U.S. Bankruptcy Court for Massachusetts Judge Melvin Hoffman earlier this week ruled that Deustche Bank did not have the legal right to foreclose on a mortgage that is part of a securitization.

The case called In Re Schwartz involves Sima Schwartz, who questioned Deutsche's legal capacity to foreclose on her mortgage.

The judge said that Mortgage Electronic Registration System (MERS), and not Deutsche, held legal title to the mortgage on Schwartz's home as of May 3, 2006, which was the day when the notice of the foreclosure sale of Schwartz's home was initially published.

According to the Judge, since Deutsche did not own the mortgage on the day the foreclosure procedure was started, it follows that Deutsche did not have the statutory right to sell and foreclose on the mortgage.

By publishing notice of the foreclosure sale when it was not the mortgagee, Deutsche failed to comply with Massachusetts law, and thus the foreclosure sale against Schwartz is void.

This decision, according to experts, might be used in cases against MERS where it acts as a lender or where they are foreclosure cases brought through another entity such as Deutsche in this case. This is further complicated by MERS' announcement that foreclosures should not be conducted in its name.

Case Background

As background, in her bankruptcy proceeding debtor Schwartz, challenged the May 24, 2006 foreclosure of her Worcester home by Deutsche Bank. She cited the U.S. Bank v. Ibanez decision earlier issued by the Massachusetts Supreme Judicial Court, which set a legal precedent for Deutsche not owning the mortgage on the property when it initiated the foreclosure process against her. The lender on her original mortgage was MERS.

According to the judge's decision, in the chain of transactions by which Schwartz's mortgage loan was sold in three transactions, eventually ending up with Deutsche, the seller sold all of its right, title and interest in the mortgage loans being transferred. But, as the mortgage itself was originally in MERS' name as mortgagee, and not First NLC. First NLC was the seller in the very first transcation that occured before the mortgage was sold to Deutsche as a trustee. Deutsche therefore, as one of the successors to First NLC, did not obtain legal title to the mortgage.

In this case, there were no assignments of mortgage that were recorded with the registry of deeds until a day prior to the foreclosure sale on May 23, 2006. This particular assignment was executed by Liquenda Allotey, a vice president at MERS, for Lender Processing Service. The assignment was to Deutsche Bank, which completed the foreclosure sale on May 24, bid on the mortgage debt and purchased the property.

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