I represent private money (or hard money) lenders, as well as mortgage pools, and the typical progression I see on a defaulted loan is:
1. borrower stops paying
2. borrower asks for a loan modification
3. loan servicer and private money lenders (who are more responsive than institutional lenders) offer a loan modification
4. borrower doesn’t like the terms
5. lender commences foreclosure
6. borrower and lender try to work out a forbearance
7. borrower fails to make the forbearance payment
8. borrower goes to a lawyer seeking “foreclosure defense”
9. “foreclosure defense” lawyer asks lender to produce every loan document and underwriting document under the sun, as a prelude to filing a federal court action seeking rescission due to alleged TILA violations
10. borrower then files bankruptcy to stop the sale
Once in bankruptcy, the debtor has effectively stayed the lender’s Trustee’s sale. The lender must file a motion for relief to terminate the automatic stay as to that lender. That motion requires an evidentiary showing that the lender has the right to foreclose on the deed of trust.
Essentially, the key facts a lender must establish in order to seek relief:
a. the lender is owed a debt by the borrowers
b. the debt is secured by a deed of trust against the borrower’s property
c. the borrower is not paying or the lender is not otherwise adequately protected
The debtor can then object to the motion for relief by raising the “Produce the Note” defense or a variation thereof. This is in effect challenging that the party filing the motion is owed a debt by the borrowers.
In California, the original promissory note is not required by the Trustee in order to conduct the trustee’s sale. However, in every jurisdiction, the moving party (aggrieved party) must be the real-partyin-interest and have standing to bring a claim.
Example of a lender with standing to bring a motion for relief to foreclose:
Joe and Jane Smith own a house in Mountain View. The Smiths first took out a loan with Countrywide (now BofA) and then the loan was re-sold to Wachovia. Wachovia hires AMS Loan Servicing to service the loan.
The Smiths default, Wachovia commences foreclosure, the Smiths files for bankruptcy in the Northern District of California (San Jose). Wachovia’s loan servicer (AMS) files a motion for relief to conduct Wachovia’s foreclosure sale. AMS’s motion attaches a declaration from an employee of Wachovia bank, a copy of the promissory note between the Smiths and BofA, the note is endorsed to Wachovia, and a copy of the assignment of the deed of trust showing Wachovia as the assignee, and a substitution of trustee subbing in AMS. Wachovia also states in the employee declaration that it has possession (not just that it is the “holder”) of the note and that the servicing agent AMS has authority to file the motion for relief on behalf of Wachovia.
This lender has standing—has established that it is owed the debt (is the real-party-in-interest), is in possession of the debt instrument (promissory note) and that the loan servicer is the lender’s authorized agent, has been substituted in under the deed of trust, and has the power of sale. The lender did not produce the note.
Lender = win.
Example of a lender without standing to bring a motion for relief to foreclose:
Same facts as above, except the promissory note is endorsed “in blank” and Wachovia fails to state that it has actual possession of the Note.
Lender = fail.
The original note is not required but in this circumstance when the endorsement is “in blank” – then only the party with actual possession of the note can be paid on it. Essentially, “in blank” is like turning the note into cash and so only the person with the cash in hand can spend it. [See California Commercial Code Section 3205]
For an interesting discussion, see the In re: Box decision, June 6, 2010, wherein the Missouri Bankruptcy Court denied BAC (formerly known as Countrywide)’s motion for relief because they failed to establish that they were the “holder” of the Note. In re: Box follows on the heels of In re: Hwang (movant must be the real-party-in-interest) and In re: Jacobson (Wells Fargo’s servicing agent denied), all bankruptcy decisions denying lender motions for relief from the automatic stay.
PRACTICE POINTER – the Court (Judges) need to know that the borrower only has to pay the debt once. Lenders need to supply enough evidence to show that it is unlikely that any other lender is going to come out of the woodwork and produce the original note and demand to be paid. The more facts presented to show that even without the original note, that the copy of the note shows an endorsement to the moving party and that the loan instruments all have the same beneficiary (assignee), the stronger the case the lender has in establishing it is the real-party-in-interest and has standing to conduct the foreclosure sale.