Why Mortgage Loans Made Between 2001-2008 Were Unenforceable Against The Borrower Homeowner

Why Securitized Mortgages Dated 2001�8 Would Have Been Unenforceable In Cases Where A Few Essential Facts Were Known If A Court Would Have Applied The Correct Law As It Is Written.

This is intended to be a concise statement of the legal basis for contending that mortgage loans made between 2001-2008 were unenforceable against the borrower homeowner. Though there were exceptions to the rule, the fact patterns laid out herein were present in nearly every case of a mortgage loan made during this time frame. Though these statements are astonishing, there are two basic generalizations can be made as to mortgage loans made during this time frame. The first is that all residential mortgage loans made during these years were securitized. As will be more fully explained, a more precise way to say this is that these loans were contractually, or on paper, intended for securitization. The second generalization is that there was failure to accomplish delivery of the loans to the MBS Trusts.[2] The failure to deliver the loans rendered the attempted transfer of loans to the trusts ineffectual, pursuant to the requirements for delivery set forth in the same contractual documents that established intent to sell the loans to the trusts.[3]

The truth of the above generalizations is shared among a relatively small group of private, government, and pseudo-governmental attorneys, experts, officials and interested parties nationwide, that were deeply involved in the research, investigation and/or challenging of the enforcement of those mortgages, and of the legitimacy thereof. Inclusion in this group presupposes that one's political, philosophical, or legal predispositions or obligations had not rendered them incapable of seeing the truth, due to either a closed mind, or because they were bound in some way to intentionally pretend not to grasp thereto or agree therewith.

The thesis here consists of two major contentions. The first is that because these loans were not owned by the MBS Trusts, on whose behalf all collection and enforcement was performed by the various servicers, there were no legitimate rights to either collect payments due on the notes, nor to enforce the mortgages by foreclosure processes in the event of non-payment. The second is that these rights would have been ruled factually and legally unenforceable in any case in which: 1) The challenge to enforceability had been procedurally proper; 2) A few essential facts had been allowed to be, and were established by the evidence; 3) The attorney for the homeowner borrower presented the correct law and arguments; and 4) The court would have applied the correct law as it is written. The rarest of the above to find were courts that were able and willing to agree with and applied the correct law. This is the firm opinion of myself, and that of several other. For reasons left to each to surmise, Courts were almost unanimous in their unwillingness to let the necessary facts and law to be presented and/or to apply the correct law. It would have meant that the homeowner borrowers legal title to the residential properties remained in tact and that there was simply no party anywhere out there that had the right to enforce the loan and mortgage, as matters of fact and law. Additionally, equity could not repair the problem for the mortgage industry as a matter of law. As a practical matter, the home would have been owned free and clear of any debt or lien.

U.C.C. Article 9 governs the legal issues in cases where a note was sold or purportedly sold. ARS § 47â�‘9109(a)(3).[4] Article 9 provides the substantive law governing the transfer of note ownership when a note has been sold, ownership of the right to payment thereon, and transfer of the mortgage that secures payment thereon. In re Veal, 450 B.R. 897 (9th Cir. BAP)("Veal"), at 913 and fns. 12, 17â�‘19, citing UCC § 9â�‘109(a)(3) (ARS § 47-9109(a)(3)). When evaluating whether a mortgage note that was purportedly sold is enforceable by the party claiming the right to enforce a mortgage (for brevity, sometimes the "Bank"), the first true substantive question to ask is whether the "security interest has attached" in Bank's favor. This phrase does not have the usual meaning. Rather it asks whether there was "completion of the sale of the promissory note," (applies to both negotiable or non-negotiable notes § 47-9102(A)(47) and (65)). See ARS § 47-9203(A) and (B) for the purport and necessity of such attachment in order for the mortgage loan and note to be enforceable following a purported sale, and the elements necessary to accomplish this. The only way that the completion of a sale of a note can be accomplished is expressly pursuant to ARS § 47-9203(B). This is also the only way that a party can obtain the right to enforce the Mortgage. It is absolutely essential to be fluent with the applicable Article 9 definitions in order to understand the decisive legal issues in these cases.[5]

