IndyMac Lost The Notes Owner

Here In re Hwang, 393 B.R. 701, 2008 Bankr. LEXIS 2460 ( Bankr. C.D. Cal., 2008) we have an interesting variation of negotiable instruments gone wild. 

Mortgageit, Inc. originated a mortgage loan on a Las Vegas, NV property and then Mortgageit transfers the loan to IndyMac Bank.  IndyMac subsequently gets taken over by the FDIC. 

Since payments apparently aren’t being made on the loan on time and the homeowner has filed a Chapter 7 bankruptcy, IndyMac seeks a relief from stay to foreclose. 

Here’s where it gets interesting.  The bankruptcy court learns through testimony of an IndyMac employee, that IndyMac no longer owns the note.  And IndyMac doesn’t know exactly who owns it, but they’d like to foreclose anyway as the servicing agent of the (missing) note’s owner.

The Court wasn’t having any of it and gave IndyMac ample time to find the “real party in interest” and join them to then be granted a relief from stay; but, it never happened and so after two months the relief from stay was denied.

The questions In re Hwang cited above were apparently brought not by the defense but by the judge, as I see the legal term of sua sponte which means “of one’s own accord”.  Stepping aside from the instant case In re Hwang for a moment, it makes me think of how many foreclosures are taking place with procedural errors and affirmative defenses and counterclaims that might be available to the homeowner and yet are never raised.  Property gets foreclosed.  End of story.

I found this excerpt from the Court’s order interesting and most likely applicable to thousands upon thousands of loans that were merely pledged to securitization trusts in subprime and Alt-A loan pools:

“[A] person who has an ownership right in an instrument might not be a person entitled to enforce the instrument.  For example, suppose X is the owner and holder of an instrument payable to X.  X sells the instrument to Y but is unable to deliver immediate possession to Y.  Instead, X signs a document conveying all of X’s right, title, and interest in the instrument to Y.  Although the document may be effective to give Y a claim to ownership of the instrument, Y is not a person entitled to enforce the instrument until Y obtains possession of the instrument.  No transfer of the instrument occurs under Section 3203(a) until it is delivered to Y.”

Yeah, I think it probably does apply to hundreds of thousands or even millions of loans out there that were pledged by now defunct mortgage lenders and the promissory notes were not subsequently indorsed to the securitization trusts.  The question is how many borrowers going through foreclosure are going to question it?

This author is not an attorney and this information should not be considered legal advice.  Please consult an attorney for legal advice.