Daily Development for Tuesday, March 23, 2010
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

MORTGAGES; FORECLOSURE; STANDING: Although state law requires that the defendant raise the issue of standing at the beginning of a case, where foreclosure defendant does not appear and files no response, court may raise standing issue independently and will dismiss if it determines that filed papers do not support verified complaint stating that plaintiff is owner of the note and mortgage.

Deutsche Bank National Trust Co. v. McRae, 2010 Westlaw 309105 (N.J. Sup. 1/25/10)

This case likely is a product of the current turmoil, well known to the New York courts, concerning whether mortgagees seeking to foreclose in fact have control over the debt.  New York law apparently that the mortgagee of a “high cost home  loan, or the mortgagee’s agent, demonstrate when filing for foreclosure that it “is the owner and holder of the mortgage and note.”

“1. Any complaint served in a proceeding initiated pursuant to this article relating to a high-cost home loan or a subprime home loan, as such terms are defined in section six-l and six-m of the banking law, respectively, must contain an affirmative allegation that at the time the proceeding is commenced, the plaintiff:

(a) is the owner and holder of the subject mortgage and note, or has been delegated the authority to institute a mortgage foreclosure action by the owner and holder of the subject mortgage and note; and

(b) has complied with all of the provisions of section five hundred ninety-five-a of the banking law and any rules and regulations promulgated thereunder, section six-l or six-m of the banking law, and section thirteen hundred four of this article.

2. It shall be a defense to an action to foreclose a mortgage for a high-cost home loan or subprime home loan that the terms of the home loan or the actions of the lender violate any provision of section six-l or six-m of the banking law or section thirteen hundred four of this article.”

It is not clear whether possession of the debt might be deemed the possession of the rights under the mortgage.  The editor would venture the conclusion “probably not.”   but that issue is moot in this case, because the question raised by the court on its own motion was whether the mortgagee in fact held the note at the time of filing for foreclosure.  There was a written assignment of the mortgaage. 

As indicated the mortgagee filed a verified complaint stating that is was the owner of the note and mortgage, but the attorney’s verified the complaint on the basis of “information and belief.”  It attached a xerox copy of the note, made out to original lender, was attached to the complaint filing.  The court commented that this clearly does not satisfy the statutory standards for ownership of the note 

The judge first determined that the mortgagee had not met New York’s new statutory procedure mandating a kind of mediation period prior to final foreclosure, and also that it had not demonstrated to the court’s satisfaction that it owned the note and mortgage.  In this opinion, the court does not give the basis for that original opinion. 

Later, after meeting the requirement concerning mediation, the mortgagee sought to reargue the question as to whether it was the holder of the note.  This time it attached a copy of the note that contained an endorsement of the note from the original mortgagee to an apparent related party to the original mortgagee and then an endorsement in blank, executed by the original mortgagee.  Both were undated.   The judge did not indicate whether these endorsements were on the note body itself or in allonges attached to the note. 

Although there was authority, and the statute suggested, that issues of possession of the note are to be raised defensively at the first hearing, the judge determined that, in the absence of the mortgagor or its counsel at that hearing, the court should represent the interest of the mortgagor and make a ruling on standing where appropriate. 

“Today, with multiple and (and often unrecorded) assignments of mortgage obligations and multiple securitizations often related to the same debt, the courts should carefully scrutinize the status of parties who claim the right to enforce these mortgage obligations. For the unrepresented homeowner, the issues of standing and real party in interest status of the foreclosing party are never considered. Without such scrutiny, there is a risk that the courts will give the judicial "seal of approval" to foreclosures against unrepresented homeowners who have little, if any, understanding of these issues, much less the legal significance thereof. To quote my colleague in Kings County, "[a]llowing this case to proceed on behalf of a plaintiff without standing at the commencement of the action would [also] open the door to potential fraud and place in jeopardy the integrity of title to the property to be foreclosed."

Comment: This case could have been avoided easily if the parties responsible for the foreclosure had arranged their ducks in a row prior to filing.  They clearly had an assignment of the mortgage and control over the note.  But the editor agrees that the circumstances suggest that the formal endorsements of the note did not occur until after the mortgage was first filed.  And it might have been difficult for the mortgagee to demonstrate that the original note was actually in possession of the foreclosing party, unendorsed, prior to the filing.   

There is a lot of fuss and feathers about the propriety of behavior of mortgage foreclosure lawyers.  It seems likely that, in the past, they routinely fudged the rules because, after all the debt was not paid and the mortgagor was not contesting the foreclosure proceeding.  No more fudging.  But why haven’t they heard this message already???

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