The Article 9 statutes and rules of law herein provide the sole means that the ownership and right to enforce a mortgage transfer incident to the sale of a note can be accomplished.[6] The Article 9 provisions discussed herein are superior to all other law where they are applicable.[7] They trump common law and equity, and though their principles may be amplified by agreement, they may not supplant them. Simply stated, negotiable instrument law has no substantive connection to mortgage notes and there can be no mere "Holder" of a note incident to a mortgage.[8]

Ownership of a mortgage loan, note and mortgage incident to a purported sale is successfully completed, and the right to enforce the mortgage passes only when the three requirements in ARS § 47-9203(B) have been satisfied.[9] But in summary, to be the Owner of the Mortgage Note that has been sold, that party must have: 1) paid value to purchase the mortgage note; 2) from the party that was its owner at the time value was paid for the purchase; and be in possession of the mortgage note, or be the purchasing party to a contract it entered for the purchase of the mortgage note; as set forth in UCC Section 9â�‘203.[10]

The Arizona Supreme Court implied by way of the cases and statutes it cited, without directly saying so, in Hogan v. Washington Mutual Bank, et al, CVâ�‘11â�‘0115â�‘PR (consolidated with CVâ�‘11â�‘0132â�‘PR) and Order (AZ S Ct 05â�‘18â�‘2012, en banc), at p. 6-7, �, that a deed of trust, may only be enforced by the owner of the mortgage loan. "We agree. But Hogan has not alleged that WaMu and Deutsche Bank are not entitled to enforce the underlying note." Citing Restatement (Third) of Prop.: Mortgages § 5.4 © (1997); and Hill v. Favour, 52 Ariz. 561, 568â�‘69, 84 P.2d 575, 578 (1938).[11] The Court did not decide the real and hotly contested unresolved issues, because as usual, the issues brought to this (or other) high appeals court by the homeowner appellants were not those that had a chance of success.

See In re Krohn, 203 Ariz. 205, 208 � 8, 52 P.3d 774, 777 (2002) ("[D]eed of trust sales are conducted on a contract theory under the power of sale authority of the trustee."). . . . The note is a contract that evidences the loan and the obligor's duty to repay. See A.R.S. § 33â�‘801(4). The trust deed transfers an interest in real property, securing the repayment of the money owed under the note. See A.R.S. § § 33â�‘801(4), â�‘801(8), â�‘801(9), â�‘805, â�‘807(A).

Hogan, p. 8, � 9-10.

Plaintiff may argue and hopefully establish legal truths that differ from dicta or apparent dicta in Veal, depending on what would actually held if one of a number of the issues herein were squarely before the BAP. This is may in part be because the pertinent amendments to UCC Article 9 are fairly new (2005, but adopted by all 50 states, UCC Report, p. 2, fn 8), and have not been thoroughly contemplated due the historical practice of law. The Veal opinion stated at 912,

Under established rules, the maker should be indifferent as to who owns the note so long as . . . they know the identity of the "person entitled to enforce" the Note (meaning "holder"). . .

Although this is ideal and the way facts enabled law to be practiced in the past, unfortunately, this is not the reality. This is because apparent "holders" have consistently for years been shown to not be the agent of the owner of the note (nor much less the owner in their own right). Only the owner of the mortgage loan, note and mortgage has the right to enforce the mortgage, although that party can have an agent exercise its rights (in these cases, generally a servicing agent).

For example, if the pertinent statutes in Article 9 are thoroughly digested, and as more fully explained below, the following platitudes are ironclad truths:

a) Whether a party is a holder of a note or not has absolutely nothing to do with whether they have the right to enforce the mortgage substantively.[12]

b) In cases in which a mortgage note has been sold, negotiations on the Note have no conclusive legal effect or consequence, except as provided herein. Negotiable instrument law has nothing to do with the right to mortgage enforcement when Article 9 of the UCC applies, which is every case involving the sale of a mortgage note.

c ) Article 3 has no application to the ownership of a Mortgage loan, note, nor the right to enforce the Mortgage, in cases where the Mortgage Note has been sold.[13]

d) Likewise, the principal of "Holder in Due Course" has no application to ownership of a Mortgage loan, note, nor the right to enforce the Mortgage when Article 9 of the UCC applies, which is every case in which a Mortgage Note has been sold. See ARS § 47-9109(A)(3).

e) An Assignment of a Deed of Trust (ADOT) has absolutely nothing to do with whether that assignee has the right to enforce the mortgage and an ADOT has no power inandof itself to transfer any interest in a mortgage note.

