By Thomas J. Sheeran
ASSOCIATED PRESS
November 16, 2007
CLEVELAND – A financial company serving as a trustee
for securitized mortgages has been rebuffed in its attempt to foreclose on
14 homes. A federal court judge ruled the company didn't provide clear
proof of mortgage ownership, questioning a practice that usually goes
unchallenged.
U.S. District Court Judge Christopher A. Boyko's
decision on Oct. 31 in a foreclosure case brought by Los Angeles-based
trustee Deutsche Bank National Trust Co. places more responsibilities on
players in the secondary mortgage market, where investors acquire and pool
mortgages for the investment return.
It was unclear what, if any, effect the ruling may
have on the increasing pace of foreclosures nationwide.
The judge noted that people about to lose a home
through a foreclosure typically want to remain in the home or quickly find
a new place to live. Boyko said they usually don't challenge the
institution to show proof of its right to foreclose.
In the often complex arena of the sale and pooling of
mortgage loans, proof of just who holds a debt can become clouded.
Boyko warned Deutsche Bank National Trust on Oct. 10
that he would dismiss the 14 foreclosures it was seeking through his court
if proper mortgage ownership documents weren't produced. The judge said
the documents filed with the court by the trust only indicated plans to
turn over the documentation.
Three weeks later, foreclosure actions were dismissed
without prejudice, meaning they could be refiled.
Boyko noted that institutions seeking foreclosures
without proof of ownership “seem to adopt the attitude that since they
have been doing this for so long, unchallenged, this practice equates with
legal compliance. Finally, put to the test, their weak legal arguments
compel the court to stop them at the gate.”
John Gallagher, a Deutsche Bank spokesman in New
York, said the Frankfurt, Germany-based Deutsche Bank would not comment in
detail on the ruling involving its trust arm, which had depended on a
separate servicer to litigate the foreclosures.
“The function of the trustee is largely an
administrative one; the trust company has no ownership stake or beneficial
interest in the underlying loans of a securitization, nor is it
responsible for foreclosures or selling foreclosed property,” Gallagher
told The Associated Press in an e-mail.
“Foreclosure decisions are made by the servicing
companies, according to contracts for the different securitization
trusts,” Gallagher said.
The attorney who handled the case, Benjamin Hoen in
Cleveland, didn't return a message seeking comment.
The first-named defendants in the case, Donna and
Sean Jenkins, took out an $87,300, 30-year mortgage for a house in
Cleveland's inner-city Glenville neighborhood on Nov. 21, 2005, at a fixed
rate of 9.05 percent. The lender was Argent Mortgage Co., which placed the
mortgage in a securities pool on Feb. 1, 2006.
The couple could not be reached for comment. They
have an unlisted phone at the suburban South Euclid address listed on the
summons issued to them.
Jonathan Entin, a Case Western Reserve University law
professor, said the Boyko ruling reflected the increasingly complex nature
of mortgages.
Entin said the case would send the message that
lenders must be better prepared when they go to court to show they have a
well defined interest in a property.
“It does not mean borrowers are necessarily going to
have an out, and I don't think Judge Boyko wrote his order in a way that
can fairly be read that way,” he said.
The pooling of home loans into securities has been a
long-standing practice. Some $6.5 trillion of securitized mortgage debt
was outstanding at the end of 2006.
When a loan goes into a securitization, the note is
not sent to the trust and instead shows up as a data transfer. The actual
note typically is kept at a separate document repository company.
Larry Platt, who specializes in mortgage lending
issues at the K&L Gates law firm in New York, downplayed the importance of
the ruling.
“I think it's scaring more lenders than it needs to.
It is focused on a narrow procedural issue,” Platt said. “The case seems
to suggest there's only one way to prove it (holding a mortgage) and, I
think, historically there's been alternative ways.”
The number of U.S. homes in foreclosure is growing at
a rapid pace. Irvine, Calif. based RealtyTrac Inc.'s research found that
446,726 homes nationwide were affected by some sort of foreclosure from
July to September, nearly doubling from 223,233 properties in the year-ago
period.
Ohio is among the hardest hit states by the
nationwide spike in foreclosures and Cuyahoga County, which includes
Cleveland, is the state's foreclosure leader. Ohio's 3.5 percent
foreclosure rate for the first quarter of the year was almost triple the
national figure, according to the Mortgage Bankers Association.
Here’s
4111 Archwood, a vacant foreclosed house four blocks down the street from
me. (Click on it to get a closer look.)
