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Banks Seeking to Foreclose Face More Questions About Legal Standing

Several recent cases show that banks are facing more questions not only about their foreclosure documents--but about whether they can prove their legal standing to enforce a foreclosure.

As we’ve noted, banks seeking to enforce foreclosures must demonstrate that they have proper documentation proving their right to enforce a foreclosure—meaning they have the legal standing to enforce the foreclosure either as the holder of the note or as an agent acting on behalf of the holder.

In bankruptcy court, this hasn’t always been easy for the banks. Over the weekend, a piece by Gretchen Morgenson of the New York Times noted that the United States Trustee Program—a Justice Department unit tasked with overseeing bankruptcy courts—has ramped up its scrutiny of banks’ foreclosure processes and is forcing banks to prove that they have the right to enforce foreclosures.

Morgenson points out two cases in federal bankruptcy court in Atlanta in which a U.S. trustee stepped in and asked bankruptcy judges to deny requests from Wells Fargo and Chase to allow them to proceed with foreclosure. In both cases, Walton filed motions saying that the bank had “failed to allege sufficient facts from which the Court can conclude that it is in fact the authorized agent” of the note holder.

Issues of a note’s proper transfer and the bank’s right to enforce a foreclosure were also raised when a U.S. bankruptcy judge earlier this month rejected an attempt by Bank of America to foreclose on a New Jersey homeowner. According to a piece in Bloomberg today, the judge ruled that the bank had failed to properly transfer the note to its true owner and therefore did not have legal standing to enforce the foreclosure.

As part of that case, Bank of America employee Linda DeMartini testified [PDF] that it was standard practice for Countrywide—which was acquired by Bank of America—to sell mortgage loans without physically transferring the note to the new owner. 

Countrywide “transferred the ownership, not the physical documents,” DeMartini testified, noting that the practice was “normal” for the company. The judge, in her ruling [PDF], wrote that “the fact that the owner of the note, the Bank of New York, never had possession of the note, is fatal to its enforcement," calling into question whether other cases that were similarly handled could face similar challenges.

An attorney working on behalf of the bank told Bloomberg that DeMartini had been wrong about the company’s practice:

It was the policy of Countrywide Financial Corp., acquired by Bank of America in July 2008, to deliver notes as called for in its securitization contracts, according to Larry Platt, an attorney at K&L Gates LLP in Washington designated by the bank to answer questions about the case.

“This particular employee was mistaken in what she said,” Platt said in a telephone interview.

While judges and trustees may have caught a few of such cases and tried to stop them, foreclosures without proof of standing may be surprisingly common.

University of Iowa law professor Katherine Porter analyzed bankruptcy mortgage claims in 2007 and found that about 40 percent of the time, banks didn’t provide the proper paperwork—specifically, the note—to enforce a mortgage claim and collect the debt.

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