Friday, February 24, 2012

FYI: 10th Cir Rejects Borrower's "Standing" Challenge Based on Mortgage Loan Securitization Argument

The U.S. Court of Appeals for the Tenth Circuit recently held that securitization of a mortgage loan (1) did not affect the foreclosure rights of the holder of an underlying trust deed or the rights of the holder's nominee; and  (2) did not require the express authorization from all the investors in the asset securitization trust before the foreclose process could begin. 
A copy of the opinion is available at: 
Plaintiff-appellant borrower obtained a residential mortgage loan secured by a deed of trust naming Mortgage Electronic Registration System, Inc. (MERS) as beneficiary and nominee.  Sometime thereafter, the loan was sold and became part of a mortgage-backed securities trust. 
Pursuant to agreement, a bank served as trustee of the securitization trust and owned the underlying mortgage notes on behalf of the trust investors.   Laterthe borrower defaulted on his mortgage loan, MERS assigned its beneficial interest in the trust deed to the trustee bank, and a substitute foreclosure trustee foreclosed on the loan and sold the property.  
Plaintiff borrower filed suit in state court against the mortgage originator, the bank as trustee of the securitization trust, MERS, and unknown investors (collectively "Defendants"), claiming among other things that the foreclosure and sale of his property were improper because the Defendants supposedly lacked an enforceable interest in the subject property under the trust deed due to the securitization of the loan. 
Asserting various purported "causes of action" seeking injunctive and declaratory relief, Plaintiff borrower argued that the investors in the mortgage-backed securities trust owned the underlying debt and thus solely possessed the right to foreclose.  Plaintiff borrower further argued that the holder of the underlying note could not properly foreclose without the investors' express authorization.  
Defendants removed the case to federal court based on diversity jurisdiction and moved to dismiss, arguing that, contrary to Plaintiff borrower's assertions, investors in mortgage-backed securities do not own the underlying promissory notes or have authority to enforce a deed of trust, but own an interest in the proceeds of the trust fund.  Defendants also argued that all actions taken by Defendants leading up to the foreclosure and property sale were valid and proper under Utah law.
The district court, noting the insufficiency of Plaintiff borrower's briefing and evidence, ordered Plaintiff borrower to provide additional support for his arguments and converted Defendants' motion to dismiss to a motion for summary judgment.  When Plaintiff borrower's counsel failed to provide the additional support and authority, the court concluded that Plaintiff borrower had not demonstrated any impropriety in the foreclosure process or that the investors held anything other than an interest in the proceeds from the payments made on the underlying mortgages. 
The court also concluded that the trustee bank owned legal title to both the securitization trust holding Plaintiff borrower's debt as well as the beneficial interest under the underlying mortgage trust deed.   The court entered judgment in favor of the Defendants. Plaintiff borrower appealed, and the Tenth Circuit affirmed.
As did the lower court, the Court of Appeals noted the conspicuous inadequacy of the pleadings and evidence to support Plaintiff borrower's arguments that the securities investors owned the underlying promissory notes and that the trustee bank thereby lacked any interest in Plaintiff borrower's note or trust deed.  The Court also observed that this case was the latest in a series of nearly identical cases filed by Plaintiff borrower's attorney asserting that securitization of a mortgage nullifies the foreclosure rights of the holder of the underlying trust deed and the rights of its agent-nominees. 
Citing a number of court opinions in Utah and the Tenth Circuit, the Tenth Circuit concluded that precedent required it to affirm the district court's judgment.  See, e.g., Commonwealth Prop. Advocates, LLC v. Morg. Elec. Registration Sys., Inc.,  __   F.3rd  __, 2012 WL __ (10th cir. 2012) (rejecting theory that securitization destroys the foreclosure rights of the holder of underlying trust deed and holder's nominees).   Accordingly, the Tenth Circuit affirmed the grant of summary judgment in favor of Defendants. 

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
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