The
County Auditor’s database says the owner of this house is
Deutsche Bank
National Trust Company. It says Deutsche Bank NTC paid $50,000 for the
house in a sheriff’s sale in March 2007. The sheriff’s sale was the
outcome of Case CV-05-554639, an action for foreclosure against the
previous owners, filed in Common Pleas Court in February 2005 by Deutsche
Bank NTC “as Trustee”.
But Deutsche Bank never held a mortgage on 4111 Archwood. And
Deutsche Bank doesn’t really own 4111 Archwood now.
We’ll get back to Case CV-05-554639 and that magic word “Trustee” in a
minute. But first, a short tour of the New Mortgage Industry, courtesy of
the Chairman of the Federal Deposit Insurance Corporation, Sheila Bair.
Chairman Bair
testified before the U.S. House Committee on Financial Services last April.
Her entire testimony is well worth reading, but it’s modestly famous for
two charts.
The first chart depicts the mortgage transaction as many (most?) of us
still understand it:
Simple. Straightforward. Ancient history.
Here’s Chairman Bair’s second chart, “Borrowing Under a
Securitization Structure”, depicting the typical mortgage transaction
in 2007 (click to enlarge):
As Chairman Bair explained to the Committee:
Securitization takes the role of the lender and breaks it into
separate components. Unlike the more traditional relationship between a
borrower and a lender, securitization involves the sale of the loan by
the lender to a new owner–the issuer–who then sells securities to
investors. The investors are buying “bonds” that entitle them to a share
of the cash paid by the borrowers on their mortgages. Once the lender
has sold the mortgage to the issuer, the lender no longer has the power
to restructure the loan or make other accommodations for its borrower.
That becomes the responsibility of a servicer, who collects the mortgage
payments, distributes them to the issuer for payment to investors, and,
if the borrower cannot pay, takes action to recover cash for the
investors.
And she listed some of the roles in this modern mortgage transaction:
- Issuer - A bankruptcy-remote special purpose entity (SPE)
formed to facilitate a securitization and to issue securities to
investors.
- Lender - An entity that underwrites and funds loans that are
eventually sold to the SPE for inclusion in the securitization.
Lenders are compensated by cash for the purchase of the loan and by
fees. In some cases, the lender might contract with mortgage brokers.
Lenders can be banks or non-banks.
- Mortgage Broker - Acts as a facilitator between a borrower and
the lender.The mortgage broker receives fee income upon the loan’s
closing.
- Servicer - The entity responsible for collecting loan payments
from borrowers and for remitting these payments to the issuer for
distribution to the investors. The servicer is typically compensated
with fees based on the volume of loans serviced. The servicer is
generally obligated to maximize the payments from the borrowers to the
issuer, and is responsible for handling delinquent loans and
foreclosures.
- Investors - The purchasers of the various securities issued by
a securitization. Investors provide funding for the loans and assume
varying degrees of credit risk, based on the terms of the securities
they purchase…
- Trustee - A third party appointed to represent the investors’
interests in a securitization. The trustee ensures that the
securitization operates as set forth in the securitization documents,
which may include determinations about the servicer’s compliance with
established servicing criteria.
“Bankruptcy-remote”. What a great adjective.
So what does this all have to do with 4111 Archwood? While I explain,
you might want to keep that second chart handy.
In August 2003, the couple that had owned 4111 Archwood since 1996
refinanced it for $93,500. Their lender was Argent Mortgage Company, LLC,
a division of
ACC Holdings of Orange, CA, which also owned
Ameriquest
Mortgage and AMC Mortgage Services. Argent was the biggest single
subprime lender in Cuyahoga County between 2003 and 2005, going from no
originations in 2002 to nearly 2,400 in 2003, 4,900 in 2004, and 3,800 in
2005. (Following several years of lawsuits and other problems, ACC
recently closed Ameriquest’s doors and sold Argent, AMC and Ameriquest’s
servicing contracts to Citigroup. Argent is now doing business as
Citi Residential Lending.)
Less than two months after the mortgage on 4111 Archwood was signed,
Argent Mortgage Co. LLC transferred it to Argent Securities, Inc., which
“deposited” it, along with thousands of other Argent mortgages into
something called
“Argent
Securities, Inc. Asset-Backed Pass-Through Certificates Series 2003-W5″.
Let’s just call it “ASIABPTCS2003W5″ for short.
