BY JOE TYRRELL
With mortgage loans increasingly chopped up and repackaged into other investments, lenders must be able to demonstrate they still hold the underlying note before they can foreclose on a property, a Superior Court judge has ruled.
In Atlantic City, Judge William C. Todd dismissed The Bank of New York's attempt to foreclose on a Brigantine house, saying the bank had not adequately documented that it holds the mortgage after a complex trail of financial transactions.
The ruling is not binding on other courts, but pulls New Jersey into a trend emerging in other states, what some observers have called a "borrower rebellion."
As a tide of foreclosures sweeps the nation, more American homeowners and businesses are asking courts to take a closer look at the sometimes obscure transactions that precede them. Some decisions have required banks to prove they are more than issuers or investors in securities derived from mortgages.
In August, the
Kansas Supreme Court ruled that both a secondary lender and a national mortgage registration system used by many banks lacked standing in a foreclosure case.
In October, a federal court in New York expunged a foreclosure on a home in White Plains, returning it to the borrowers after finding the plaintiff bank also lacked necessary documentation for its claim.
"This ruling is definitely part of that trend, and it's the first case in New Jersey," said attorney Eric Garrabrant, who represented Roman Krywopsuk, a real-estate investor.
Besides triggering a financial crisis and a taxpayer bailout, the increasingly exotic market in mortgage-related securities has become hard for the layperson to follow, said Karen DiPrima, spokeswoman for Garrabrant's firm, Flaster/Greenberg PC.
The new ruling "is ironic, because as the transactions get more complicated, we've seen people in foreclosure get confused while trying to find out who holds their mortgages, and now banks seem to be falling into the same little web."
Krywopusk and Michael Raftogianis bought the beachfront house in Brigantine in September 2004 as an investment, Garrabrant said. They took out a mortgage of almost $1.4 million from American Home Mortgage Acceptance Inc.
At the time, "they were buying a number of properties in the area, but then the real estate market did what it did," Garrabrant said. The two men were not alone in being unable to make payments.
According to a report today by Lender Processing Services, 12.4 percent of mortgages nationwide were delinquent or in foreclosure through May, the last month for which data was available.
New Jersey has been spared the worst of the calamity, which has particularly hit western and southern states. But in May, New Jersey crept into 10th place in foreclosure filings as listed by Realty Trac, the Irvine, Calif., firm that tracks the foreclosure market around the country.
Like others coping with the financial meltdown, though, Krywopusk and Raftogianis were surprised by the foreclosure action.
"They borrowed money from American Home Mortgage, and then The Bank of New York comes along and forecloses," Garrabrant said. "People have a right to question."
In his ruling, Todd noted the mortgage was the first stop in a lengthy series of transactions. Unbeknownst to Krywopusk and Raftogianis, after they closed on the property, their loan note kept moving.
The lender elected to out the transaction into the Mortgage Electronic Registration System, the judge said. Member lenders across the country use MERS, a private corporation, to transfer and track ownership and servicing rights in mortgage loans, and can designate it as the mortgagee of record.
For the banks, this has several advantages, according to the judge. Using MERS, they can transfer their interests in loans without publicly recording the action or incurring fees. Many of these secretive registrations also give MERS the right to assign mortgages for foreclosure.
But the judge also saw a weakness, because the system "can make it difficult for mortgagors and others to identify the individual or entity which actually controls the debt at any specific time."
According to the ruling, the mortgage defined AHMA as the lender, and referred to MERS as "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns." AHMA transferred its interest to an investment partnership, American Home Mortgage Securities LLC.
Next, AHM Securities established a trust with Wilmington Trust and The Bank of New York. The latter served as "trustee on behalf of the holders of the notes and the insurer," that is, those who invested in the securitized mortgages. In turn, the trust former a three-party servicing agreement, with AHM Servicing and The Bank of New York.
Todd described the documents as "typical" of mortgage loan securitizations, "lengthy, complex and difficult to understand." An attachment that simply described terms used in the indenture ran to 55 pages, the judge wrote.
But what might be incomprehensible to the average person should have been clear to the financiers, according to Todd.
"It is apparent that the parties to the securitization did understand that some of the loans being securitized were evidenced by negotiable notes," the judge said. "Several provisions deal with the handling of notes in very specific terms."
When it filed for foreclosure in February 2009, The Bank of New York reported that it was already the owner of the loan note and mortgage, without mentioning any securitizations, Todd said. Krywopusk filed an answer and counterclaim three months later.
But in February, MERS said that as nominee for American Home Mortgage Acceptance, it had assigned and transferred the mortgage to the bank.
While that may have been "intended" to transfer the debt, Todd wrote, "it is now apparent that is not what occurred."
The Bank of New York needed to show that it was not merely the trustee for investors, but actually held possession of the mortgage note. But that got more difficult as the court asked for documentation.
A copy of the endorsement provided to the court, intended to show the note had been transferred to the bank, was blank, the judge wrote.
The bank then submitted a certification from AHM service. But records showing three separate servicing agreements as part of the security sales, without a loan schedule showing whether the Brigantine mortgage had been part of those sales, the judge said.
In April, the bank for the first time said it had note, Todd said. Instead, it presented another certification, this one from one of its own vice presidents with what he described as a "redacted" loan schedule. It was very heavily redacted, the judge noted dryly.
The only entry still visible "appears to list the loan at issue here," Todd said. The context was unclear, and there was no explanation for how and when the bank had found the schedule, the judge said.
Still missing, the judge wrote, were "any meaningful proofs as to the transfer or negotiation of the note" or when that occurred.
The dismissal is almost certainly not the end of the case. The Bank of New York did not respond to a request for comment. But Garrabrant acknowledged he would be "surprised" if the bank does not re-file a foreclosure action with some documentation. Even so, he said, this outcome is not a foregone conclusion.
In the meantime, that beachfront house belongs to Krywopusk and Raftogianis, Garrabrant said, "and it's for sale."
Bank of International Settlements in Basel, Switzerland