Article 3 governs only the bare right to enforce a negotiable instrument, which at most establishes no more rights that the right to enforce an unsecured debt, such as a credit card debt. This right expressly does not grant the right to enforce a mortgage. Moreover, in the case of any Note that has been sold, the "holder" of a mortgage note would not even have the power to enforce the note even as an unsecured debt, because sales of negotiable and non-negotiable promissory notes are governed by Article 9 of the UCC, not Article 3.

ARS § 47â�‘9313, allows for the perfection of the sale of an instrument by taking possession of the instrument. By reference to elementary commercial law, there can be no perfection of a security interest until there has been attachment. Attachment is governed by 47-9203(A) and (B).

Assignments of Deed of Trust ("ADOT") are often filed as exhibits by banks in court cases,[14] as are Notes to show the apparent and purported negotiations thereon, but such evidence has no true legal significance to the satisfaction of any element necessary to establish a successful sale and ownership of a mortgage loan, note and mortgage.

Ownership of the mortgage loan and note, includes ownership of the mortgage, meaning the right to enforce the mortgage. ARS § 47-9203(G). "The attachment of a security interest in a right to payment or performance secured by a security interest . . . is also attachment of a security interest in the . . . mortgage . . ."[15] To aid in understanding, it is important to remember that "ownership of mortgage loan contract" means the same thing as "ownership of mortgage note," and such ownership is required in order to have the right to enforce the Mortgage.

Remembering the forgoing and the definitions used, a party that purchases a mortgage note for value and fulfills the two other requirements of ARS § 47-9203(B), automatically obtains the mortgage. The right to enforce a note that has been sold does not exist in the buyer until the security interest has attached, meaning completion of the sale, pursuant to ARS § 47â�‘9203. There is no other way they can obtain owner of the loan, note and mortgage in cases of sales of mortgage note debt. ". . . [A] security interest is enforceable against the debtor and third parties with respect to the collateral only if. . . [the elements in ARS § 47-9203(B) have been fulfilled]." Emphasis added. By following the definitions, this means that the right to enforce a mortgage note and the mortgage that secures the note that has been sold does not exist in the buyer until the sale has been successfully been completed, pursuant to ARS § 47â�‘9203(A), (B) and (G).

An Assignment of a Deed of Trust ("ADOT") is insufficient as a matter of law to transfer anything of value. The only way that any interest in either the Mortgage Note or the Mortgage is through ARS § 47-9203. If the true facts accord with the three part test therein, the transferee of the Mortgage Loan Contract Owns the Mortgage Note and the Mortgage.[16] Otherwise they own neither and have no right to enforce the Mortgage, if challenged in Court.

An ADOT that has been recorded may under certain circumstances be useful in providing notice to third parties that there may be certain parties that claim a mortgage interest to a particular item of real estate, pursuant to the applicable recording statutes, but the ADOT cannot, as a matter of law, create any mortgage rights to such property.

Additionally, an ADOT does not even fulfill the conditions under ARS § 47-9707(B) that would procedurally allow the owner of a mortgage note to plug or bridge any gaps in the county public records between the original lender and the party that intends to hold a trustee sale pursuant to a deed of trust in a non-judicial foreclosure state. This is because an ADOT specifically does not qualify as a "security agreement," which is defined in 47-9102(A)(72); 47-9102(A)(7), and means an agreement that provides for the purchase and sale of a note.

By Ronald Ryan, J.D.

Ronald Ryan PC


[1] By Ronald Ryan, J.D., Ronald Ryan PC, www.ronryanlaw.com.

[2] MBS Trust stands for "Mortgage-backed Securities Trust." This is a trust in which one can invest by purchasing a bond interest, or certificate, whose value consists primarily from the ownership of a pool of mortgage loans in the form of the right to the monthly payments made on the loans by the borrower home owners.

[3] There were also reputed failures on the part of the trusts to pay value to purchase the loans. This would be a separate basis to find that the trusts did not own the loans in question. Though this appears to be correct, there was insufficient factual discovery and attempts to assert this theory in practice that it cannot be claimed herein with certainty to have been established.

