Mortgage Borrowers win in Court, sort of....

In two New Jersey cases, both decided on November 16, 2010,  mortgage lenders lost battles with borrowers because they could not proved they held the Notes those mortgages were based on and otherwise could  not establish they were the party entitled to proceed in court.

In Kemp v Countrywide Home Loans, Inc, decided by Chief Judge Wizmur of the U.S. Bankruptcy Court for New Jersey, Countrywide Home Loans was denied the right to enforce payment of arrears in a Chapter 13 bankruptcy because it did not have possession of the mortgage note, and the original note had not been endorsed over to it until the time of trial. As a result, the debtor/borrower will not have to pay those arrears under his bankruptcy plan. This is, however, only a pyrrhic victory, because at the end of the day, the mortgage will still be there, unpaid and even further in arrears. However, the opinion illustrates ways in which a lender seeking to foreclose on a mortgage can be challenged, and what a mortgage lender needs to show in order to prove that it is the "holder" of the note entitled to enforce the underlying mortgage loan obligation. The opinion illustrates that under New Jersey law and the Uniform Commercial Code, the right to enforce a mortgage depends on being the "holder" of the mortgage. And recently, a judge in Atlantic County dismissed a foreclosure case without prejudice on similar grounds.

Here is the link to the slip opinion Kemp v Countrywide, case no 08-02448-JHW as featured in the New York Times article Trying to Put a Price on Bank Errors, NY Times, Nov. 21, 2010

Mr. Kemp filed a Chapter 13 bankruptcy plan which proposed to pay Countrywide's mortgage arrears on its two mortgages, then filed suit in the bankruptcy court challenging the proof of claim asserting arrears which Countrywide had filed as agent. Countrywide, now owned by Bank of America had transferred the mortgage loans into a trust for which Bank of New York was servicer and got back a share certificate in the trust. That trust was governed by a Pooling and Servicing Agreement [PSA] which required that the original  Note be delivered, endorsed in blank. Critically, this was never done and testimony established that the original Note had stayed in Countrywide's possession.

An assignment of the mortgage to Bank of New York as trustee was recorded, but this was not enough to give it the right to enforce the loan obligation and collect upon it.

Countrywide tried to fix things by producing a late filed "Allonge to Promissory Note" that assigned the Note to Bank of New York. this was not enough because Bank of New York had not been given, and never had actual possession of the original Note.

The decision details the requirements for one to be the "holder" of a negotiable instrument under Article 3 of the UCC. It signals that mortgage lenders are going to have to be more careful to make sure that the person claiming to be paid or claiming to have the right to foreclose a mortgage actually has done what is needed to have that legal right.

Separately on the same day and on substantially the same grounds, the NJ Superior Court in Atlantic County dismissed a foreclosure complaint filed by Bank of New York. Bank of New York v. Raftogianis, F-7356-09. Judge William Todd ruled that because BONY could not establish it had possession of the Note when it filed its foreclosure Complaint, it did not have the right to seek foreclosure as the holder of the obligation. While the lender can refile its foreclosure, the Judge required that the Complaint be accompanied by a certification by someone with personal knowledge stating that the lender is in actual possession of the Note at the time the Complaint is filed.

Beyond alerting those representing defaulting borrowers to ways to challenge lenders and possibly leverage concessions as part of a settlement, these rulings, when applied will only delay the inevitable and will not prevent foreclosures nor wipe away mortgages.  Once the lender follows the right steps to have the proper enforcement rights, there is nothing stopping the ultimate collection of monies due or foreclosure on the mortgaged real estate. That said, it is only fair and proper that, like any other plaintiff seeking relief in our courts, lenders take care to see that all the proper steps have been taken to establish their right to relief. In these days of  mortgage obligations bundled into trusts and securitized, it is no longer clear or obvious who really owns a mortgage, and the courts' recognition of this reality is long overdue.