Declaration of Irv Ackelsberg

8/13/2019 Declaration of Irv Ackelsberg

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IN THE UNITED STATES DISTRICT COURTFOR THE EASTERN DISTRICT OF PENNSYLVANIA

MONTGOMERY COUNTY, PENNSYLVANIA, :RECORDER OF DEEDS, et al., : Civil Action

Plaintiff, ::v. : No. 11-cv-6968-JCJ

:MERSCORP, INC., et al., :

Defendants

DECLARATION OF IRV ACKELSBERG, ESQUIRE, IN SUPPORT OFAMICUS CURIAE BRIEF OF COMMUNITY LEGAL SERVICES, INC., PENNSYLVANIA

LEGAL AID NETWORK AND HOUSING ALLIANCE OF PENNSYLVANIA

Introduction

1. I am a licensed Pennsylvania attorney since September, 1976, and a member ingood standing of the bars of the United States District Court for the Eastern District ofPennsylvania; the Third Circuit; and the United States Supreme Court. I am a partner in thePhiladelphia law firm, Langer Grogan & Diver, PC.

2. I received my B.A. from Haverford College in 1972 and my J.D., magna cumlaude, from Rutgers University-Camden School of Law in 1976.

3. Since 1978, I have specialized in consumer law. I practiced for 30 years withCommunity Legal Services (CLS) (1976-2006), the civil legal aid program serving Philadelphia,where I managed the North Philadelphia office and led the programs consumer law work. My

practice at CLS was concentrated mostly in the area of consumer debt, unfair and deceptive practices, bankruptcy and mortgage foreclosure. At CLS, I had a diverse practice which includedindividual case representation, class action litigation, appeals, legislative and regulatoryadvocacy and drafting, and extensive lecturing, teaching and writing.

4. Much of my work at CLS during the last ten years of my tenure was concentratedin addressing the explosion of subprime mortgage lending that first appeared on a large scale,around 1996, and grew exponentially until the financial collapse of 2008. This work included afocus both on the front-end of mortgage origination practices and the back-end of mortgageservicing and foreclosure practices. My work in this area was multi-faceted. I had an extensivelitigation docket which included, for example, the first decision interpreting the previouslyuntested Home Ownership Equity Protection Act, Newton v. United Companies Financial, Inc .,24 F. Supp. 2d 444 (E.D. Pa. 1998) and the Pennsylvania Superior Court decision thatestablished the existence of equitable defenses to a foreclosure action brought to enforce a

Case 2:11-cv-06968-JCJ Document 39-3 Filed 03/07/13 Page 1 of 10


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predatory mortgage transaction, Green Tree Consumer Discount Co. v. Newton , 909 A.2d 811(Pa. Super. 2006). On two occasions, in 2001 and 2007, I was invited by the BankingCommittee of the United States Senate to testify in hearings regarding predatory mortgagelending. In 2006 I testified as an expert in an investigation of mortgage broker fraud conducted

by the Federal Reserve Board. Among the organizations that invited me to lecture on variousaspects of the mortgage industry have been: the Federal Reserve Bank of Philadelphia, thePennsylvania Housing Finance Agency, the NAACP, and the Pennsylvania Bar Institute. I alsoadvised the Rendell Administrations Banking Department on predatory lending issues,including conducting trainings for staff and serving on an official Advisory Committee thatassisted the Department in reorganizing itself to be more responsive to abuses in the marketplaceand in developing new mortgage lending rules.

5. Particularly applicable to the instant legal matter in which my opinion has beensought, my work has led me to develop expertise on a number of issues relating to the mortgage

industry, including: (a) the mortgage financing system called securitization and thefragmentation of ownership resulting from this system; (b) the unique role of mortgage servicersin managing all aspects of a securitized mortgage; (c) the private mortgage recording systemcalled the Mortgage Electronic Registration System, or MERS, that the industry participants inmortgage securitization created and how MERS operates; (d) the Pennsylvania foreclosure

process; and (e) a homeowners right under the federal Truth in Lending Act to notice regardingthe identity of the actual owner of a mortgage on his/her house.

