Posted on Wednesday, February 16, 2011
Sandra Castillo-Rivera is fighting the foreclosure on her Doral townhouse, but first she's got to figure out who has the right to take her on.
Castillo-Rivera obtained a $220,000 mortgage loan in 2006 from WMC Mortgage, but Deutsche Bank, is foreclosing on her home on behalf of investors in a pool of securitized mortgages.
She claims the trust managed by Deutsche Bank violated its own documents when it obtained her note and mortgage.
Her lawyer, Robert Jimenez, says that trust documents provide specific steps that must be taken to assure ownership when notes and other financial instruments held in trust are transferred. The attorney says trust law should be used to determine if a trust owns a note and has the right to foreclose.
Trusts, however, say that under the Uniform Commercial Code, a note holder can foreclose on a note and mortgage even if they don't own or are "in wrongful possession" of them.
Jimenez says Castillo-Rivera's case highlights a conflict between trust laws and the UCC, a state law that, among many other things, regulates how notes are enforced and transferred.
Jimenez's argument that trust law should determine the right to foreclose was rejected by Miami-Dade Circuit Judge William Thomas on Jan. 24. Thomas sided with Deutsche Bank and said it could proceed with foreclosure against Castillo-Rivera.
Castillo-Rivera and her lawyer aren't giving up. They have appealed to the 3rd District Court of Appeal and taken the unusual step of asking that the case be immediately certified for review by the Florida Supreme Court.
Jimenez said the appellate courts need to quickly decide which law should apply when establishing a trust's right to foreclose.
"Both [laws] can't be right," he said. "It can't be a situation where trust law says a trust needs to follow a trust document, but the UCC says 'except in this instance.' There is disarray in Florida over whether you follow a trust analysis in these types of cases or if you follow a UCC analysis."
He wants the 3rd DCA or the Supreme Court to decide:
• Whether a trust can own a note in violation of its trust documents.
• If a trust can foreclose on a home if it doesn't own the note.
• Whether a homeowner can challenge a trust's right to foreclose after proving it violated its trust documents.
These are key questions that could affect other cases. Thousands of foreclosure cases in the state could be tossed out and many more couldn't be filed if Jimenez prevails.
The case highlights a growing frustration among foreclosure defense lawyers who claim circuit judges don't always understand the intricacy of the trusts holding the notes. Critics say they need guidance on which law to apply.
The trusts are created to hold notes that are pooled into mortgage-backed investments. During the life of the loan, the mortgage may be transferred multiple times.
The trusts are governed by pooling and servicing agreements (PSA) that usually require the trusts receive the original notes with the proper signatures when the documents are transferred. Some trusts may have never received the original documents, in violation to their own PSAs, or lack signatures, foreclosure defense lawyers claim.
"It is like if I say, 'I am going to marry you,' and I just never do it, can I then divorce you?" asked April Charney, a consumer advocate and attorney with Jacksonville Area Legal Aid. "So, if I say I am going to buy a loan and I never actually do the paper work, can I then foreclose on you?"
Explaining to judges the complex world of securitization can be difficult, said Charney.
"It is not an easy argument to make to a judge who is likely not inclined to want to do all the work to understand the [pooling and servicing] agreement and who is basically angry at the homeowner for not living up to their obligations," she said.
Miami-Dade Circuit Judge Jennifer Bailey, who presides over foreclosure cases, said the securitization and transfer of residential mortgages into trusts have created new issues for Florida's courts, including whether trust law or the UCC should apply.
"Ultimately, these questions will be presented to and resolved by Florida's appellate courts," she said, declining to comment further.
Seeks Reduced Payments
One afternoon in November, Jimenez stood before Judge Thomas to make his case. Castillo-Rivera stopped making her $2,100 monthly mortgage payments in mid 2009, after she and her husband separated. The two-bedroom Doral townhouse the couple bought for $280,000 during the housing boom is now worth $150,000,according to Castillo-Rivera, a marketing coordinator for a civil engineering firm in Miami.
She wants to negotiate a reduced mortgage payment with the owner of her note. But first, she needs to find out who really owns the note. Jimenez argued that Deutsche Bank, as trustee for Morgan Stanley ABS Capital I Inc. Trust, lost its right to foreclose by failing to follow the proper chain of note endorsement established in its pooling and servicing agreement.
"A blank endorsement is not enough for this trust to be the owner and holder of the note and mortgage," Jimenez said at the hearing.
Fort Lauderdale attorney Ryan Cox, whose firm Smith Hiatt & Diazrepresents the trust, successfully argued that under the UCC an entity possessing a note has the right to foreclose.
"The party who has the note is entitled to foreclose the mortgage even if supporting documents, in that case the assignment, was defective," Cox said at the hearing. Cox did not return a phone call seeking further comment.
On Feb 1, Jimenez filed a notice of appeal with the 3rd DCA and urged the 3rd DCA to certify the appeal for direct review by the Florida Supreme Court.
Jimenez wants the 3rd DCA to determine whether the judge "erred in not allowing" Castillo-Rivera to challenge the trust based on its alleged violation to the trust documents, he said.
Foreclose defense lawyer Thomas Ice isn't optimistic the Florida Supreme Court will take on this issue for now.
"I have my doubts that the Supreme Court is going to be interested in entertaining this at this stage," said Ice, with Ice Legal in Royal Palm Beach. "It will most likely defer to the 3rd DCA resolution of the summary judgment issue."
Ice often challenges the right of a trust to foreclose based on alleged defect to its pooling and servicing agreement. But gaining access to the trust documents hasn't been easy.
"We have been having a hard time in getting discovery to prove the trust issue," he said. "Judges were ruling very consistently that we were not entitled to find out if a note and mortgage made it into a trust."
Trust representatives claim borrowers are not parties to the agreement so they should have no say on whether a trust is faithful to its pooling and servicing agreement.
"But we are not complaining that they didn't comply with the agreement," Ice said. "What we complain about is that they don't have standing to foreclose."
Charney said a recent ruling by the Massachusetts Supreme Court — while not binding in Florida — may shed some light on trusts.
In the case of U.S. Bank National, as trustee, v. Antonio Ibanez, the Massachusetts high court ruled the bank's securitization documents failed to demonstrate that the trust was the holder of the mortgage at the time Ibanez's home was sold at a foreclosure auction. The court ruled that the trial judge did not err in invalidating the foreclosure sale and rendering judgments against the plaintiffs.
"[That decision] started to set a road map for judges around the country," Charney said. "We are starting to get closer."
Castillo-Rivera, hopes her fight will also help make a difference.
"I want to open the door to other people, especially people who lost their homes without knowing they had the right to fight," she said.
Trusts are created to hold notes that are pooled into mortgage-backed investments. During the life of the loan, the mortgage may be transferred multiple times.
The trusts are governed by pooling and servicing agreements that usually require the trusts receive the original notes with the proper signatures when the documents are transferred. Some trusts may have never received the original documents, in violation to their own PSAs, or lack signatures, foreclosure defense lawyers claim.
"It is like if I say, 'I am going to marry you,' and I just never do it, can I then divorce you?" asks one consumer advocate. "So, if I say I am going to buy a loan and I never actually do the paper work, can I then foreclose on you?"
Paola Iuspa-Abbott, DAILY BUSINESS REVIEW