Mass. Bankruptcy Judge Voids Foreclosure Of MERS Mortgage

by Rich Vetstein on August 23, 2011 · 20 comments

in Foreclosure, Massachusetts Real Estate Law, Mortgage Crisis, Mortgages, Title Defects

Judge Tells Lenders You Can’t Have Your MERS Cake & Eat It Too

“The sophisticated financial minds who wrought the MERS regime sought to simplify the process of repeatedly transferring mortgage loans by obviating the need and expense of recording mortgage assignments with each transfer. No doubt they failed to consider the possibility of a collapse of the residential real estate market, the ensuing flood of foreclosures and the intervention of state and federal courts.”

–Judge Melvin S. Hoffman, U.S. Bankruptcy Court Judge for Massachusetts, In Re. Schwartz, Aug. 22, 2011

Coming off a ruling (In re. Marron) that the MERS mortgage registration system does not run afoul of Massachusetts law, the same jurist, Bankruptcy Court Judge Melvin Hoffman, on Monday issued a ruling voiding a MERS-held mortgage which fell victim to sloppy paperwork. As Banker & Tradesman reports, the case is potentially troubling for any MERS held mortgage in default. The case is In Re. Schwartz and is embedded below.

Debtor Challenges Foreclosure Of Securitized Mortgage

During her bankruptcy proceeding, the debtor, Sima Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She asserted that under the U.S. Bank v. Ibanez decision issued by the Massachusetts Supreme Judicial Court earlier in the year, Deutsche did not own the mortgage on the property when it first started the foreclosure process.

The “lender” on her original mortgage was Mortgage Electronic Registration System (MERS), as nominee for First NLC. Many housing advocates have criticized MERS’ role in the foreclosure crisis, with the New York Times weighing in most recently. The mortgage loan was securitized and subsequently transferred at least 3 times, ultimately winding up held by Deutsche Bank. No assignments of mortgage were recorded with the registry of deeds until a day before the foreclosure sale on May 23, 2006. That assignment was executed by Liquenda Allotey, one of the hundreds of deputized vice presidents of MERS, and an alleged “robo-signer” for Lender Processing Service (LPS) which has come under fire for document irregularities. The assignment ran to Deutsche Bank, which completed the foreclosure sale on May 24, bid its mortgage debt and purchased the property.

There was no dispute that under the U.S. Bank v. Ibanez case, the late-filed mortgage assignment rendered the foreclosure defective unless Deutsche could establish its ownership of the mortgage loan when the foreclosure process started. During the trial, Deutsche submitted all the various agreements documenting the securitization process including the pooling and servicing agreement (PSA), loan purchase agreement, bill of sale and custodial log.

Judge: Lenders Can’t Have Their MERS Cake And Eat It Too

Critically, as the judge noted, the PSA provided that for a MERS mortgage such as this, assignments of mortgages did not have to be prepared or delivered to the buyer of the loans. As is endemic with most securitized mortgages, the participants in the securitization did not deliver and record any assignments documenting such transfers, instead, relying on the internal MERS registration system, which is out of the public records view. Throwing this provision back in the lenders’ faces, the judge basically said “you can’t have your cake and eat it too” — rendering his ruling that the mortgage itself (as opposed to the underlying loan) was never transferred through the securitization system from entity A, B, C, to Deutsche Bank, and that MERS had always held, and never relinquished, “legal title” to the mortgage. Accordingly, the judge held, Deutsche Bank was never the owner of the mortgage in the first place, could not foreclose in its name, and its foreclosure sale was null and void.

Impact: Are Foreclosures Of MERS Mortgages Now Open To Challenge?

I’m not sure what’s going to happen with Ms. Schwartz’s home. She’s been living in it since 2006 probably mortgage/rent free! Certainly, MERS could (and should have) started a second foreclosure and done it the right way. I’m perplexed why Deutsche and MERS kept fighting this case in court. As for the broader implications, it’s still unclear as to the effect on past and current foreclosures. One this is for certain, the ruling is yet another example of the legal fallout from the deficiencies in the MERS system.