6. I am the author of the recently published treatise on Pennsylvania foreclosure lawentitled, Residential Mortgage Foreclosure: Pennsylvania Law and Practice (Bisel Co. 2012).

See http://www.bisel.com/Descriptions/bk714.htm.

7. I have received several awards recognizing my professional achievements. I wasthe 2005 recipient of the National Consumer Law Centers Vern Countryman Award, awardedannually to a consumer lawyer, in recognition of excellence and dedication in the practice ofconsumer law on behalf of low-income consumers. See http://www.nclc.org/about-us/countryman-award.html . The Countryman Award is the most prestigious award in myfield. In 2001, I was awarded the Andrew Hamilton Award by the Public Interest Section of thePhiladelphia Bar Association for my lifetime contribution to public interest law in Philadelphia.

8. I am receiving no compensation for the study and testimony I am providing in thismatter.

Opinion

9. In preparing this report, I reviewed the following documents:



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a. The Complaint (Doc. 1);

b. The Courts Memorandum and Order filed October 19, 2012 (Doc. 22);

c. Defendants Motion to Dismiss Plaintiffs Claims to Quite Title andMemorandum of Law (Doc. No. 32);

d. Plaintiffs Memorandum in Response to Defendants Motion (Doc. 36); and

e. Defendants Reply (Doc. 38).

10. Based on my training and experience and my analysis of these materials, I havereached the following conclusions:

a.

Pennsylvania homeowners, whose homes are subject to mortgages in whichthe named mortgagee, according to the public mortgage records, is theMortgage Electronic Registration System (or, MERS), as a nominee forsome named lender, have an interest at stake in this matter, namely, theinterest in knowing who actually owns that mortgage.

b. That interest is entirely consistent with the relief being sought by the Plaintiffin this case. I can imagine no circumstance in which the disposition of thisaction would, in any practical manner, impair or impede the ability of thehomeowners to protect that interest.

c. Not only is the relief being sought by Plaintiff consistent with the interests ofhomeowners, it is also consistent with federal housing policy protecting theright of homeowners to know the identity of their mortgagees.

Basis for Opinion

Residential Mortgage-Backed Securitization, in General

11. The original paradigm of residential mortgage lending on a mass scale was themortgage originated by a local bank or savings and loan association that used the savings of itsdepositors as the capital to make the loan. The loans would sit on the books of the bank as anasset and the bank would collect payments on the loan on its own behalf. This market paradigmdisappeared decades ago.

12. In the modern mortgage market, mortgages are traded as investment commoditiesin a secondary market known as the Residential Mortgage-Backed Securities (RMBS) market.



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The generic process of turning income flows into marketable securities is called securitization.RMBS first became a successful method for capitalizing the mortgage market throughsecuritizations that were arranged and backed by government or the government-sponsoredagencies (Fannie Mae and Freddie Mac). These are known as agency securitizations. In the90s, Wall Street devised competing private label versions of a RMBS.

13. Because of the dominant role of securitization, 1 mortgages are now rarely held asassets by the entities originating the loans, and those entities that are collecting payments andotherwise managing the mortgage accounts are doing so as servicing agents for different legalholders of the loan, not on their own behalf. In a typical RBMS transaction, mortgages are

purchased from an originating lender, pooled with other mortgages, and packaged by a largeinvestment bank that divides the pooled income streams into fractional shares that are sold toinvestors as mortgage-backed securities. As a result of various legal requirements and

bankruptcy-insulation strategies, an individual mortgage obligation being put into the pool of

mortgages backing a particular securitization deal will, by necessity, go through multipletransfers of ownership.

