How-to Use PSAs For Best Foreclosure Defense
A major issue arising in foreclosure defense cases is the homeowner’s ability to challenge the foreclosing party’s standing based on noncompliance with securitization documentation. Several courts have held that there is no standing to challenge standing on this basis, most recently the 1st Circuit BAP in Correia v. Deutsche Bank Nat’l Trust Company. (See Abigail Caplovitz Field’s cogent critique of that ruling here.) The basis for these courts’ rulings is that the homeowner isn’t a party to the PSA, so the homeowner has no standing to raise noncompliance with the PSA.
I think that view is plain wrong. It fails to understand what PSA-based foreclosure defenses are about and to recognize a pair of real and cognizable Article III interests of homeowners: the right to be protected against duplicative claims and the right to litigate against the real party in interest because of settlement incentives and abilities.
The homeowner is obviously not party to the securitization contracts like the PSA (query, though whether securitization gives rises to a tortious interference with the mortgage contract claim because of PSA modification limitations…). This means that the homeowner can’t enforce the terms of the PSA. The homeowner can’t prosecute putbacks and the like. But there’s a major difference between claiming that sort of right under a PSA and pointing to noncompliance with the PSA as evidence that the foreclosing party doesn’t have standing (and after Ibanez, it’s just incomprehensible to me how this sort of decision could be coming out of the 1st Circuit BAP with a MA mortgage).
Let me put it another way. Homeowners are not complaining about breaches of the PSA for the purposes of enforcing the PSA contract. They are pointing to breaches of the PSA as evidence that the loan was not transferred to the securitization trust. The PSA is being invoked because it is the document that purports to transfer the mortgage to the trust. Adherence to the PSA determines whether there was a transfer effected or not because under NY trust law (which governs most PSAs), a transfer not in compliance with a trust’s documents is void. And if there isn’t a valid transfer, there’s no standing. This is simply a factual question–does the trust own the loan or not? (Or in UCC terms, is the trust a "party entitled to enforce the note"–query whether enforcement rights in the note also mean enforcement rights in the mortgage…) If not, then it lacks standing to foreclosure.
It’s important to understand that this is not an attempt to invoke investors’ rights under a PSA. One can see this by considering the other PSA violations that homeowners are not invoking because they have no bearing whatsoever on the validyt of the transfer, and thus on standing. For example, if a servicer has been violating servicing standards under the PSA, that’s not a foreclosure defense, although it’s a breach of contract with the trust (and thus the MBS investors). If the trust doesn’t own the loan because the transfer was never properly done, however, that’s a very different thing than trying to invoke rights under the PSA.
I would have thought it rather obvious that a homeowner could argue that the foreclosing party isn’t the mortgagee and that the lack of a proper transfer of the mortgage to the foreclosing party would be evidence of that point. But some courts aren’t understanding this critical distinction.
Even if courts don’t buy this distinction, there are at least two good theories under which a homeowner should have the ability to challenge the foreclosing party’s standing. Both of these theories point to a cognizable interest of the homeowner that is being harmed, and thus Article III standing.
First, there is the possibility of duplicative claims. This is unlikely, although with the presence of warehouse fraud (Taylor Bean and Colonial Bank, eg), it can hardly be discounted as an impossibility. The same mortgage loan might have been sold multiple times by the same lender as part of a warehouse fraud. That could conceivably result in multiple claimants. The homeowner should only have to pay once. Similarly, if the loan wasn’t properly securitized, then the depositor or seller could claim the loan as it’s property. Again, potentially multiple claimants, but the homeowner should only have to pay one satisfaction.
Consider a case in which Bank A securitized a bunch of loans, but did not do the transfers properly. Bank A ends up in FDIC receivership. FDIC could claim those loans as property of Bank A, leaving the securitization trust with an unsecured claim for a refund of the money it paid Bank A. Indeed, I’d urge Harvey Miller to be looking at this as a way to claw back a lot of money into the Lehman estate.
Second, the homeowner had a real interest in dealing with the right plaintiff because different plaintiffs have different incentives and ability to settle. We’d rather see negotiated outcomes than foreclosures, but servicers and trustees have very different incentives and ability to settle than banks that hold loans in portfolio. PSA terms, liquidity, capital requirements, credit risk exposure, and compensation differ between services/trustees and portfolio lenders. If the loans weren’t properly transferred via the securitization, then they are still held in portfolio by someone. This means homeowners have a strong interest in litigating against the real party in interest.
I’m not enough of a procedure jock to know if there’s a way for a homeowner to force an interpleader among the potential claimants-trust, depositor, seller, etc, but that seems like the right way to handle this. In any event, I think the fact that the homeowner isn’t a party to the securitization is kind of beside the point. The homeowner should be able to challenge standing because the homeowner has real legal interests at stake in litigating against the right party.