I have been practicing foreclosure and bankruptcy law for over sixteen years, and during most of that time, I have represented the creditors, the banks, “the big, mean, bad guys.” Lately, though, more and more borrowers have been seeking my counsel, and from what I have seen, those big banks have made some big mistakes. I would implore any defaulting homeowner on Long Island (and that includes Brooklyn and Queens), to bring their foreclosure papers to me for review. You may be surprised by my analysis.
Make no mistake about it. There are many home loans out there wherein the mortgage broker, or lender itself, victimized the borrower - true cases of predatory lending. However, there are also many home loans out there that were originated with a bit of deception on both sides. The broker doctored the application information, the lender turned a blind eye and the borrower acquiesced because the ultimate goal was to buy a house and refinance for a better deal down the road.
Where are we now? Well, now, the borrower is struggling or in outright default on the home loan, and the payoff on the loan or loans (there are many second mortgages, piggybacks and lines of credit out there, call them what you will) either rival or are more than the value of the homes themselves. We call this situation upside down or underwater. The mortgage broker is either out of business, in jail or otherwise removed from the situation. And the lender? Many of them are defunct or have sold their home loans on the secondary mortgage market. Holding the bag are the investors in these home loans. So, no biggie, they just foreclose on the homes, right? Wrong. Even if the foreclosing investors are legitimate owners of the home loan debts, the bidders at these foreclosure auctions are savvy and are not willing to pay full price for the homes. As I stated above, the home loan payoffs now rival or exceed the homes’ values, so unless the owners of the notes and mortgages are willing to take a haircut at the auctions, they are forced the buy the homes back themselves. Never before in the history of the world have so many lenders been owners of so many residences. Okay, that’s one problem. But there’s shaping up to be a novel twist of epic proportions, and it may be a boon for the seemingly hopeless homeowner and a literal bust for the investors.
In the frenzy to make more and more money, the lenders appear to have made vital mistakes in the transfer of the home loan debts. In 1994, major members of the mortgage industry created Mortgage Electronic Registration Systems Inc (“MERS”). Remember this acronym. This was a service the purpose of which was to register and track the owners of mortgages without having to actually go down to the county clerk’s office, pay a fee and make a formal assignment of mortgage from one entity to another. This created a more fluid market and afforded lenders the ability to buy and sell your “mortgage paper” at a furious pace. The drawback? Many courts are now opining that such transfers were not effected according to state law and thus are void. Do you mean to tell me that “HSBC, as Trustee”, the party suing to foreclose on my house may not legally own my note and mortgage? Yes, that is what I am telling you. And because it does not legally own your note and mortgage, it has no standing to foreclose, and you may have the ultimate defense against it.
You see, you gave a promissory note and signed a mortgage to “Original Lender” in 2005. You remember that much. In the meantime, Original Lender sold the loan to Lender B. Lender B sold the loan to Lender C, and Lender C sold the loan to the HSBC Trust. When the HSBC Trust decided to commence the foreclosure action against you, some Joe Blow, signing for MERS, purportedly assigned your mortgage from Origina Lender directly to the HSBC Trust. That created more complications and inconsistencies than this author believes warrants writing about in this simple article, but suffice it to say that it was not good for the HSBC Trust.
Not only does the above situation create significant obstacles to foreclosing plaintiffs in state courts, but wait until you hear what can happen in a bankruptcy court! In Nassau and Suffolk Counties on Long Island, New York, we may be on the precipice of some big cases. Judge Grossman, in a 2011 decision called In re Agard, opined among other things that MERS does not have the capacity to assign a mortgage. That opinion is on appeal, but the issue has been forced onto another judge in the same courthouse. If the bankruptcy courts begin to find assignments of mortgages void, then debtors are going to have to start listing the entities that are foreclosing against them as unsecured creditors on their petitions. As many know, unsecured debt can either be paid off in a Chapter 13 five-year plan, for pennies on the dollar, or it can be discharged entirely in a chapter 7 bankruptcy case.
Many might question, and some indignantly, “Why would a defaulting homeowner be entitled to such a windfall? My neighbor might get to keep his house by paying $50,000 over five years, or more incredibly, receive money at a bankruptcy sale of his house when it has no equity?” Yes, that indeed may be the case. Right now, I cannot think of a reason why it could not be the case. But please try not to think of it as a case wherein someone who took a risk does not have to pay the loss. Rather think of it as a banking industry, blinded by greed, which shot itself in the foot. Either we will have a rational resolution to the foreclosure crisis or the integrity of the banking industry will be preserved. It is an “either-or” problem, and with the decisions in the hand of the judiciary at the moment, it looks as though we are getting a rational resolution. The only game-changer will be if Congress legislates to save the banks from their own poor practices. We’ll soon see how this one plays out.Article Written by Charles J. Fisher, Esq. Mr. Fisher has over 16 years of experience with residential foreclosures and bankruptcy. His practice covers all of Long Island as well as Brooklyn and Queens, and his main offices are located in Massapequa, New York.
Contact Mr. Fisher at email@example.com.