Successfully challenging a foreclosure can be difficult, but for a while it looked like a California case, Glaski v. Bank of America, might help California homeowners fight foreclosures in situations where the lender didn't properly transfer loan documents when it sold the loan to a securitized trust. Although, California courts are not following Glaski.
Read on to learn more about securitized trusts, how loans are transferred to such trusts, and whether or not the improper assignment of a loan to a trust could provide a basis to fight the foreclosure in California.
Understanding Mortgage Loan Transactions
When you take out a loan to purchase a property, you will sign two documents:
- the promissory note, and
- a mortgage or deed of trust.
The promissory note is your promise to repay the money you borrowed. (Learn more about promissory notes.)
You will also sign either a mortgage or a deed of trust. (Most borrowers who take out a residential loan in California sign a deed of trust.) The mortgage/deed of trust is the document that pledges the parcel of property as security for the debt and creates a lien on the property. (Learn more about the difference between mortgages and deeds of trust.)
How Loan Transfers Work
Banks and other mortgage investors often buy and sell loans from one another. In a typical transaction, when the lender sells the loan, it will also record an assignment of mortgage (or deed of trust) in the land records and indorse (sign over) the promissory note to the new owner of the loan. Assignments and indorsements prove which entity owns the debt and has the legal right to initiate a foreclosure action. (Learn more about assignments and indorsements.)
Understanding Securitized Trusts
In a process called securitization, multiple loans (including both the promissory note and the mortgage/deed of trust) with similar characteristics are pooled, and then sold in the secondary market, often to a trust.
A Pooling and Servicing Agreement (PSA) is the legal document that governs the relationship between the various parties in the securitization process (such as the trustee, servicer, and investor) and controls what can and cannot be done with the trust. (Learn more about PSAs and securitized trusts.)
Background of the Glaski Case
In Glaski v. Bank of America, N.A., 218 Cal. App. 4th 1079 (2013), the borrower (Glaski) took out a home loan that the lender eventually sold to a securitized trust. However, the lender did not transfer the loan documents into the trust at that time. Instead, it transferred the promissory note and deed of trust to the trust after the trust’s closing date, which was set out in the PSA that governed the trust.
When Glaski stopped making mortgage payments, the home was foreclosed. After the foreclosure, Glaski filed a lawsuit claiming wrongful foreclosure and that the foreclosing entity (the securitized trust) was not the true owner of the loan due to a defective loan transfer.
The foreclosing party (Bank of America, as successor trustee to the securitized trust) then filed a demurrer (a motion to dismiss) to Glaski’s complaint, which the lower court granted. Glaski appealed the decision to the California Court of Appeal.
The California Court of Appeal overruled the demurrer and decided that Glaski could move forward with a wrongful foreclosure claim because his loan was assigned to the securitized trust after the trust’s closing date, which voided the assignment.
Effect of Glaski
The Glaski decision appeared to give borrowers the opportunity to challenge assignments in foreclosure cases where the loan was assigned to a securitized trust after the closing date of the trust, thus violating the PSA.
Foreclosed Homeowners Begin Filing Suits Based on Glaski
After the Glaski decision, several homeowners in California filed wrongful foreclosure suits relying on violations of the PSA to try to win their case. However, there is a growing body of case law suggesting that district courts in California will not follow the Glaski decision.
Various California Courts Refuse to Follow Glaski
In Dahnken v. Wells Fargo, the United States District Court for the Northern District of California declined to follow the California Court of Appeal’s Glaski decision. Instead, the court chose to adopt what it described as the "majority position" that foreclosed homeowners lack standing to challenge noncompliance with a PSA in securitization unless they are parties to the PSA or third-party beneficiaries of the PSA (foreclosed homeowners will almost never be a party or beneficiary of the Pooling and Servicing Agreement).
Other courts have refused to follow Glaski as well.
- In the case of Diunugala v. JP Morgan Chase, the United States District Court for the Southern District of California expressly refused to follow the Glaski decision because the foreclosed homeowner was not a party to, nor a third-party beneficiary of, the PSA.
- In the case of Subramani v. Wells Fargo, the court also declined to follow Glaski and instead followed the majority rule.
- In the case of Newman v. Bank of New York Mellon, the United States District Court for the Eastern District of California decided that until the California Supreme Court, the Ninth Circuit, or other appellate courts followGlaski, it too will continue to follow the majority position.
- In the case of Keshtgar v. U.S. Bank, the California Court of Appeal criticized the Glaski court’s ruling that a borrower has standing to challenge an assignment because that holding was based two federal Court of Appeals cases interpreting the law of other jurisdictions and an unpublished federal district court case, not on California authority. (The California Supreme Court granted review of Keshtgar, along with two other similar cases where borrowers asserted that the foreclosing beneficiary in a nonjudicial foreclosure did not have the right to foreclose because of a defective assignment of the note and deed of trust. It’s hard to guess how the California Supreme Court might ultimately rule on this issue. A decision is expected sometime in mid-2015.)
Hiring an Attorney
If you are considering trying to challenge a foreclosure, you'll most likely need an attorney to help you through the process and ensure that you fully understand the likelihood of success in your case.