Contributed by Kevin Chern, Total Attorneys, Inc.
Homeowners facing foreclosure are, understandably, looking for hope. News reports of homeowners successfully asserting the “produce the note” defense to stop foreclosure have sparked that hope in many. It seems only logical that a company commencing a foreclosure action should be required to demonstrate that it is the real party in interest before that action can move forward. But simply demanding that a mortgage servicer produce the note or establish itself as the real party in interest isn’t the magic bullet it sometimes appears in the popular press.
We know mortgage documentation is rife with errors, misrepresentations and missing links. Various studies have estimated the percentage of mortgage claims containing substantial errors between 57% and 80%. Katherine Porter’s 2007 study of mortgage proofs of claim in bankruptcy cases revealed that 52.77% of proofs of claim lacked at least one clearly-required document. What those errors mean for the homeowner depends not only on the nature of the error, but also on the state and jurisdiction in which the claims are prosecuted.
Success Stories
Attorneys in some states have had tremendous success with the defense. In September of 2008, the First District Court of Appeals in Ohio ruled on a case in which Wells Fargo Bank had commenced a foreclosure action based on a mortgage it did not own. (Wells Fargo Bank, N.A. v. Byrd, 178 Ohio App.3d 285, 2008-Ohio-4603.)
Although Wells Fargo subsequently acquired the mortgage by assignment, the trial court ruled that this later acquisition did not cure the jurisdictional defect and dismissed with prejudice. The trial court also ordered that the law firm filing the case on behalf of Wells Fargo submit proof that its client was the real party in interest in all future foreclosure actions filed by that firm.
Publicity surrounding Wells Fargo and a handful of other similar cases produced a flurry of real party in interest defenses and optimistic news coverage. A year later, the Ohio Supreme Court declined to review a similar case in Wells Fargo Bank, N.A. v. Jordan, leaving stand an Eighth District Court of Appeals ruling that “If plaintiff has offered no evidence that it owned the note and mortgage when the complaint was filed, it would not be entitled to judgment as a matter of law.”
At the same time, Florida legal aid attorney April Charney and a handful of others began challenging claims supported by affidavits of lost notes. It seemed that in the frenzy to slice, dice, flip and securitize the high-risk loans of the 1990s and early 2000s, many lenders and mortgage servicers had dropped the ball when it came to keeping accurate records. In many cases, the paper trail was broken, non-existent, or simply didn’t conform to legal requirements. Some plaintiffs in mortgage foreclosure cases found their claims dismissed outright for lack of documentation, and some homeowners found themselves in a better position than they’d ever imagined: enormous mortgage debt simply disappeared as it became clear that no proof of ownership of the debt could be produced.
It was heartening to see mortgage servicers taken to task and forced to follow the rules, but even in the oft-cited Byrd case, the real victory was scaled back considerably by the appellate court. While the dismissal was affirmed, the appellate court ruled that it should have been without prejudice; the order that the law firm submit additional documentation in subsequent cases was reversed. Those cases in which demanding the note and dissecting the paper trail resulted in a windfall for the homeowner were few and far between.
The State-by-State Difference
To a layperson, common sense dictates that a plaintiff would have to own the note and mortgage in order to file a complaint based on it; the big surprise is probably not the Ohio rulings above but the fact that the question ever arose. However, that question is far from settled in many states. Consumer attorneys in some states report that their courts are simply declining to entertain defenses like the one successfully raised in Byrd. The most likely explanation for this pattern is simple economy: a case dismissed without prejudice may be re-filed as soon as the defect has been cured, so many courts are apparently reluctant to go through the motions of dismissing a claim on procedural grounds only to have it filed as a new case soon after.
But disparate treatment of this issue by the courts isn’t the only—or even the most significant—difference from state to state. More than half of U.S. states allow for some form of non-judicial foreclosure. That means that the foreclosing party doesn’t have to file a court case in order to foreclose on the property. Non-judicial foreclosure doesn’t render true ownership of the mortgage irrelevant, but it does make it more difficult for the homeowner to pursue the issue.
While the defendant in a judicial foreclosure can simply raise the issue as a defense, the homeowner in a non-judicial foreclosure will typically have to file suit himself to get the issue of mortgage ownership and documentation before the court. That means not only filing fees and service of process, but also a host of procedural hoops unfamiliar to most homeowners. Few will be able to successfully prepare and argue such a claim without an attorney. That isn’t to say that the claim won’t succeed or isn’t worth pursuing in a non-judicial foreclosure state, but the process is far more complex, time-consuming and potentially expensive than the victory stories on television and in news reports might seem to suggest.
The Real Value of Demanding the Note / Questioning the Real Party in Interest
While demanding that the claimant produce the note / arguing that the claimant isn’t the real party in interest and doesn’t have standing to pursue a foreclosure action only occasionally results in a decision that effectively forgives the mortgage debt, the challenge can be a valuable tool for homeowners facing foreclosure. If a claim is dismissed and re-filed, that may buy the homeowner valuable time in which to negotiate or assemble funds to cure the default; the added procedural complications and the possibility that the mortgage servicer or alleged note holder may not be able to establish its claim provide an incentive for the claimant to compromise. Likewise, in a non-judicial foreclosure state, initiating a suit against the claimant may only rarely put an end to a foreclosure action altogether, but may still benefit the homeowner by slowing the proceedings and creating an incentive for the mortgage holder to negotiate a workable settlement.
– Kevin Chern
Total Attorneys, Inc.
25 East Washington Street, Suite 400
Chicago, IL 60602