14. In a typical RMBS transaction, an individual loan is made by an Originator, andthen sold to a Sponsor or Seller. The Sponsor can be an affiliate of the Originator, or can be anindependent aggregator of loans, or both. The Sponsor then sells a pool of loans to a Depositor.Again, the Depositor can be a subsidiary of the Sponsor, or an unaffiliated business partner. Atsome point, the pool of mortgages will then be transferred to a Special Purpose Vehicle (SPV,also called a Single Purpose Entity), an entity that has no other assets or liabilities. The reasonfor the transfer of the mortgage pool to this intermediate pass-through entity is to create a legally

recognized true sale that removes the remote possibility that the mortgages might be brought back into a bankruptcy estate in the event the Originator or Sponsor were bankrupt. 2 The SPVitself or a subsequent transferee of the SPV will function as the Issuer, issuing the securities

1 About 60% of all outstanding mortgages, 75% of all outstanding first-lien mortgages and over90% of mortgages produced in the years immediately preceding the 2008 collapse were

securitized. See Hearing: Problems in Mortgage Servicing From Modification to Foreclosure,U. S. Senate Committee on Banking, Housing, and Urban Affairs, Nov. 16, 2010 (testimony ofAssoc. Prof. Adam J. Levitan, citing industry data) available athttp://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=df8c

b685-c1bf-4eea-941d-cf9d5173873a&Witness_ID=2ada1da6-e7cc-4eca-99a4-03584d3748af .

2 By virtue of changes in 2002 to the Statement of Financial Accounting Standards, the use ofintermediate SPVs became an accounting requirement, to ensure that the mortgages could beexcluded from the balance sheets of the Originator or Sponsor.



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backed by the pools of mortgages. Investors purchase the securities, providing the capital thatworks its way back down the transfer chain to the Sponsor. 3

15. The individual mortgages comprising a securitized mortgage pool function ascollateral in two ways. They are collateral for the individual borrowers promise to repay thedebt, and they are also collateral for the investors right to receive the income stream represented

by its RMBS investment. For the investor, however, its collateral is not a specific mortgage orgroup of mortgages, but rather a fractional interest in the mortgage pool as a whole. 4 Legalownership over the pool of mortgages is placed in a named Trustee, ordinarily a largecommercial bank. It is the Trustee who is nominal legal owner of the mortgage pool and thelegal representative of the investors. Formally, the investors are the creditors of the trust, not theowners of the mortgages within the trust.

16. While the Trustee has nominal legal title to the mortgage loans in the pool, the

Trustees role is, by design, entirely passive.5

The final and most important character in asecuritization transaction is the Servicer. It is the Servicer that actively manages the individualmortgage accounts for the Trustee. This activity includes not only billing and collectionresponsibilities, but also sole responsibility over the initiation and settlement of foreclosurecases. If asked, most homeowners would identify their lender as being the mortgage servicingcompany that currently bills them every month, or perhaps the entity that first made the loan tothem. Chances are neither company is their lender now, if by lender one means the entitythat currently holds beneficial ownership rights in the mortgage obligation. The original lenderundoubtedly sold the loan soon after making it; the current holder is a commercial bank trustee

3For a similar description of the cast of characters in a securitization transaction, see LuminentMortg. Capital, Inc. v. Merrill Lynch & Co., 2009 WL 2590087 (E.D.Pa. August 20, 2009);MBNA Ins. Corp. v. Royal Indem. Co., 519 F.Supp.2d 455 (D.Del. 2007), affd 321 Fed. Appx.146 (3d Cir. 2009).

4 More specifically, investors hold certificates in a particular slice, or tranche, of thesecuritized trust. These tranches are organized into an ascending order of protection from lossand descending order of yield and risk. The senior certificate-holders are those whoseinvestments have the highest grade and the lowest yield. They are followed by mezzanine,junior and residual certificate-holders.

