Balancing the Scales of Justice for Pro Se Homeowners

Two Issues in Flux in Regards to Foreclosure – Assignment of Deed of Trust and Applicability of FDPCA in Foreclosures – Part One

Posted by on Jan 23, 2012

In California there is a statue called California Civil Code § 2932.5 that governs the Assignment of Mortgages. With all the foreclosures being done by Trustee’s of REMIC Trust it has called into question as to whether this little Statue also covers Deeds of Trusts.

“Where a power to sell real property is given to a mortgagee, or other encumbrancer, in an  instrument intended to secure the payment of money, the power is part of the security and vests in any person who by assignment becomes entitled to payment of the money secured by the instrument. The power of sale may be exercised by the assignee if the assignment is duly acknowledged and recorded.”

Encumbrancer according to Webster’s dictionary is “one who holds an encumbrance”, which according to Webster is “a claim (as a mortgage) against property”.   The California Supreme Court has ruled that a Deed of Trust is nothing more than “a mortgage with a power of sale clause”.  So many people (homeowners) who read this statue have read it to mean that before an entity can exercise the power to sale clause of the Deed of Trust, they must first demonstrate in the public land records that they are the beneficiary of the Deed of Trust and Note, who is entitled to have the Trustee exercise the power of sale upon a written declaration of default on the Note.  The banks on the other hand argue that the assignment is done for constructive notice and they are under no obligation to file an assignment, because the Deed of Trust has actually passed title of the property to the Trustee, and the Trustee can take a written declaration of default from the beneficiary of the Note to exercise the power of sale.  If you are scratching your head here, I understand.  So let me give you an example:

[ismember]Bank of America makes a loan to a homeowner for their property; the homeowner then grants “title” of the property to the Trustee of the Deed of Trust who, as an objective 3rd party, will hold the title as a lien against the property until the loan is paid.  If the borrower fails to make the payments the beneficiary of the Promissory Note – Bank of America- can make a written declaration of default to the Trustee, demanding the property be liquated to pay off the loan.  The Trustee, upon receiving a written declaration of default, then can exercise the power of sale to conduct a non judicial foreclosure with the intention of satisfying the loan through the sale proceeds of the house. 

Now this is all nice and groovy and we get this.  Here is where it gets hinky –  When the homeowner receives the Notice of Default it states the beneficiary of the Note is a REMIC Trust with some exotic name like, “Deutsche Bank National Trust Company as Trustee for the Morgan Stanley ABS Series of Certificates” and they (the REMIC Trust or Trustee of the REMIC Trust) has issued a written declaration of default to the Trustee of your Deed of Trust.   Naturally the homeowner questions this as their creditor/lender is Bank of America.

The only logical place to find out if these strangers have a right to be issuing a declaration of default is to look at the land records to see if the Deed of Trust has been assigned to these companies as a beneficiary of the Note and Deed of Trust.  If there is no assignment in the land records, where do these companies get this right and how do you confirm they have this right?  Even more confusing is that these strangers then do a Substitution of Trustee and replace YOUR Deed of Trust Trustee with THEIR Deed of Trust Trustee – one that these strangers are paying to exercise the power of sale.

Do you really think this new Trustee being paid by these strangers is an objective 3rd party who will protect your rights too?[private Monthly|annual|advocate] It is very natural to demand that the foreclosing Trustee provide you with evidence of the written declaration of default, proving that the people claiming the default are indeed the parties who suffered the default when you missed your payments.  In theory you could tell your neighbor you missed your loan payments and your neighbor can hire an agent to issue a Notice of Default and start a nonjudicial foreclosure on your property, and then the neighbor can file a “Substitution of Trustee” because, as the banks say, they don’t have to prove your neighbor is now the beneficiary of the Note with rights to make this substitution.

And that is the fight that is going on in the courts right now.  There was a ruling by one federal court judge in the Central District,  In re Eleazar Salazar  that found the foreclosure to be invalid because of the failure to record the assignment of Deed of Trust.  In the original Deed of Trust (DOT) Accredited was the lender, Chicago Title was the DOT trustee, and MERS was the nominal beneficiary.   MERS substituted Litton Loan Servicing and Quality Loan Service Corp to run the foreclosure; Litton Loan then identified US Bank as the beneficiary on the Trustee’s Deed Upon Sale.   There was no assignment from Accredited to US Bank; and MERS who was the beneficiary at the inception of the loan was not at the time of the foreclosure.  The court found that under CCC § 2932.5 the assignment to US Bank had to be recorded. First US Bank had to be entitled to the payments and second, the public record had to show US Bank’s status as the foreclosing beneficiary BEFORE the Trustee Sale.

While the bank argued that MERS was the beneficiary, MERS was NOT the beneficiary at the time of the Trustee Sale – it in fact had no role in the foreclosure at all!  The court also refused to recognize MERS as an alternative recording system to the state’s land records.  (Many courts are finding that MERS seeks to circumvent state laws and is illegal; alas, California State Courts have been more reluctant to take that stance – but more on that later).

Two other cases making the rounds by the banks attorneys are Gomes v. Countrywide and Robinson v. Countrywide.  In these two cases the Plaintiffs (homeowners) lost because the homeowners specifically granted MERS the right to initiate the foreclosure in their Deed of Trust.  These cases are also being cited by the banks even when MERS is not involved; if MERS is not on your Deed of Trust, this is a viable way to distinguish your case from these two cases.

As Gomes and Robinson have shown, MERS is an original party to the Deed of Trust making it damn hard to stop or overturn the foreclosure but what happens when NONE of the foreclosing parties are the original parties named on the Deed of Trust or Note, there is no MERS involvement?  In the Robinson v. Countrywide ruling, under Footnote 5 the Court stated, “This does not mean that a borrower who believes that the foreclosing entity lacks standing to do so is without a remedy. The borrower can seek to enjoin the trustee’s sale or to set the sale aside. (See generally Bernhardt, Cal. Mortgages, Deeds of Trust, and Foreclosure Litigation (Cont.Ed.Bar 4th ed. 2009) §§ 7.23-7.31, pp. 538.2-538.11, pp. 538.2-538.11.)

California Law does not require an assignment of deed of trust to be recorded to impart constructive notice; however an assignee can only enforce the power of sale under a deed of trust if the assignment is recorded, because the assignee’s authority to conduct the sale must appear in the public records.  Miller & Starr CA Real Estate 3d 9/00, Deeds of Trust 10:39, citing Civ. Code §2932.5; Strike v. Transwest Discount Corp. (4th Dist. 1979), 92 Cal.App. 3d 735, 742; New York Life Ins. Co. v. Doane, (2d Dist. 1936),13 Cal. App. 2d 233, 235-237.  As explained in Strike:

A recorded assignment of note and deed of trust vests in the assignee all of the rights, interests of the beneficiary (Musgrave v. Renkin, 180 Cal. 785, 183 P. 145) including authority to exercise any power of sale given the beneficiary (Civ.Code, § 858)… The power of sale here derived from the instrument itself. (Civ.Code, § 2932; McDonald v. Smoke Creek Livestock Co., 209 Cal. 231, 235-236, 286 P. 693.)  Id.  [/private]

 Whether this argument will fly with the State trial courts or with the Court of Appeals is yet to be determined.  Right now most of the cases coming out of the Court of Appeals have involved MERS; and the Court of Appeals seems to be leaning in favor of allowing MERS to initiate the foreclosures.  This matter is far from being over and as more and more homeowners start standing up to the banks this issue will continue to be front and center.


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