Calif. Supreme Court Lets Borrowers Challenge Wrongful Foreclosures

Image: coolcaesar
Image: coolcaesar
Loss for Bankers: "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights," according to a California Supreme Court ruling that borrowers can contest foreclosures if the purported holder of a loan cannot prove it is the legitimate owner.

The California Supreme Court on Thursday ruled that borrowers may challenge a wrongful foreclosure on the grounds that the assignment of the deed of trust was invalid.

The decision in Yvanova v. New Century Mortgage Corp. has the potential to radically increase the number of lawsuits brought by borrowers, particularly on loans that were pooled into securitized trusts, experts on both sides of the issue said.

"There will be a flood of litigation only because the lending industry was not diligent in doing its paperwork during the housing finance boom," said Richard Antognini, who represented the plaintiff, California homeowner Tsvetana Yvanova.

The decision tackles a question that became important after the housing market's collapse in 2008: can a defaulted homeowner contest the validity of the chain of assignments involved in the securitization of loans?

In 2012 Yvanova challenged the foreclosure and public auction of her Woodland Hills, Calif., home, alleging there was a four-year break in the chain of title, essentially making it void.

Yvanova in 2006 took out a loan for $483,000 from Irvine, Calif.-based New Century Mortgage, which went bankrupt the next year. In 2011 the mortgage servicer Ocwen Loan Servicing executed an assignment of the deed of trust on Yvanova's loan to Deutsche Bank, which served as a trustee of a Morgan Stanley investment trust.

But Yvanova alleged that the Morgan Stanley investment trust had a closing date of January 2007 and should never have been assigned the mortgage. But the foreclosure went through, and Yvanova ultimately was evicted in May 2015.

Multiple lower courts in California had ruled in high-profile cases such as Jenkins v. JPMorgan Chase that borrowers have no standing to file a claim of wrongful foreclosure because they are not a party to or holder of the debt.

However, the state Supreme Court disagreed with those rulings and essentially sided with a 2013 state appellate ruling in Glaski v. Bank of America, which held that a borrower has standing to challenge a nonjudicial foreclosure sale based on alleged violations of the terms of a pooling and servicing agreement.

"The borrower owes money not to the world at large but to a particular person or institution, and only the person or institution entitled to payment may enforce the debt by foreclosing on the security," the Supreme Court stated in a 33-page ruling. "A homeowner who has been foreclosed on by one with no right to do so has suffered an injurious invasion of his or her legal rights at the foreclosing entity's hands. No more is required for standing to sue."

The case now will go back to the state Court of Appeals or a trial court, which would decide on the merits of Yvanova's claim.

Frederick Levin, a partner at BuckleySandler, said the decision will breathe new life into the foreclosure defense bar, which believes that a loan assigned into a securitized trust after the trust's closing date makes the assignment void.

"This decision has [the] potential to increase litigation challenging securitized loans," said Levin, who on behalf of banks has long argued that contractual language gives investors and lenders broad latitude to reassign loans.

Others said the court was sending a big message to the lending industry.

"This was the court in California directing lenders and Wall Street securitizers to be very careful in documenting their instruments and assignments," said Kenneth Styles, a litigator at the law firm Miller Starr Regalia. "They've been more than sloppy in the past, and this was a directive to make sure their procedures are clean."

Antognini, the attorney for Yvanova, put it this way: "if you claim you own a debt, you have to prove it. And if you claim to own a debt, the borrower has the ability to allege and later to prove that you don't own it."

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Comments (6)
I agree with Mike and tmarkstamm.
BrianMahany seems to be an industry attorney looking to cash flow on these types of technicalities. The difficulties involved with foreclosing, sometimes makes the process extend over 5 years and dramatically increases the delinquency. If the foreclosure should have happened it shouldn't matter who enforces the action. Technicalities like this shouldn't be allowed to let someone off in the financial world or the criminal world in my opinion.
Posted by Randy H | Wednesday, February 24 2016 at 8:27AM ET
The reason this case matters so much is that servicers have substantially different interests than investors. Borrowers attempting to negotiate some sort of workout deserve to be able to talk to whomever legally owns the loan, not someone more interested in foreclosing quickly to sweep under the carpet all of the fraudulent and predatory loans.

This case is not about a loophole. Rather, it is simply requiring lenders and servicers who seek to foreclose to follow the clear requirements of the deed of trust as to who is allowed to initiate foreclosure. The Big Banks/Wall St. have a huge financial advantage over the individual homeowners. This case simply says that lenders cannot pick and choose which laws they will follow. It is shocking that CA courts refused to require them to do so until this case.

With the lender/servicer record of document fabrication and mistreatment of borrowers during loan mod and short sale negotiations, it is a surprise that no one has yet gone to jail. The real battle after this case will be to determine void vs. voidable assignments. That may shift the war to NY, as most of the trusts are NY [or DE, but same law]. And the NY Atty Gen'l is one of the few public officials to move aggressively against such servicing abuses. So justice may yet prevail.
Posted by williamP | Monday, February 22 2016 at 8:14PM ET
I agree with most comments here.

Question: Did the borrower pay any payments to the lien holder who foreclosed on them? If they did, does that not show that they accepted the change? Did they argue that fact at that time or only after they stopped paying the bank and it was foreclosed on. Seems like a Lawyer found a hole and wants to exploit it. Yes, the banks did some very shawdy work and they should get in trouble for it, but, not this way. If someone has truly unlawfully foreclosed on. (By Mistake, they made payments) Then yes, go to court.
Posted by Jcollins11 | Monday, February 22 2016 at 5:09PM ET
"Wrongful foreclosures" is a term I'd expect in Pravda or the New York Times, but not in an industry trade publication. These people borrowed money and didn't pay it back. In what way were they "wronged"? They are thieves, not victims.
The government's core mission today seems to be separating actions from their consequences.
And Mr. Mahany's comment about doing good for the public makes me want to puke.
Posted by tmarkstamm | Sunday, February 21 2016 at 4:17PM ET
What happened to my word is my bond? Everyone seems to be missing the point that this borrower defaulted and doesn't "deserve" a free pass on a documentation technicality. This is just going to encourage every loose moral borrower to try to skirt their responsibility. I hate a freeloader.
Posted by Mike C | Friday, February 19 2016 at 5:08PM ET
To the extent that Fannie, Freddie and the FHA paid claims on these bad loans, there is a potential huge False Claims Act violation here. We are interested in speaking with insiders at any of the servicers and learning more about the process.

Whistleblowers under the federal False Claims Act can receive up to30% of whatever the government collects from wrongdoers. In 2014, the government paid out $435 million in whistleblower awards.

There are big opportunities here to do some real good for the public.
Posted by BrianMahany | Friday, February 19 2016 at 2:13PM ET
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