As you may have guessed, ASIABPTCS2003W5 is one of those “bankruptcy-remote
special purpose entities” Chairman Bair mentioned. It was set up by
Argent to be the vehicle by which all that mortgage paper, with a face
value of $1.5 billion, would be sold to investors. Once that was
accomplished, the mortgage on 4111 Archwood became a tiny piece of the
paper assets owned by ASIABPTCS2003W5, a corporate entity owned not by
Argent but by its investors.
The “Pooling and
Service Agreement” that created ASIABPTCS2003W5 named Argent’s sister
company, Ameriquest Mortgage, as “Master Servicer” for all those
mortgages.
And it named Deutsche Bank National Trust Company as the “Trustee” of
ASIABPTCS2003W5 — the party paid to represent the interests of the
investors and oversee the Master Servicer’s performance.
This all happened at the beginning of October, 2003.
Sixteen months later, in February 2005, the borrower was in default and
Deutsche Bank — as the Trustee for ASIABPTCS2003W5 — filed an action for
foreclosure in Common Pleas Court.
But — funny thing — nobody had bothered to tell the County Recorder,
who’s legally in charge of keeping track of these things, that Argent
Mortgage had sold the mortgage to ASIABPTCS2003W5. Ten months into the
foreclosure proceeding, the magistrate somehow figured out that Argent was
still the mortgagee of record and that Deutsche Bank lacked standing to
foreclose on the property. (As the case summary, entry for 12/21/05, puts
it: “PLAINTIFF’S MOTION TO VACATE CASE AND PLACE ON THE ACTIVE LIST IS
DENIED. THE PARTY PURPORTEDLY GRANTED RELIEF FROM STAY IS NOT THE
PLAINTIFF IN THIS ACTION.”)
The lawyer for Deutsche Bank quickly filed a motion to make Argent the
“substitute plaintiff” in the case. The magistrate agreed to this, putting
the foreclosure back on track. Then Argent’s lawyer got it together to
file the correct document — it’s called a “Release Assignment” — with the
Recorder’s Office in February, confirming the sale of the mortgage on 4111
Archwood to, ahem…
“DEUTSCHE BANK NATIONAL TRUST COMPANY AS TRUSTEE OF ARGENT
SECURITIES INC., ASSET BACKED PASS THROUGH CERTIFICATES SERIES 2003-W5
UNDER THE POOLING AND SERVICING AGREEMENT DATED AS OF OCTOBER 1, 2003″
Finally, seven months later — after the foreclosure was
granted to substitute plaintiff Argent, which had sold off its interest in
the mortgage three years earlier — the magistrate granted a second
plaintiff substitution, swapping Argent out and “Deutsche Bank National
Trust Company as Trustee of ASIABPTCS2003W5″ back in.
So it was “Deutsche Bank National Trust Company as Trustee of
ASIABPTCS2003W5″ listed as plaintiff on the sheriff’s sale notice, and as
the grantee (buyer) on the sheriff’s deed. And now it’s “Deutsche Bank
National Trust Company” listed as the owner on County records — with a tax
mailing address at 505 City Parkway Suite # 100, Orange, CA, which just
happens to be the last-listed address of Ameriquest Mortgage. (Remember
them? Master Servicer for ASIABPTCS2003W5. Now defunct. Mortgage servicing
contracts bought by Citigroup.)
But of course Deutsche Bank NTC doesn’t actually own 4111
Archwood, any more than it actually ever owned the mortgage.
ASIABPTCS2003W5 — that “bankruptcy-remote special purpose entity”, a
paper creation owned by nobody in particular — owns 4111 Archwood.
Deutsche Bank, as Trustee, just represents ASIABPTCS2003W5 for certain
purposes. Ameriquest Mortgage was supposed to take care of
ASIABPTCS2003W5’s properties, but Ameriquest is out of business; this job
may have passed to Citi Residential.
So who’s actually responsible for 4111 Archwood? Good
question.
That’s just one house. Deutsche Bank currently “owns” over 900 houses
in Cuyahoga County through foreclosures in which it acted as Trustee for
some “special purpose entity”, commonly an entity created by Argent.
Argent alone organized at least thirty-one of these billion-dollar
mortgage-backed investment pools from 2003 through 2006.
So maybe you can see why Judges
Boyko,
O’Malley, Rose,
et al are making a big deal about checking Deutsche Bank’s
paperwork.
In accordance with Title 17
U.S.C. Section 107, this material is distributed without profit to those who
have expressed a prior interest in receiving the included information for
research and educational purposes.
See also
