Attorney Christopher Brown was recently asked for his perspective on an important decision about mortgage foreclosures by the Commercial Record. Here’s his recent column on the decision that appeared in the September 5 issue.
In an apparent bow, or at least a nod, to mortgage industry pressure, the Supreme Court of Connecticut recently released its opinion in J.E. Robert Company, Inc. v. Signature Properties, LLC. . Mortgage lenders and servicers will claim that the decision lowers the “standing” hurdle that borrowers often erect in the foreclosing party’s lane to defend against loss of their property. But I believe it’s doubtful that it will have any real effect on the pace of completing foreclosures in the state. There’s much more to the story.
Granted, when those in Connecticut’s mortgage industry complain that the state’s foreclosure process is among the slowest in the country they are right. It’s so slow, in fact, that earlier this year, the Federal Housing Finance Authority proposed raising fees on mortgage loans made by government sponsored entities (Fannie Mae and Freddie Mac) in Connecticut and four other states to cover increased costs associated with these slow foreclosure processes. There’s a reason for that. Connecticut’s process (like the other four states) is “judicial.” This means that foreclosure is a lawsuit and must follow the same process as any other lawsuit, which is almost always slower than the plaintiff wants. Contrast that with “nonjudicial” foreclosure states, where the foreclosing party is in control and decides when things happen, and you can see why lenders find states like Connecticut frustrating.
In addition to the inherent delays associated with any lawsuit, many Connecticut borrowers attempt, sometimes successfully, to slow down or even derail a foreclosure lawsuit. Often, that is done by attacking the plaintiff’s “standing.” Standing in a foreclosure case means the right to foreclose. Once the borrower challenges the plaintiff’s right to foreclose, the case must come to a complete halt until the court determines whether the plaintiff does actually have the right to foreclose. Sometimes this requires an evidentiary hearing, which is like a mini-trial solely on the issue of plaintiff’s standing. This “lawsuit within a lawsuit” contributes to foreclosure delays. Not only that, if the court determines that the plaintiff did not have standing, the case has to be dismissed – thrown out of court. Someone with standing would have to restart it from square one.
Who does have the right to foreclose? Connecticut law has been that only the owner of the debt has the right to foreclose the mortgage. This is not always an easy determination because of the way mortgage transactions are structured. A mortgage transaction in Connecticut typically has at least two parts. The borrower signs a promissory note agreeing to repay the loan. The property owner signs a mortgage deed that essentially posts the property as collateral for repayment of the loan. The promissory note effectively represents the right to collect the loan. Now for the tricky part: The owner of the loan can transfer the right to collect without also transferring ownership of the loan. Though the law recognizes that the person who has the right to collect the loan also is most likely the owner of the loan even that “presumption” is subject to the borrower’s attack. The split between ownership and the right to collect is normally at the heart of an attack on standing.
The split also is something that almost always occurs where the mortgage loan has been securitized, making foreclosure of securitized loans particularly fertile ground for attacks on standing. Mortgage loan securitizations often involve one or more changes in ownership of the loan and one or more transfers of the right to collect. They also normally involve multiple parties (for example, “depositors”, “trustees”, “master servicers”, “subservicers”, “custodians”) who all might seem on their face to have a right to foreclose, which can make it difficult to identify the owner of the loan.
The mortgage industry’s dissatisfaction with Connecticut’s slow foreclosure process, and the particular vulnerability of securitized mortgage loans to standing challenges, came to a head in J.E. Robert. The first two sentences of the opinion note that “securitization of mortgage loans has become increasingly favored by financial lenders” and that in foreclosures of securitized loans “challenges to the standing of parties other than the lender to bring such actions have been on the rise.” That’s essentially the same thing as the Court broadcasting a desire to make it easier to foreclose a mortgage in Connecticut.
Foreclosing plaintiffs will claim that the effect of J.E. Robert is that the foreclosing party does not have to own the loan to have the right to foreclose the mortgage. Instead, any person who can show that it was “vested” with the right to collect the loan has standing to enforce the mortgage. Plaintiffs may not be right about this. Much of the preexisting law says that only the owner of the debt has the right to foreclose. The Court in J.E. Robert did not expressly invalidate all of that law. So, it remains to be seen whether that preexisting law remains viable.
But, even if the plaintiffs are right about the effect of J.E. Robert, does it mean that standing challenges will decline or foreclosures will be faster to complete? Probably not. Why? Because securitizations are complex. It’s that complexity that makes it difficult to identify the party with the right to foreclose, regardless of whether that party is the owner of the loan or the party vested with the right to collect the loan. J.E. Robert did not lower the standing hurdle. It just moved it to a different lane. Stay tuned.
About the Author
Attorney Christopher Brown is a founding partner of Begos Brown & Green. He works primarily on cases involving mortgage foreclosure issues and employment law. Attorney Brown has a long history at the helm of precedent-setting mortgage foreclosure cases. His foreclosure defense work has been receiving the attention of the legal and consumer press since 2008. That is when he began a string of ground-breaking foreclosure cases in which he took on and beat the mortgage industry in foreclosure matters.
Begos Brown & Green LLP is a focused law firm with practices that involve mortgage foreclosure, business and employment law, family law, real estate law and insurance coverage disputes. When it was known as Begos Horgan & Brown it was recognized by the Connecticut Law Tribune as one of the state’s “Dozen Who Made a Difference”, by Corporate Counsel as one of the nation’s “Go To” law firms and by the Commercial Record as one of the state’s best general law firms. The firm has offices in Southport, CT and Bronxville, NY. For more information see bbgllp.com or call (203) 254 -1900.