5 This passivity is a requirement imposed by the special tax treatment accorded to Real EstateMortgage Investment Conduits, or REMICs. See Levitin Testimony, supra note [33], at 9(contrasting duties of securitization trustee to that of a common law trustee with fiduciaryduties); Adam J. Levitan and Tara Twomey, Mortgage Servicing, Yale J. Reg. 1, 32 (2011)(explaining how an RMBS is designed to ensure that taxation on the income from the mortgagesis imposed only on the securities holders, not the SPV, and that the use of the REMIC structure isthe most common method of avoiding double-level taxation).



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they have never heard of; and the mortgage company billing them is actually the servicer for thetrustee.

How Mortgages are Transferred and the Different Treatment of MERS and non-MERSMortgages

17. Every mortgage obligation consists of two components: a promissory note thatdefines the terms of an obligation to repay a loan, and a mortgage conveyance that secures thatrepayment obligation. Most of the terms of the obligation e.g ., the interest rate and the amountand number of monthly paymentsare contained in the note rather than the mortgage. Mostmodern mortgage forms expressly incorporate the separately and contemporaneously executed

promissory note by reference, but do not expressly state those particular terms. Becausemortgages are recorded and notes are not, a public record about a mortgage transactions consistsmainly of the date of the transaction, the names of the parties involvedthe lender and the

property ownerand the original principal amount of the mortgage obligation, while theremaining terms remain private.

18. Because notes and mortgages are governed by two different bodies of law, thetransfer of a single mortgage obligation has traditionally involved compliance with the separaterules for transferring the note and the mortgage component of the obligation. Notes aretransferred in accordance with the negotiation requirements established by Article 3 of theUniform Commercial Code, involving a proper endorsement and physical delivery of the note. 6 Mortgage liens, on the other hand, are transferred through compliance with the rules governingthe conveyance of interests in real estate. In Pennsylvania, that process involves the execution,

6 Under the law of negotiable instruments, once the lender accepts an executed note from the borrowera note maker or issuer under the language of the UCC, see 13 Pa. C.S. 3103(definition of maker as a person who signs or is identified in a note as a person undertaking to

pay)the legal obligation to repay the loan merges into the physical note itself. 13 Pa. C.S. 3310(b) (if a note . . . is taken for an obligation, the obligation is suspended to the same extentthe obligation would be discharged if an amount of money equal to the amount of the instrumentwere taken). The contractual duty to repay the loan is thus transformed into a form ofcommercial paper that can be exchanged for value. The issuers note is negotiable by virtue ofits being subject to transfer by the original lender to some other holder. Once negotiated, the

borrowers repayment obligation is owed not to the original lender, but to a subsequent holderof the instrument. 13 Pa. C.S. 3201(a) (Negotiation means a transfer of possession, whethervoluntary or involuntary, of an instrument by a person other than the issuer to a person whothereby becomes its holder.); Manor Bldg. Corp. v. Manor Complex Associates, Ltd. , 435 Pa.Super. 246,252, 645 A.2d 843, 846 (1994); Official Comment to 3201(A person can becomeholder of an instrument when the instrument is issued to that person, or the status of holder canarise as the result of an event that occurs after issuance. Negotiation is the term used in Article3 to describe this post-issuance event.)



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acknowledgment and recording of an instrument called an Assignment of Mortgage. Throughthis process, the identity of the current mortgagee remains a matter of public record.

19. However, as a result of the mortgage industrys establishment of MERS, thissystem of public notice was fundamentally altered with respect to an enormous portion of themortgage market. 7 This can best be explained by way of an example. In the case of a non-MERSmortgage that is transferred into a securitized trust, there will be of record two instruments: (a)the original mortgage between the property owner and the lender and (b) an Assignment ofMortgage that names as the assignee the commercial bank serving as trustee for the securitizationtrust and the name of the specific trust. 8 On the other hand, in the case of a mortgage that is putinto the MERS system, there will be only one instrument of record, that being an originalmortgage which names as the mortgagee MERS acting as nominee of the original lender.When the actual obligation is transferred into the trust, no Assignment of Mortgage is executedand recorded. Instead, the name of the current owner of the mortgage is supposedly noted in the

private records of MERS that are accessible by MERS members but not the owner of the property subject to the mortgage.

