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.

 

 

 

 

 

 

 

 

 


[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);

Thursday
Jun302011

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.   

 

 

 


[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.