Lastly, while I don’t claim to be a mortgage securitization expert, if the mortgage was not assigned/transferred properly and if it is MERS that holds legal title, then there is a mortgage backed security investor somewhere who THINKS he owns this mortgage but, in fact, does not. Even if MERS wanted to transfer the mortgage to the relevant trust or foreclose, sell the property and transfer cash, they may not be able to for legal and tax reasons. Now multiply by a million. So how many mortgage backed securities are missing how many mortgages? Are there mortgage backed securities out there that don’t actually own ANY mortgages? If someone sells a “mortgage backed” security that doesn’t legally own the mortgages in question, hasn’t that someone committed fraud? And furthermore, how the hell do we clean this up?


Richard D. Vetstein, Esq. is an experienced real estate litigation attorney who’s handled numerous foreclosure defense and title defect cases in Land Court and Superior Court. Please contact him if you are dealing with a Massachusetts foreclosure and title dispute.


In Re Schwartz

  • Kernighan

    I am very glad these sorts of matters are being handled thoroughly, there are several different issues going on here, and things could, and probably WILL, get worse, unless the business world and society get wise with regard to what’s really happening. I call this area: “Settlement risk”, for lack of a better term.

    Do we realize that under a “securitization” scenario with mortgages and trust deeds, some sort of a central clearing agency like MERS, and unique loan identification (globally unique loan numbering) is essential? Jurisdictions like counties (and even entities like GNMA, or FNMA) must have access to information, at least partly because of the mentioned taxation tracking. The more the interests change in these items, the more a thorough, and non-pedestrian tracking must be done, and infrastructure for that tracking must be working. Errors must be handled. The cost of such systems much be met.

    In the securities industry, stocks, bonds and all securities are identified with a CUSIP identifier, because unique identification is essential (mistaking one bond offering from another is easy to do). Back offices of broker-dealers track, along with securities custodian / registrars, the actual ownership, location, and loan/borrow of securities positions. The Depository Trust Company (DTC) keeps most actual underlying securities in ‘book entry” form, rather than there being movement of physical certficates, and destruction and reissuance of all those certs. The DTC, and various securities industry “plumbing” entities like this are known for high degrees of automation, and precision. It’s what allows billions of shares, and trillions in fixed income securities to trade.

    A similar situation began to occur in mortgages (up to around early 2009), but the efficiency of a DTC was not happening. The MERS entity was an effort to remedy very obvious and serious deficiencies having to do with location and identification of individual loans as they wound up with their ownership and servicing being transferred and handled often by trustee entities, and wrapped within securities, then sometimes, re-securitized. Who really is the “trustee” for a particular troubled loan?

    When securitization was happening solely within GSE (GNMA, FNMA, FHLMC), the loans could be indentified, and very detailed handling was manageable. GSEs have mandatory “repurchase” requirements which cause the seller bank to have to take back a deficient underlying loan, once it becomes delinquent to a certain level. This sort of tracking works well.

    Under wider securitization, identification, and tracking can break down, and flaws enter and affect the entire system. We see this in foreclosure, as a first obvious “symptom” of a wider problem. Right now, private label securitization is drastically reduced from the scale it had in the period from around 2000 – 2008. Much of the troubleshooting from the mid-2000’s is now done. Some new private label securitization is occuring, but most volume of new securitization now runs through the former GSE entities.

    The primary mover of the “debacle” effect of, say 2008-9, is likely the use of monoline insurers to “spiff” security tranches and use statistics to create an artificially “better” caliber of fixed income product. This only works when the various underlying loans behave in a “normal” manner, with the population of loans properly “fitted” to the statistical model used to analyze the securitization. Let any anomaly arise like a serious recession, and underlying payment flows can become far out of “norm”. Thus, the insurers now are potentially exposed to sudden claims demand (e.g 2008). They have this happen all at once, and cannot possibly cope. These are “black swan” events. The flaw is in even using insurance to enhance such a potentially unstable structure. Have no identification mechanism for loans and you have even greater liklihood of catastrophe. This affects all participants in the economy. It is very possible that the “answer” is for there NOT to be such securitizations. But, I’d like to point out that right now, nothing prohibits their existence.