20. Even in the case of a MERS mortgage, however, the concealment of the identityof the mortgagee will end in the event a foreclosure action is filed. Just prior to foreclosure, theservicer generally files an instrument purporting to be an Assignment of Mortgage, with MERSas the assignor and the securitization trustee as the assignee. There are several reasons whyservicers believe they have to do this in order to foreclose on a delinquent mortgage. Under Pa.Rule of Civil Procedure 2002, all civil actions must be filed in the name of the real party ininterest. MERS is a registration system, not an entity that holds any beneficial rights in the

registered mortgages themselves, so MERS could not properly be a foreclosure plaintiff. Rule1147(a)(1) further provides, more specifically, that foreclosure plaintiffs must allege the partiesto and dates of the mortgage and any assignments and a statement of the place where themortgage and the assignments are recorded. As a result of these two rules, the usual practice in

7 According to the separate Declaration of Joan Decker, the Philadelphia Records Commissioner,129,932 mortgages in the City of Philadelphia alone have been lodged in the name of MERS asmortgagee.8

Where the securities issued by the trust are publicly traded, much information about the trustwill also be publicly filed. In such a case, most of the applicable securitization documents should be registered with the Securities and Exchange Commission and available on its website,www.sec.gov. The SEC site uses a search engine named EDGAR, an acronym for theElectronic Data Gathering, Analysis, and Retrieval system. EDGAR can be accessed byselecting Search for Company Filings on the site. These documents include a ProspectusSupplement and a Pooling and Servicing Agreement which will identify, among other things, allthe various parties to the securitization transaction.



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the case of MERS mortgage is for the servicer, or the law firm filing the foreclosure action forthe servicer, to record a pre-complaint Assignment of Mortgage. 9

21. The result of these foreclosure-related practices is that homeowners with MERSmortgages who are in foreclosure will be notified of the identity of the actual owner of theirmortgage, but homeowners who are not in foreclosure will be unable to determine, from theofficial county property records, who owns their mortgage.

Homeowners Interest and Right to Learn the Identity of their Mortgagee

22. A property owner has an interest in knowing the identity of an entity that holds aninterest in his or her property. In the event the owner wants to pay off or refinance that mortgage,he/she needs to pay and make a demand for satisfaction from the proper party. Thus, when alender sells and transfers a mortgage sometime after making a loan to a homeowner, thehomeowner has an interest in knowing the identity of the transferee.

23. This interest in knowing the identity of the current mortgagee is not, as suggested by Defendants in their Reply Brief (at 13), a matter of idle speculation. On the contrary, it is aninterest recognized and enforced by federal law. Mortgage servicers are obligated under theTruth in Lending Act (TILA) to identify the beneficial owner of the mortgage upon amortgagors written request, see 15 U.S.C. 1641(f)(2), and any failure to do so subjects themto a TILA action for $4,000 in statutory damages and attorneys fees. 15 U.S.C. 1640(a). Morerecent amendments to TILA have supplemented this duty of servicing agents to disclose theidentity of their principals by creating an enforceable duty of a mortgage assignee to disclose itsacquisition directly to the homeowner at the time of the assignment. The Helping Families SaveTheir Homes Act of 2009 10 amended TILA to require notification to a mortgagor whenever amortgage is transferred. See 15 U.S.C. 1641(g)(1). The assigneenot the servicernow must

9 I refer to these as purported assignments because there is substantial doubt about the legalcharacter of such instruments. Since MERS holds no beneficial interest in the mortgage, it is notclear what such an assignment from MERS could mean under Pennsylvania conveyancing law.There are no Pennsylvania cases specifically discussing how a mortgagee of record that holds no

beneficial interest in the real estate, and is, instead a nominee for a lender or the lendersassigns, can convey an interest in property. Oother state supreme courts have suggested that

putting the mortgage into the name of MERS while the note is separately transferred to a new beneficial owner may render the mortgage unenforceable in a foreclosure action. See, e.g ., Landmark Nat. Bank v. Kessler , 216 P.3d 158 (Kan. 2009). The legal significance of suchassignments appear even more questionable when, as has often been happening, a lawyer fromthe foreclosure firm executes the mortgage as a so-called officer of MERS, meaning that counselfor the so-called assignee is executing the supposed conveyance on behalf of the assignor.10 Act of May 20, 2009, Pub. L. 111-22.



