PSA- Can Borrower Mention it?

Posted by kevin on November 3, 2013 under Foreclosure Blog | Comments are off for this article

A good proportion of the mortgages in default in New Jersey were sold to investors by means of private securitizations. In such cases, a sponsor will buy about a thousand mortgages from one or more originators, transfer them to related entity called a depositor, who then sells them to a trust. (Multiple transfers are necessary to insure bankruptcy remoteness). The trust is usually a REMIC (real estate mortgage investment conduit) which means that only the investors are taxed. The guiding document is called a Pooling and Servicing Agreement (PSA) which describes in detail what happens, how the various notes and mortgages are transferred into the trust, how and how much the investors are paid, and what the functions of the various parties are.

Unless the securitization is exempt from federal securities laws, the sponsor must register the offering with the Securities and Exchange Commission (SEC). Because of this registration requirement, some of the documents associated with the securitization, including the PSA, can be available on the SEC site. When you get the opportunity to read 100 or so PSA’s, you realize that many require that the note have an endorsement from the depositor to the trustee or in blank with all intervening endorsements so that there is a complete chain of endorsements. This is to comply with the requirements concerning bankruptcy remoteness.

When you compare the your client’s note to the usual requirements of the PSA, you often times find that the endorsement(s) on the note do not come close to complying with the requirements of transfer set forth in the PSA. If the PSA is governed my NY law, it is pretty clear that if the note and mortgage are not transferred to the trust in accordance with the terms of the PSA, then the note and mortgage are not in the trust and the plaintiff, trustee, has no standing to bring the action.

This could be a major problem for lenders. Literally, hundreds of thousands of cases in New Jersey and across the United States could be tossed out of court. But, that has not happened to date. Why? Because an unpublished case in NJ stated that a borrower cannot refer to the requirements for transfer set forth in the PSA because the borrower is not a party to the PSA. Yeah, the lender broke the rules of its own operating agreement, but the borrower, who stands to lose her home, cannot bring it up. Many trial courts in NJ have adopted this position notwithstanding that the case setting forth this rule is an unpublished, and under our Court rules, unpublished opinions have no precedential value. You can draw your own conclusions on this, but it does seem to defy common sense.

More on this in upcoming blogs.

Liable on Note after Deed in Lieu of Foreclosure

Posted by kevin on December 25, 2011 under Foreclosure Blog | Comments are off for this article

Last week, the Appellate Division came down with a case that may have some implications for borrowers.  There were two defendants which collateralized a business loan with New Jersey real estate.  They defaulted on the payment of the loan.  The bank sued on the note.  If it is not a residential first mortgage, the lender has the option to foreclose, sue on the note or do both at the same time.

Ultimately, the parties settled.  The settlement agreement was drafted by the lender and was very involved and in legalese.  In essence, the borrowers would give up two properties by deeds in lieu of foreclosure.  The lender gave one borrower a release and the other a $4,000 credit.  The collateral left a balance due in excess of the $4000.  So, the bank sued the one borrower for the difference.

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