Yes that does change things a bit if the lender does not have the deed of trust at all, California is a nonjudicial foreclosure states, so the lenders' legal ability to even foreclose is in question in a situation such as this. For example, in a state such as California in which deeds of trust paired with promissory notes provide evidence of mortgage debt. The deed of trust contains a "power of sale," giving the trustee the ability to foreclose. Once the deed of trust is created and recorded, if there is a default, the beneficiary routinely changes who the trustee is by recording a "substitution of trustee," putting a new trustee in the job. An important court decision has held that without ownership of a property's trust deed, the lender may not be able to foreclose that property.
"Veal v. American Home Mortgage Servicing, Inc.," a June 2011 decision by the United States 9th Circuit Court, affects nonjudicial foreclosures. Basically, the 9th Circuit held that if a foreclosing lender can't prove it possesses a property's trust deed it can't foreclose. Evidence of property ownership, the trust deed is typically the lender's best proof that it actually has a right to foreclose. The U.S. 9th Circuit Court's decision is valid only in California and other states in that court's jurisdiction.
The U.S. 9th Circuit Court's decision is important to homeowners being foreclosed because it addresses promissory notes as well as trust deeds. The court's decision held that trust deeds follow their promissory notes. Lenders holding promissory notes but not their trust deeds usually aren't able to prove they have ownership and a legal right to foreclose a property.
Homeowner lawsuits have been filed that bring up lack-of-standing arguments against foreclosing lenders. For trust deeds and foreclosure, lack of standing on the part of a foreclosing lender can occur when the lender doesn't actually possess the trust deed. In trust deed states like California, trust deeds can be assigned several times to different lenders as they take over mortgage servicing. For lenders, trust deeds occasionally aren't legally recorded during assignment and can even be lost.
Contesting foreclosure based on a lender's missing trust deed requires the services of skilled real estate attorneys. Experts advise homeowners facing foreclosure to seek legal advice. State and various federal courts often allow holders of trust deeds missing just their promissory notes to foreclose. Cases dealing with missing trust deeds often deal with nonjudicial foreclosure. Lenders in nonjudicial foreclosure states are free to pursue judicial foreclosure even if they're missing trust deeds.
In Shuster vs. BAC Home Loan Servicing LP (formerly known as Countrywide Loan Servicing) Shuster borrowed $670,000 to buy a house in Simi Valley. Mortgage Electronic Registration Systems, Inc. (MERS) was named beneficiary; but there was no trustee named in the document. Shuster ended up in default, MERS recorded a Substitution of Trustee, and the new trustee foreclosed. Shuster brought this action.
Shuster argued that, with no trustee, there was no one to receive the conveyance of bare legal title. This transforms the deed of trust into a standard mortgage. Under California law, a mortgage that is not standard deed of trust (with a power of sale) may only be foreclosed by judicial foreclosure - filing a lawsuit for foreclosure and obtaining a court order.
The court said no. A deed of trust is not like a grant deed. With a grant deed, failure to name a grantee makes the deed void. However, in the case of a deed of trust, the instrument only conveys the bare legal title for purpose of foreclosure, and "carries none of the other incidents of ownership of the property." Here MERS, as beneficiary, appointed a substitute trustee prior to the foreclosure, that was enough.
This is a case of first impression in California, meaning it is the first time a court of appeal has ruled on this issue. As is common, the displaced homeowner made every argument they could find to get the home back. This was a good argument to make, but it didn't work.
The point of all of this case law is that many times Judges will make an equitable decision regarding a situation such as this. Some Judges might just go by the letter of the law and allow a home owner such as yourself to have the property free and clear (this is very unlikely) but with a non-secured debt. Therefore it is possible that the property cannot be foreclosed upon, it is likely that a court will not allow a nonjudicial foreclosure, but it might also be likely that a judicial foreclosure will be enforced simply with the promissory note. The court will normally try to find the "right" thing to do and if you got a mortgage and are trying to sell, avoid foreclosure, etc., the court will normally not allow you to get away free and clear. I hope this makes sense.
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