by A Michigan state court found that a debtor may oppose foreclosure on the basis that the assignment of the mortgage to the foreclosing party was in violation of the Pooling and Service Agreement and, therefore, ineffective. HSBC Bank, USA v. Young, No. 11-693 (Cir. Ct. Mich. Oct. 16, 2012). HSBC conducted a foreclosure by advertisement and bought the property at the foreclosure sale. When it moved the court for possession of the property the debtor challenged the legitimacy of the foreclosure on the basis that the assignment of the note and mortgage from Wells Fargo to HSBC took place after the note was in default in violation of the terms of the PSA.
The court began by finding that the debtor challenged HSBC’s ownership of both the note and the mortgage and Michigan law does not allow foreclosure by a party who owns neither the note nor the mortgage. Residential Funding Co. v. Saurman, 490 Mich 909, 805 NW2d 183 (2011).
The court then turned to the question of whether the debtor had standing to challenge the assignment of the mortgage and note on the basis that it did not conform to the requirements of the PSA. The court found that she did. Citing Livonia Property Hldgs v. 12840-12976 v. Farmington Rd. Hldgs, 717 F.Supp. 2 724, 746 (E.D. Mich 2010), the court recognized an exception under Michigan law, to the rule that only a party or third party beneficiary to a contract may enforce its terms. Under that case, a debtor may protect herself from the threat of having to pay the same debt twice by raising as a defense the assignee’s lack of title.
The court distinguished the holdings of others courts that found that mortgagors lack standing to enforce the terms of the PSA on the basis that those cases relied on state law that did not permit a debtor to challenge an assignment. Michigan, by contrast, does not preclude that challenge and because the debtor suffered an injury from the allegedly invalid assignment, she had standing under state law to raise failure to comply with the PSA as a defense to the foreclosure.
While the court framed the issue as one involving the borrower’s right to challenge compliance with the PSA, in fact the debtor is not, in most cases, attempting to enforce the PSA. Instead the PSA provides the road map that tells the world who is supposed to own the loan and how the transfer of ownership was supposed to be accomplished. Failure to comply with the terms of the PSA potentially means that the party claiming ownership of a loan may not in fact have obtained those rights. Certainly, borrowers have standing to challenge the legitimacy of a party seeking to foreclose on their home. The PSA is an important piece of evidence that describes the conditions under which one party or another owns the loan.