It must have been “mortgage day” at the Alabama Supreme Court! Also on September 13, 2013, it decided the case of Harris v. Deutsche Bank, Case No 1110054. This was a MERS mortgage, with a securitized trust. Deutsche Bank was the Trustee.
You have to understand that the promissory note is the instrument the borrowers sign, in which they agree to repay the money they borrowed. The mortgage is a separate instrument, in which the borrowers agree their real estate will be collateral for the promissory note. The term “mortgage loans” generally refers to the entire transaction, note and mortgage.
In this case, the mortgage was assigned to the Trustee before the foreclosure. In the post-foreclosure ejectment action, the plaintiffs proved up the default and the assignment of the mortgage. They presented no evidence the promissory note was assigned to the trust. The trial court entered summary judgment in favor of the Trustee, and against the borrower.
The Alabama Supreme Court agreed with the borrower, that a foreclosing party must own the promissory note before it is entitled to foreclose. Because the borrowers put this at issue, the Trustee was obligated to present proof that it owned the note. It did not. As a result, summary judgment was improper, and the case was remanded.
As an aside, the Court also took the opportunity to reiterate that defenses based on technical defects regarding the PSA–Pooling and Servicing Agreement–cannot be raised by a borrower. For those of you who do not follow these things, the argument goes like this:
- The PSA has an open date, which is the date on which the trust is supposed to receive assignment of all the mortgage loans that will be held in the pool. New mortgage loans cannot come dribbling in at later dates. This is one of the requirements for receiving conduit tax treatment by the IRS. It is also necessary so the trust can create the various tranches and sell them out to bondholders. You can’t slice the pie up, sell pieces to people all over the world, and then keep changing the size of the pie. It doesn’t work. Because of these issues, the PSA says the trust will close on a certain date, and no more mortgage loans can be added.
- BUT, because everyone was so busy making money originating loans “back in the day,” a lot of legal niceties were not taken care of. The entire securitized trust industry was based on the assumption that real estate prices would continue to rise at a steady rate, defaulting borrowers would be able to sell their property and pay off their mortgages, and nobody would get hurt. So, why stock up on bandages, right? Many mortgage loans were not assigned to the trusts until LONG after the close date.
- The borrowers argued, as a result, that the subsequent assignment of the mortgage to the trust was illegal under the terms of the PSA, so the trust cannot foreclose on the property. Somebody might be able to foreclose, the borrowers argued, but it was certainly not the trust.
The Alabama Supreme Court said issues about what a trust can and cannot do, under the terms of its PSA, are not issues that can be raised by a borrower. The borrower is neither a party to that agreement, nor a third party beneficiary. As a result, that argument was kicked out of court.