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notify the homeowner in writing within 30 days of the transfer of: its name, address andtelephone number, the date of the transfer and the location of any recorded assignment. 11

24. Under these provisions of federal law, if a homeowner with a MERS mortgagewere to submit a written request to his/her servicer, the servicer would be required to disclose thename of the actual beneficial owner of the mortgage, presumably, a commercial bank serving atrustee of a specific securitization trust. If, in the case of an intended foreclosure, MERS were toassign the mortgage by filing an Assignment of Mortgage to the beneficial owner, that actwould trigger a duty on the part of MERS to make the required disclosure to the homeowner.

25. With regard to homeowners who are not in foreclosure, and whose mortgages arenot assigned by their current owners, they will remain ignorant of the identity of their mortgagee,unless they specifically request that information from their servicer. It is that group ofhomeowners who stand to benefit from this litigation, because, if MERS is required to file

assignments pertaining to the original transfer of the mortgage to the current owner (presumably,a securitization trustee), they presumably will be provided notice pursuant to 15 U.S.C. 1641(g)(1).

No Homeowner Interest Can Be Impaired or Impeded by this Action

26. A disposition of this action will have one of two results, either requiring or notrequiring MERS to execute and record assignments to the actual beneficial owners ofPennsylvania mortgages. While the former case would provide a real benefit to many owners of

properties subject to MERS mortgages, in neither case would the interests of such owners be

impaired or impeded in any way.

27. If Defendants are successful in defending the action and MERS is not required toexecute and record assignments in favor of the actual mortgagees, then homeowners with MERSmortgages will be in the same position they are now, i.e ., entitled to demand the identity of theirmortagees by placing a written demand on their servicer pursuant to 15 U.S.C. 1641(f)(2); andentitled to receive notice of any future assignments pursuant to 11 U.S.C. 1641(g)(1).

28. If, on the other hand, Plaintiff is successful and obtains an order requiring MERSto execute and record assignments, then the owners of such properties will obtain notice whenMERS complies with its obligations under 15 U.S.C. 1641(g)(1). As explained above, the onlyPennsylvania homeowners who do not know the identity of their actual mortgagee are those (a)

11 15 U.S.C. 1641(g)(1)(C) and (E). The rule also applies to transfers occurring as the result ofa merger, acquisition or reorganization, 12 C.F.R. 226.39(a)(1), but does not apply totemporary, intermediate holders of the mortgage. 12 C.F.R. 226.39(c)(1). The rule applies toall transfers occurring on or after the enactment date, May 20, 2009.



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whose mortgages were put in the name of MERS as nominee for a lender; (b) who have notaffirmatively asked their servicer for the identity of the actual mortgagee, and (c) who have not

been defendants in a foreclosure action. Property owners in this group stand to benefit byPlaintiffs action, but if Plaintiff loses, they will be in no worse legal position than they are now.

29. Requiring homeowners to appear as parties in this case would not bring before theCourt any relevant interest that is not being currently represented. While the Plaintiffs interest islargely a monetary one, based on the recording fees that MERS has failed to pay, Plaintiffsinterest is also that of the statutorily endowed caretaker of the public mortgage records. Herexercise of her duty to enforce the mortgage industrys obligation to record mortgages iscompletely consistent with the interest of property owners in knowing who holds mortgagesagainst them. Such an interest is being furthered by this action, not impaired nor impeded.

Dated: March 4, 2013 /s/ Irv Ackelsberg


Documents

Declaration of Irv Ackelsberg