Blog Archive

Wednesday, February 27, 2013


“As the millennium dawned, American financial markets soared to new heights. One of the vehicles that propelled this dizzying flight involved the bundling and securitization of residential mortgage loans. But all good things come to an end, cf. Geoffrey Chaucer, Troilus and Criseyde (circa 1374) (‘There is an end to everything, to good things as well.’), and it was not long before the economy faltered and the housing bubble burst. A rash of residential mortgage foreclosures followed.”Culhane v. Aurora Loan Services of Nebraska, 12-1285, 2013 WL 563374 (1st Cir. Feb. 15, 2013). Thus begins the interesting US Court of Appeals decision which concludes that prior to instituting a foreclosure action, a note and a mortgage may be held by separate parties.

 In this case MERS was the mortgagee at the time the borrower signed the $548,000.00 mortgage; but the note landed in the hands of one of Deutsche Bank’s holders of bundled and securitized loans (the likes of which I often refer to as “The Wizard of Oz”). According to the lower court decision, the controversy started in June of 2011 when the borrower appeared pro se in Superior Court seeking a TRO to stop the foreclosure. There does not appear to be any disagreement that the borrower was substantially behind in her payments and unable to remediate the default. The borrower was unsuccessful in the U.S. District Court, and appealed to the First Circuit.

The borrower tried to claim that MERS could not assign the mortgage (to the holder of the note in preparation for foreclosure) because MERS was never a proper mortgagee whereas it did not own the beneficial half of the legal interest in the mortgage. The Court disagreed and determined that MERS is a proper holder of mortgagees and has the ability to assign mortgages. The Court stated: “The law contemplates distinctions between the legal interest in a mortgage and the beneficial interest in the underlying debt. These are distinct interests, and they may be held by different parties. See Black's Law Dictionary 885 (9th ed.2009) (defining ‘beneficial interest’ as a ‘right or expectancy in something (such as a trust or estate), as opposed to legal title to that thing’). So it is here: prior to the assignment to Aurora, MERS held the legal interest and Deutsche held the beneficial interest.”

“We add that—short of the time of foreclosure—the MERS framework, which customarily separates the legal interest from the beneficial interest, corresponds with longstanding common-law principles regarding mortgages. A mortgage loan involves the borrowing of money by one party, who secures the loan by means of a mortgage on a piece of property. It requires the execution of two separate, but related, contracts: a promissory note and a mortgage. Eaton, 969 N.E.2d at 1124. The note embodies the borrower's promise to repay the lender (or, in its stead, the noteholder). Id. The mortgage, in a title theory state like Massachusetts, transfers legal title to the mortgaged premises from the mortgagor to the mortgagee for the sole purpose of securing the loan. Id. The mortgagee holds bare legal title to the mortgaged premises, defeasible upon repayment of the loan (because the mortgagor owns the equity of redemption). Id.”


Wednesday, February 13, 2013


Do you recall the episode of “60 Minutes” from about 5 years ago when the mortgage crisis was rolling to a full boil? It was the episode in which the reporters interviewed a number of homeowners who had decided to “walk away” from their overleveraged homes. They made it sound as if walking away from their home and their outstanding debt was a viable option. The “60 Minutes” reporters said nothing to make it sound as if “walking away” was not a reasonable alternative. Like you, I sat there screaming at the TV yelling “What about the obligations under the note???!!!”
Turns out we were right. In the February 11, 2013 edition of Massachusetts Lawyers Weekly you can read about In Re: Canning, Ralph G. III, et al, Lawyers Weekly No 01-034-13;  a Chapter 7 Bankruptcy case wherein the debtor claimed that the mortgagee was being unreasonable in not releasing the lien on their underwater home via foreclosure or otherwise taking title to the residence. The Bankruptcy Court ruled that the lender has the “prerogative to decide to accept or reject the surrendered collateral.” The debtor never explained to the court exactly why a short sale or a settlement was out of the question for them. “In fact, from the record available to [the court], it seems that the Cannings employed a ‘take it or leave it’ approach to negotiating with their mortgage lender…”
The Court also stated: “The Cannings also fail to advance any legal authority, and we are not aware of any, to support the proposition that a homeowner may walk away, with no strings attached, from their legally owned residence. But even worse, in vacating their residence, the Cannings placed many of the burdens of dealing with an abandoned property on their neighbors, their town and their city – in other words, on everyone but them.”
Perhaps the Cannings were in desperate straits and perhaps they deserve better circumstances. However, you can now report to your clients (and to the know-it-alls at cocktail parties) that there is no legal authority that gives a homeowner the right to walk away from their property and their obligations, including filing bankruptcy.