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Cal Supreme Court Allows Wrongful Foreclosure Suits

California's Supreme Court just potentially opened up a can of worms in its recent holding that certain non-judicial foreclosure borrowers have standing to bring suit on allegedly void deeds of trusts.

Although the ruling is long past the time when many borrowers had defaulted on their home loans in droves, it could still set the tone for borrowers and lenders in the now profitable scheme of securitization of home interests.

Void and Voidable Assignments

In the case of Ynanova v. New Century Mortgage Corporation et al, California's Supreme court reversed a lower court ruling and held that a plaintiff-borrower had standing to sue for wrongful foreclosure without actually getting into the details of whether or the transferred deed of trust was valid. The case is now back in the lower state court of appeal.

The legal issue to be determined by the court is this: Does the bankruptcy of assignor and the fact that the receiving securitization trust was closed to new assignments make the subject deed of trust void? Or is it voidable? This distinction is a fine one, but all eyes are on the court of appeal.

Ugly Facts

In the case at hand, a deed of trust (a security against the balance of a home that allows for non-judicial foreclosure) was executed together with an assignment of a mortgage or deed of trust -- except the assignment was blank and not filled out. The lender and issue filed for bankruptcy in 2007, and was later liquidated, its assets transferred into a liquidation trust. Before the forming of that trust, the deed of trust was sold to a securitization trust in the style of collateral debt obligations. The assignment was completed and recorded well after the bankruptcy. Foreclosure of plaintiff's home took place in 2012.

The California Supreme Court's analysis held that an "aggrieved plaintiff" had standing to challenge the authority of a transferee beneficiary to foreclose on their property -- and the right and wrongfulness of the transferred authority was not even a question yet before it.

Reasons for Keeping the Transfer Blank

Securitization trusts have generally allowed and provided for assignments of mortgage (and like type) interests to be completed in blank for practical reasons including cutting down on paperwork if problems later arose due to alleged breach by either seller or buyer; as well as just plain flexibility.

It was during the 2008 sub-prime mortgage crisis that firms, lenders, and titling companies started getting much more "by the book" with regards to following the exact letter of the law.

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