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Title Talk Newsletters
Title Insurers and the Foreclosure Crisis: Part II
Title Talk has previously discussed the foreclosure crisis, its impact on our national economy and the title insurance industry’s reaction to same. See “Title Insurers and the Foreclosure Crisis” Title Talk No. 76 (Fall 2010). Since that time, the New Jersey Supreme Court and the Administrative Office of the Courts [“AOC”] have reacted to the vast increase in the number of foreclosures by expressing concerns about the practices of some lenders (and their attorneys) in prosecuting foreclosure suits. The AOC has noted with dismay that 96% of residential foreclosure proceedings in New Jersey are uncontested. Rather than take this figure as an indication that mortgagors have no meritorious defense in most instances, the judiciary has determined that additional safeguards are needed.
Accordingly, amendments to the court rules have been adopted which require plaintiffs’ foreclosure counsel to file additional affidavits and certifications with the Office of Foreclosure confirming their adherence to procedures set forth in the rules. See Emergent Amendments to Rules 1:5-6, 4:64-1 and 4:64-2 (Dec. 20, 2010). The result of this is that the process of obtaining a judgment of foreclosure is more complex and time-consuming. On the other hand, since the Office of Foreclosure will not recommend entry of judgment in the absence of proof of compliance with the court rules, presumably there will be fewer procedurally-deficient cases which could be challenged at a later date.
On the other hand, some judges have rendered decisions which have prevented lenders from completing foreclosure suits, notwithstanding the borrowers’ lack of a defense regarding payment of the debt secured by the mortgage. The grounds for doing so usually relate to the inability of the plaintiff lender to produce a proper chain of assignment or an original note at the time of commencement of the foreclosure suit. See, e.g., Bank of N.Y. v. Raftogianis, 417 N.J. Super. 467 (Ch. Div. 2010) (suit dismissed without prejudice where plaintiff did not have original note in its possession on date of commencement of action); Wells Fargo Bank v. Ford, 418 N.J. Super. 592 (App. Div. 2011) (assignee of mortgage failed to establish it was a holder in due course of mortgage note); In re Kemp (Kemp v. Countrywide Home Loans), 440 B.R. 624 (Bankr. D.N.J. 2010) (same). These courts appear to assume (without deciding) that a mortgage note is a "negotiable instrument" within the meaning of UCC § 3-104 [N.J.S.A. 12A:3-104], and thus the UCC takes precedence over real property law regarding the enforcement of mortgages. Yet it is well-settled under NJ law that "an attempted assignment of the mortgage security apart from the secured obligation [i.e., the note] is a complete nullity". Weinstein, Law of Mortgages, §11.2 (2d Ed. 2000).
Whether or not these cases were rightly decided, it is important to note that these decisions do not arise from post-judgment or post-sale proceedings, but rather from defenses asserted by the mortgagors during the pendency of the foreclosure suits. Had one of the mortgagors attempted to assert the same defenses by way of a R. 4:50 motion for post-judgment relief, the title of a third-party purchaser at the sheriff’s sale or subsequent bona fide purchaser of the realty could presumably have been successfully defended. See N.J.S.A. 2A:16-5 and 2A:17-44; Elmora & West End B & L Ass’n v. Dancy, 107 N.J.Eq. 512 (Ch. 1931) (title of purchaser protected); Cona v Gower, 89 N.J. Super. 510 (Ch. Div. 1965) (title of purchaser upheld even though foreclosing lender was guilty of “equitable fraud”). Consistent with the foregoing, a learned treatise concludes:
“After the foreclosure sale, the mortgage debtor has no further rights in the property beyond a limited right to redeem ... . ... If the purchaser is a bona fide purchaser, the purchaser’s title is valid, even if the final foreclosure judgment is subsequently reversed on appeal, if the judgment is not ‘void’ ... provided all the foreclosure proceedings were regular and the judgment on its face is valid.”
Weinstein, Law of Mortgages, §36.1. Therefore, as discussed in Title Talk No. 76, it remains the position of the FNTG companies that titles derived through mortgage foreclosures are generally insurable, provided that the proceedings are regular and FNTG’s underwriting guidelines are adhered to.
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