In the past, judges have let these foreclosures proceed; but in October 2007, an intrepid federal judge in Cleveland put a halt to the practice. U.S. District Court Judge Christopher Boyko ruled that Deutsche Bank had not filed the proper paperwork to establish its right to foreclose on fourteen homes it was suing to repossess.4?? That started the ball rolling, and by February 2008, judges in at least five states had followed suit. In Los Angeles in January, U.S. Bankruptcy Judge Samuel L. Bufford issued a notice warning plaintiffs in foreclosure cases to bring the mortgage notes to court and not submit copies. In Ohio, where foreclosures were up by a reported 88 percent in 2007, Attorney General Marc Dann was reported to be challenging ownership of mortgage notes in forty foreclosure cases.5
Few defendants, however, are lucky enough to have advocates like Charney and Dann in their corner, and most defaulting debtors just let their homes go. A simple challenge can be filed to foreclosure proceedings even without an attorney, and some subprime borrowers have successfully defended their own foreclosure actions; but retaining an attorney is strongly recommended. People representing themselves are often not taken seriously, and they are likely to miss local rule requirements. With that warning, here is some general information on challenging standing to foreclose:
Some states are judicial foreclosure states and some are non-judicial foreclosure states. In a judicial foreclosure state (meaning the matter is heard before a judge), if a promissory note or recorded assignment naming the plaintiff (the bank acting as trustee for the investors) is not attached to the complaint, the defendant (the defaulting home owner) can file a response stating that the plaintiff has failed to state a claim. This can be followed with a motion called a demurrer to the complaint. Different forms of demurrers can be found in legal form books in most law libraries. In essence the demurrer states that even if everything in the complaint were true, the complaint would lack substance because it fails to set out a copy of the note, and it should therefore be dismissed. Ordinarily there is no need to cite much in the way of statutes or case law other than the authority reciting the necessity of showing the note proving the plaintiff is entitled to relief.
In a non-judicial foreclosure state such as California, foreclosure is done by a trustee without a court hearing, so the procedure is a bit trickier; but standing to foreclose can still be challenged. If the homeowner has filed for bankruptcy, the proceedings are automatically stayed, requiring the lender to bring a motion for relief from stay before going forward. The debtor can then challenge the lender's right to the security (the house) by demanding proof of a legal or equitable interest in it.6 A homeowner facing foreclosure can also get the matter before a court without filing for bankruptcy by filing a complaint and preliminary injunction staying the proceedings pending proof of standing to foreclose. A judge would then have to rule on the merits. A complaint for declaratory relief might also be brought against the trustee, seeking to have its rights declared invalid.7
An Equitable Settlement for Everyone
These defenses can help people who are about to lose their homes, but there is another class of victims in the sub-prime mortgage crisis: investors in MBS, including the pension funds and 401Ks on which many people depend for their retirement. If the trustees representing the investors cannot foreclose, the lucky debtors may be able to stay in their homes without paying. However, the hapless investors will be left holding the bag. If the investors manage to shift liability back to the banks, on the other hand, the banks could go down and take the economy with them. How can these tricky issues be resolved in a way that is equitable for all? That question will be addressed in a followup article. Stay tuned.______________________________________________________________________________
1. Jerome a Paris, “Countdown to $200 Oil Meets Anglo Disease,” European Tribune (June 7, 2008).
2 “Contesting a Foreclosure Lawsuit: Who Owns the Mortgage?”, ForeclosureFish.com (April 22, 2008).
3. CNBC, “Subprime Derivatives,” youtube.com/watch?v=0YNyn1XGyWg (June 2007).
4 Vinod Kothari, “The True Sale Question,” vindkothari.com.
3. Bob Ivry, “Banks Lose to Deadbeat Homeowners as Loans Sold in Bonds Vanish,” Bloomberg.com (February 22, 2008).
4. Judge Christopher A. Boyko, Opinion and Order, In re Foreclosure Cases, Case 1:07-cv-02282-CAB, U.S. District Court, Northern District of Ohio, Eastern Division, filed 10/31/2007.
5. B. Ivry, op. cit.; Jimmy Higgins, “Judge Boyko’s Snowball Starts Rolling Downhill,” Fire on the Mountain (blogspot) (February 26, 2008); Wendy Davis, “Finding It Hard to Be a Loan,” ABA Journal (March 2008).
6. “More Trouble for Mortgage Securitizers?”, bigpicture.typepad.com(December 9, 2007).
7. Aaron Krowne, et al., “True Sale, False Securitizations,” iamfacingforeclosure.com (November 16, 2007).
(Note: You can view every article as one long page if you sign up as an Advocate Member, or higher).
