New Pitfalls for Foreclosure Buyers: the California Supreme Court’s Recent Yvanova Decision

By: Madolyn D. Orr

In recent years brokers have tracked foreclosure sales, especially commercial property and apartments, but also many new buyers are buying property at foreclosure sales. Here's a new trap for the unwary or the unsuspecting. Be careful.

Those who purchase residential real properties at foreclosure sales should be aware of a recent unanimous opinion by California's Supreme Court. Yvanova v. New Century Mortgage Corp. et al. (February 18, 2016) appears to permanently open a small gap for homeowners/borrowers who have been foreclosed upon to contest foreclosures after the fact, on the grounds that the person/entity who foreclosed was not entitled to do so - i.e., the wrong person foreclosed. This Supreme Court decision has implications for homeowners/borrowers, as well as for those considering buying residential properties at trustee's sales.

The heart of the Supreme Court's Yvanova opinion is the question of "under what circumstances, if any, may the borrower challenge a nonjudicial foreclosure on the ground that the foreclosing party is not a valid assignee of the original lender?"

This question has come up more and more often in recent years. Although it was once normal for the original lender to hold a residential mortgage loan for the 30 year life of the loan, that is now rare. For the past 15 years or more, the vast majority of residential mortgage loans are transferred (assigned) at least once from the original lender to someone else. Since the early 2000's, the usual route of a mortgage loan goes from sign-off at close of escrow; to recording the deed of trust shortly thereafter; to the original lender transferring the loan (promissory note) by assigning it into a New York Real Estate Investment Trust (aka "REIT"). Once assigned into the REIT, the loan secured by the deed of trust is pooled along with thousands of other mortgage loans, and "securitized" to make them attractive to investors, who obtain a return on their investment derived from the aggregated monthly mortgage loan payments. Of course this is an oversimplified version of what actually happens, but it is enough to understand the California Supreme Court's Yvanova opinion.

In theory, these REITs have a joining deadline - each is "closed" on a certain date and after that date supposedly no more mortgage loans can be added to that particular REIT. Since the REITs are usually set up under New York state law, whether or not the REIT is actually closed is also a question of New York law.

After her California home was foreclosed upon in 2012, the plaintiff in Yvanova sued, alleging that the person who foreclosed did not have the legal authority to do so - i.e., that the wrong person foreclosed. Yvanova argued that the foreclosing REIT was "closed" in 2007, but the publicly recorded documents showed that the original lender did not assign the mortgage loan to the REIT until 2011 - five years after that trust was already supposedly closed. Yvanova argued that the 2011 assignment from the original lender to the "closed" REIT was therefore totally void, so that the entity who foreclosed in 2012 did not have the legal authority to do so, and as a result the 2012 foreclosure was wrongful.

The foreclosing REIT promoted an argument that - until now - has often been repeated by foreclosing parties: that the homeowner/borrower did not have the legal authority ("standing") to contest whether the 2011 assignment between the original lender and the REIT was proper, because she was not a party to the 2011 assignment (she did not assign the promissory note, and it was not assigned to her), and this is normally a prerequisite for trying to overcome such an assignment.

California's Supreme Court disagreed. They held that even though she was not a party to the assignment, the plaintiff homeowner/borrower WAS legally entitled to challenge whether the assignment was proper, but only under certain circumstances: only if she could allege facts that - if true - would make the assignment totally "void," not just "voidable."

If the assignment is merely "voidable," that means that the parties to the assignment (the person who assigned the promissory note, and the person to whom it was assigned) can decide to make it enforceable by ratifying it, or can decide to make it unenforceable (avoid it) by rescission or other means - and the homeowner/borrower does not get a say in that decision. On the other hand, if the assignment is totally "void" - meaning that it was never enforceable and was always totally without effect - then the homeowner/borrower is entitled to challenge the assignment, and challenge any later foreclosure by the void assignee.

The Yvanova decision allowed the plaintiff in that case - and others who are similarly situated - to overcome one of the major arguments promoted by foreclosure agents against attempts to reverse foreclosures.

Based on the Yvanova decision, if foreclosed-upon homeowners/borrowers can prove that the wrong person foreclosed - or even if they can keep the property tied up on litigation regarding this issue - as a legal and/or practical matter this may prevent a foreclosure sale buyer from pursuing its intended development of the real property. Those considering purchasing residential properties at foreclosure sales may want to do some extra research to confirm that the person/entity foreclosing is entitled to do so - if the public records show that a foreclosing entity was assigned the deed of trust very recently in comparison to the date the Notice of Default was recorded, that should be a yellow flag triggering further research regarding the target property, or the assistance of a qualified real estate attorney. On the other hand, if a homeowner/borrower has reason to genuinely believe that the wrong person foreclosed on their mortgage loan, the Yvanova case may offer an opportunity to right the wrong.

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