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  • Ironfist1972

    Im glad that Massachusetts Judges are stepping up to the plate and realizing what has been going on is unlawful. BSing Americans, is what these brokers, bankers, and mortgage companies have done. They took the dreams of people owning thier own homes, and turned it into nightmares. I pray, the rest of the countries courts will follow suit, the only way to save America, is to save AMERICANS!! We have been taken advantage of, beaten up, and used by our “fellow” Americans. My Dad, dying of liver cancer, was taken for a ride, by a smooth talking Bulls34t artist, and painted a pretty picture for him about “going to heaven,” and that “jesus” loved him. He stole his money,and he ran.In 2007, my dad died. Now the paperwork has bounced around so many times, the paper trail goes around the moon. I got some bad news for the banks…Just TRY to take my mothers house from her.  Treading on me, is a very bad idea. I think its time AMERICANS, take BACK AMERICA, and it starts with me, if my mothers health suffers anymore, due to the bankers, and the bullsh*&ters, I got news for ya, Im coming for you, and Im bringing HELL with me!!

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  • Jon Steinberg

    Since Ibanez I have seen an in increase in mortgage assignments recorded on properties in the midst of the foreclosure process as banks try to back fill paperwork to cover themselves.  What’s interesting about this case is it specifically identifies the timing of the recorded assignments as they relate to the beginning of the foreclosure process.  Also, the sequence of such assignments as they establish the actual chain of ownership of a mortgage.  Sounds to me like it could further cloud the title of many homes that have gone through the process over the past five years.  Certainly supports the purchase of Title Insurance.

    • Thanks for the comment Jon! I’m still perplexed that Deutsche just didn’t start over with a new foreclosure in this case. They gave the debtor 5 years of free rent!

      • Mildred Wilkins

        I have long taken the position as a trainer on foreclosure and title issues that once the lender has taken a certain position in court, they are honor bound to see the game/position out to the end.
        Any other course would be the same as conceding defeat.Simply put Richard, to start the foreclosure over again would be tantamount to admitting that they didn’t have the right to do so in the first place.  If they had re-filed, this would have been the outcome at the pint that they re-filed.  So they waited it out, praying that the Winds of Heaven would give them a break; that the borrower would see the error of her ways or California would fall into the Pacific Ocean and then nobody would care what they did with people’s mortgages.None of those things happened.  

        Similiar situations happen more often that you would think; they go unreported because the lender backs off, does not file any other action and the consumer it satisfied to just live quietly without filing any action either, hoping nobody will notice and almost believing it is a dream come true. Unfortunately, there remains a cloud over the borrower because the issue has not been settled in a court of law.

        More and more consumers are now and will continue to file quiet title actions AGAINST the so-called ‘lenders’ to demonstrate they have the right to foreclose.

        I strongly support such actions and believe that most consumers will prevail, IF they stand steadfast; for exactly the reasons this mortgage was found to be void. 

         Make no mistake, void is way better that voidable.

        Void is way better than quietly living in your home hoping no one shows up or sends you a letter threatening your right to live there peacefully.

        The pendulum has swung so far that it is now back on the consumer’s side of the dark sid eof the moon.

        Oh happy day.  OH HAPPY, HAPPY DAY!

        Mildred Wilkins

      • Ironfist1972

        why are you perplexed? Wall street as well as the banks, have frauded the people!! this whole system has been corrupt for decades! what I am peplexed about, is that the United States government hadnt stepped in any earlier, THEN, it could have been avoided. The government, bailed out all of the banks, and it is the CITIZENS of this country that put the money there. they should have bailed out thier people. A few corrupt, and souless people have profited on the hard work, sweat, and tears of millions of AMERICANS. this is deplorable, and they should be HUNG. the debtor lived rent free, yes, but stress free, anxiety free? BS free? get with the program Richard, or the program..will get you.

    • Thanks for the comment Jon! I’m still perplexed that Deutsche just didn’t start over with a new foreclosure in this case. They gave the debtor 5 years of free rent!

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