The Mess that Boyko Made: Pot, Meet Kettle
There has been quite a brouhaha made in the media out of a recent ruling by a federal judge in Ohio -- on October 31, Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases involving Deutsche Bank as trustee. Other similar rulings have since followed suit, all on the grounds of improper assignment and release. The bloggers who first broke the story sensationalized the rulings as an "escape hatch out of foreclosure" for troubled borrowers. The New York Times' Gretchen Morgenson then lifted the story (without credit, bad form for a journalist), saying that Boyko's ruling generated "questions about the legal standing of investors in mortgage securities pools." And Tanta over at Calculated Risk was forced to weigh in with some heady analysis, too, noting in the end that the issue was merely "the true cost of doing business belatedly showing up." It's a well-worn axiom of real estate finance that paying your mortgage is the only way to keep your property. Not paying your mortgage will cost you your property -- the only question is how long and at what cost. One attorney representing lenders reminded me of this when I asked him about the rulings by Boyko and others. In spite of a lot of huffing and puffing to the contrary, there is not a question of "legal standing" here insofar as who actually owns the mortgages. (The mortgage loans were, in fact, sold under a signed contract. The lender did, in fact, receive proceeds from the sale. The purchased loans were, in fact, pooled and securitized.) For HW readers who aren't already familiar, to see why this is you'll need to understand how the secondary market is actually structured (courtesy of the FDIC, click for larger image): Deutsche Bank is the trustee in the foreclosure cases in question here, and in the securitized world the trustee will usually act as agent of the issuer in pursuing foreclosure actions against borrowers who do not pay their mortgages. There isn't anything onerous or new here, although I've seen some commentary suggesting, wrongly, that this is the case. (I've also seen commentary wondering why the various foreclosure actions were filed in a Federal court -- the reason is something called diversity jurisdiction, and not the result of anything more telling than that.) The problem Boyko's ruling zeroes in on lies within Step 2 of the above illustration, when a Mortgage Loan Sale and Assignment Agreement is executed. What usually happens here is that a Release Assignment would be filed with the County Recorder so that the court is aware of the sale and chain of title correctly reflects the sale. But it appears that the assignment in this case wasn't filed with the court properly, or wasn't filed at all. In the end, it means that Deutsche Bank goes back and crosses its t's and dots its i's, and then simply refiles its foreclosure action. A delay? Yes. Catastrophic for investors? Hardly. It's worth noting here that Boyko's ruling only really matters in states that process a foreclosure by judicial action. Not all states are so-called judicial foreclosure states, most notably California -- which means Boyko's ruling will have limited import on a national scale. Some commentary by a consumer attorney in California has theorized about using the Boyko ruling to block a Trustee Sale in a non-judicial foreclosure, but let's be very clear: theories about how a legal issue might work are one thing, and actually obtaining judgments are another thing. "Defendant's counsel needs to earn their paycheck, too," said one attorney I spoke with. "Doesn't mean they're right." Boyko's ruling also only applies wherever something known as MERS wasn't used -- MERS is an industry-sponsored electronic registration system that eliminates the need to record mortgage assignments, and has been around for some time. Something tells me Deutsche Bank will be rethinking its strategy in this area. That's not to say there isn't news here -- it's just that nobody's covered it yet. From the discussions I've had with foreclosure and eviction attorneys, title defects are very common in the foreclosure business. But speed has long been king in the foreclosure industry, meaning any attorney wanting to stay in business had to start a foreclosure often within minutes of receiving a referral. Yes, minutes. Yes, really. Nearly every foreclosure is referred to a local attorney via some electronic platform, which in turn measures how quickly the attorney acknowledges receipt and files "first action." In a perfect world, the foreclosing attorney would check title for evidence of defects before proceeding. Thanks to what can best be described as an automated system of Timelines Gone Wild®, however, any foreclosure attorney that wants to stay in the business generally has had to stop checking title on initial referral; not only would a client refuse to pay for such a title search, but they'd likely refuse to send future referrals. So attorneys took to filing their "first action" without checking title, and the courts didn't stop the practice ... which means it quickly became a best practice. Time is money, after all. Boyko may be dead-on in his ruling, but it's more than a little late in arriving. All of which makes it interesting for people like me to read references in his Order to "the jurisdictional integrity of United States District Court," especially when we're talking about Cuyahoga County in Ohio, long a foreclosure hot spot. After all, Boyko has been on the federal bench in Ohio since 2005 -- so this isn't his first rodeo, not by a long shot, and you have to wonder what other "sloppy" foreclosures he allowed previously. Pot, meet kettle.