Foreclosure Deed may be Voided by Mortgage Transfer or Servicing Problems

By Max Gardner

A Federal District Court, in a December 7 order, has denied a motion to
dismiss a homeowner’s lawsuit to set aside the nonjudicial Missouri
foreclosure sale based on a deed of trust, based on allegations that 1)
the homeowner was not in default and 2) the nonjudicial sale was baed on
an invalid transfer of the mortgage and note. This decision illustrates
the potentially broad ramifications that defective mortgage transfers
and wrongful foreclosures will have for any house titles derived from
foreclosure sales in nonjudicial foreclosure states.
More specifically, the homeowner alleges that she made all payments when
due, until instructed by the servicer to stop making payments in order
to qualify for a modification. She also submitted the mortgage transfer
documents that showed a significant break in the chain of ownership. In
a deed of trust state, instead of a mortgage the loan originator
typically files a deed of trust, which transfers a power of sale from
the homeowner to a trustee, usually a local lawyer, on behalf of the
trust deed beneficiary, who is the lender or investor. In order to
transfer the mortgage, there needs to be a transfer of the note and a
change in the beneficiary of the trust deed. This is routinely done by
filing a substitution of trustee with the local recorder of deeds. The
substitution of trustee names a new trustee with a power of sale, and a
new beneficial owner of the mortgage/deed of trust. In this case the
substitution of trustee form listed a grantor of the transfer, i.e. the
prior owner of the loan, that did not match the identified beneficial
owner of the original deed of trust. This break in the chain, according
to the court and basic logic, would render the subsequent trustee deed
invalid.
A second, independent basis for setting aside the foreclosure deed was
the alleged absence of a default. In a nonjudicial foreclosure, there
is no court judgment establishing that the homeonwer defaulted on the
loan. For that reason, a completed foreclosure sale can later be set
aside if there was in fact no default. The homeowner’s allegation in
this case was that she was current in payments until the servicer
instructed her to stop paying so that it could modify her loan. This
type of servicer-induced payment interruption can be characterized as
either nondefault based on a modification of the contract, a waiver of
the payment obligation by the servicer as agent for the mortgagee, or
perhaps a repudiation by the servicer. In any case, this scenario is
sufficiently common to raise serious questions about large numbers of
property titles in nonjudicial foreclosure states.