A Standing Question: Mortgages, Assignment, and Foreclosure

By Zacks, Eric A.; Zacks, Dustin A. | Journal of Corporation Law, April 1, 2015 | Go to article overview

A Standing Question: Mortgages, Assignment, and Foreclosure


Zacks, Eric A., Zacks, Dustin A., Journal of Corporation Law


"Banks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank's deed of trust."1

INTRODUCTION

Determining when to require strict and formal compliance with procedures or process when adjudicating substantive rights is, admittedly, a difficult problem. The procedures protecting contract or property rights can be administered conservatively or liberally, depending on the adjudicator's disposition or opinion regarding the proper substantive outcome. When important or even fundamental rights are involved, adjudicators, in their ostensibly neutral or impassive roles, should reasonably be expected to refrain from prejudging the merits of any such litigation. This may be particularly true in those instances when the ex ante transaction process, as well as the ex post enforcement process, was dominated by only one party.

This dilemma has played out in fantastic fashion during the mortgage foreclosure crisis. First, lenders and their originators were able to assign and transfer loans with few, if any, restrictions.2 When the housing market crashed, mortgagees and their assignees, again utilizing the formal instruments of contract that dictate when a party has defaulted under an obligation, sought to foreclose upon the residential properties.3 In the rush to originate and assign as many mortgages as possible, and in the face of an overwhelming volume of foreclosures to be processed, mortgagees and their assignees often failed to assign the mortgages properly and, in some instances, committed fraud or other unauthorized acts in order to correct the assignment paper trail.4

These are not merely hypothetical or isolated issues. The crash of the housing bubble brought countless documentation issues to light in the foreclosure context.5 One such "lightning rod" for criticism was Mortgage Electronic Registration Systems, Inc. (MERS), the corporation utilized as a mechanism by which lenders and servicers were able to document loan transfers electronically and to produce assignments more easily while avoiding recording requirements.6 Even law firms representing allegedly malfeasant lenders did not escape the foreclosure documentation problems unscathed. 7

The oft-alleged documentation errors are not relevant solely to individual litigants and law firms, but to the housing market as a whole. The factory-like production of assignments assisted lenders in securitizing loans more easily and inexpensively, which ostensibly lowered mortgage costs and increased home ownership during the rise of the American real estate market in the 2000s.8 These increased numbers of assignments mean that increased enforcement of formality in assignments, then, could potentially affect the housing market in a significant way through altering the foreclosure process on a large number of delinquent loans.

If a judicial system intends to treat debtors as being responsible for complying with the terms of the mortgage contract itself, it would be reasonable to expect that system to demand that the other parties to the contract abide by similar formalism. In somewhat counterintuitive fashion, however, courts have permitted mortgagees and their assignees to subvert, supplant, and circumvent the very formalities that they utilize to foreclose upon the debtors in the first place.9 The legal system attempts to enforce loan contracts and the underlying mortgages against debtors in almost each instance, regardless of the predatory, subprime, complex, or hidden nature of the terms of the home loan. 10 The basis for this enforcement is that the debtor executed a formal instrument, and one of the basic rules of contract law is that the executing party will be bound by the contract that she executes even if she did not read it.11 Regardless of how substantively unfair the home loan transaction may appear, classical and neo-classical contract law theory, as well as certain economic schools of thought, suggest enforcement is appropriate based on the "voluntariness" of the transaction. …

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