Foreclosure Defense:  New York’s Second Department Rejects “Backdating” of Mortgage Assignments

One unforeseen side effect of the subprime mortgage crisis has been an enormous surge in foreclosure litigation involving “securitized” mortgages, i.e. mortgages that have been bundled and sold to investors through a series of complicated transactions typically involving multiple transfers of ownership of the mortgages and underlying notes.  Because these transfers often existed in theory only, or were not properly documented, many homeowners facing foreclosure have demanded that the lender provide documentation showing that, at the time the lender brought the suit, it actually owned the debt.

This requirement is part of a legal concept known as “standing”, which is designed to make sure that only individuals and entities who have an actual interest in a dispute can file a lawsuit.  An additional practical rationale for the homeowner’s emphasis on this point is the danger that another entity claiming to be the “true” owner of the obligation might appear after any settlement with the foreclosing bank.

Foreclosing banks have been caught off guard and, lacking paperwork executed at the time of each alleged transfer in ownership, have been forced to submit documents that say, in effect, “while it is true that this document regarding the transfer of the loan to this bank was created after the lawsuit was filed, the transfer is to be deemed effective as of several years ago.”

Following a string of lower court decisions, as well as a decision earlier this year in the Third Department, the Second Department has unequivocally rejected these attempts at “retroactivity” in Wells Fargo N.A. v. Marchine, —N.Y.S.2d—, 2009 WL 3380639 (2d Dep’t 2009).  In Wells Fargo, the original lender had not yet sold or “assigned” its debt at the time legal action was commenced. However, the assignment was backdated to before the beginning of the lawsuit.  While the court recognized that retroactive transactions are legitimate in many areas of law, the Court held that such a document it is insufficient to confer standing.  On this basis, the Court dismissed the foreclosure action.

Our firm has raised this same issue in an appeal before the same Second Department in, U.S. Bank National Association, et al  v. Pia, et al., Index No. 2009-07258 (Second Department, Appellate Division), which is currently pending. Our clients also have claims for violation of the Truth In Lending Act [TILA] and a variety of other state and federal consumer protection statutes in this predatory lending case.