[4] The legal arguments herein are supported in every particular by the Final Report of the Permanent Editorial Board for the Uniform Commercial Code Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes, dated November 14, 2011 ("UCC Report"), attached as Final UCC Report Exhibit, which was prepared precisely because Courts were not using the correct rules of law nor legal analyses in these cases, and there was a great need for clarification due to the mess alluded to herein during the 2001-2008 time frame. UCC Report, p. 1.

In accord is that "Confidential" internal Fannie Mae memo dated May 19, 2006, published in the New York Times on May 4, 2012. The sale of promissory notes is also now covered under Revised UCC Article 9. . . Mortgages are treated differently from promissory notes under the law. Mortgages, which establish the security interest in the home, are governed by UCC Article 9. . . Report to Fannie Mae Regarding Shareholder Complaints, dated 5�19�2006, p. 38 of 143, NY Times 5�4�2012. www.nytimes.com/interactive/2012/02/05/business/05fannie�doc.html.

In accord is Congressional Oversight Panel November Report: Examining the Consequences of mortgage Irregularities for Financial Stability and Foreclosure Mitigation, pg 16-17 w footnotes.

[5] Attached is an exhibit containing all of the relevant definitions. Examples of some of the most important definitions include: The "secured party" is the party that has purchased a promissory note. A "security agreement" is the agreement that provides for the sale and purchase of a promissory note and it is not the note (47-9102(A)(47)), the DOT nor ADOT (47�1201(B)(35); 47-9102(A)(72)). The "debtor" is the seller of a promissory note. "Collateral" is promissory notes that have been sold. A "security interest" is any interest of a buyer of a promissory note.

[6] UCC Report, p. 4, 8, including fn 30, 9-10

[7] UCC Report, p. 3, fn 11.

[8] UCC Report, p. 4, fn 13.

[9] UCC Report, p. 9. Additionally a thorough understanding of the following UCC Statutes will lead to the inescapable conclusions that Plaintiff makes herein: ARS § § 47-1201(B)(12), (29), (35); 47-9102(A)(12)(b), (28)(b), (47), (55), (65), (71)(d), (72); 47-9203(A), (B), (G). .

[10] UCC Report, p. 9.

[11] "[T]he mortgage is but . . . a security . . . of the debt. . . Where there is no written evidence of the debt or obligation [the note], the mortgage [debt may still be shown]. Nevertheless the debt is the principal thing. . ." Hill v. Favour at 568.

[12] "A negotiable instrument "is not itself a security agreement. See definition of "instrument" in definitions exhibit. ARS § 47-9201(A)(47). Consequently a negotiable instrument that has been negotiated does not constitute an agreement to sell a note. This further drives home the point that the holder status does not include the right to enforce a mortgage note that has been sold, unless the holder is the agent of the owner.

[13] Although possession of a Mortgage Note that has been sold can fulfill the one requirement set forth in ARS § 47-9203(B)(3).

[14] ADOTs have no effective legal power of any kind, though they are used as attempts to provide record notice to all third parties, by recording in county land records, of the contents of said ADOTs. The same is true of negotiations on notes. However, the PSA may require recording of a proper ADOT and generally also require specific serial endorsements on each note, as two of the several contractual requirements necessary to the successful delivery of ownership of all such loans to the corpus of a given MBS Trust. The existence of one or more ADOT and endorsements on the applicable note, may or may not have evidentiary value to show that said requirements in the PSA were satisfied. They may also provide evidence that the Bank has a severe lack of credibility, because of the well known problems of robo-signing, and also because there may be multiple versions of such documents that contain evidence of facts that contradict each other.

[15] This rule was previously codified in ARS § 33â�‘817. "The transfer of any contract or contracts secured by a trust deed shall operate as a transfer of the security for such contract or contracts." The phrase "transfer of any contract," does not refer to negotiation of a note from one holder to another, it means transfer of ownership of the Loan. "Contract", as distinguished from "agreement", means the total legal obligation that results from the parties' agreement as determined by this title [UCC Art. 9] as supplemented by any other applicable laws. ARS § 47â�‘1201 (B)(12).

[16] This presumes that the Mortgage Note was sold and transferred to the MBS Trust Pool according to any strict requirements in the Trust Documents.

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