Consumer Law

Foreclosure Deed may be Voided by Mortgage Transfer or Servicing Problems

By Alan White

A Federal District Court, in a December 7 order, has denied a motion to dismiss a homeowner's lawsuit to set aside the nonjudicial Missouri foreclosure sale based on a deed of trust, based on allegations that 1) the homeowner was not in default and 2) the nonjudicial sale was baed on an invalid transfer of the mortgage and note.  This decision illustrates the potentially broad ramifications that defective mortgage transfers and wrongful foreclosures will have for any house titles derived from foreclosure sales in nonjudicial foreclosure states.

More specifically, the homeowner alleges that she made all payments when due, until instructed by the servicer to stop making payments in order to qualify for a modification.  She also submitted the mortgage transfer documents that showed a significant break in the chain of ownership.  In a deed of trust state, instead of a mortgage the loan originator typically files a deed of trust, which transfers a power of sale from the homeowner to a trustee, usually a local lawyer, on behalf of the trust deed beneficiary, who is the lender or investor.  In order to transfer the mortgage, there needs to be a transfer of the note and a change in the beneficiary of the trust deed.  This is routinely done by filing a substitution of trustee with the local recorder of deeds.  The substitution of trustee names a new trustee with a power of sale, and a new beneficial owner of the mortgage/deed of trust.  In this case the substitution of trustee form listed a grantor of the transfer, i.e. the prior owner of the loan, that did not match the identified beneficial owner of the original deed of trust.  This break in the chain, according to the court and basic logic, would render the subsequent trustee deed invalid.

A second, independent basis for setting aside the foreclosure deed was the alleged absence of a default.  In a nonjudicial foreclosure, there is no court judgment establishing that the homeonwer defaulted on the loan.  For that reason, a completed foreclosure sale can later be set aside if there was in fact no default.  The homeowner's allegation in this case was that she was current in payments until the servicer instructed her to stop paying so that it could modify her loan.  This type of servicer-induced payment interruption can be characterized as either nondefault based on a modification of the contract, a waiver of the payment obligation by the servicer as agent for the mortgagee, or perhaps a repudiation by the servicer.  In any case, this scenario is sufficiently common to raise serious questions about large numbers of property titles in nonjudicial foreclosure states.

Full post as published by CL&P Blog on December 08, 2010 (boomark / email).